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Kazakhstan and Central Asia Country Risk Report Q2 2015

Kazakhstan and Central Asia Country Risk Report Q2 2015

Core Views

We believe the deteriorating domestic demand outlook for CentralAsia will make the region more susceptible to Islamist radicalisation.

Out of the five Central Asian states – Kazakhstan, Turkmenistan,Uzbekistan, Kyrgyzstan and Tajikistan, we believe the latter two tobe most exposed to the threat of radicalisation.

We expect the Kyrgyz som to remain on a more gradual depreciatorytrajectory in 2015 than its Tajik counterpart. The Kyrgyzstanieconomy faces more limited depreciatory pressure from fallingremittance inflows and smaller inflation costs, while the authoritiesface higher political pressure than Tajikistan, underpinning our view.

Tajikistan's social and political scene will become increasingly unstablein the coming quarters, as the country grapples with the shockstemming from Russia's economic crisis. While our core scenarioremains that the government's heavy-handed approach is likely toquell any potential opposition either in a secular or religious form,we do not rule out that the increasingly authoritarian style of theestablishment could in fact further boost radicalism over the longterm.

Uzbekistan's President Islam Karimov is almost certain to win hisfourth term in power in March, but signs of ongoing internal strugglesin the country's political and security apparatuses suggest thatcontinuity is by no means assured.

The policy responses of the Turkmen government, alongside aramp-up in natural gas production have partially offset the negativeprice effect of collapsing oil prices, meaning the country will remaina regional outperformer in the coming quarters.

Major Forecast Changes

We have revised down our 2015 forecast for real GDP growth inUzbekistan to 6.1% from 6.8% previously as the recessionary outlookfor Russia and the weakening growth outlook for China – Uzbekistan'stwo major export markets – will weigh on exports. Domesticdemand will also suffer, as weaker remittances inflows from expatsworking in Russia will reduce households' disposable incomes.

We have downgraded our forecast for real GDP growth in Turkmenistanin 2015 to 9.9% from 10.5% previously on account of theadverse impact on the economy from declining hydrocarbon pricesin H214, which have reduced gas export revenues.


Executive Summary- Regional
Core Views
Major Forecast Changes
Key Risk To Outlook
Chapter 1.1: Political Outlook - Kazakhstan
Domestic Politics
Authorities To Limit Social Costs Of Lower Oil Prices
While there is no easy way out for the Kazakh authorities to counter the negative impact of a weak Russian rouble and falling oil prices,
the government's chosen policy trajectory - a combination of currency stability and fiscal belt-tightening - seems to be the least worst
option in terms of social costs.
Chapter 1.2: Economic Outlook - Kazakhstan
Economic Activity
Authorities To Let The Tenge Adjust Gradually
While the Kazakh authorities have successfully defended the tenge throughout 2014 in the face of mounting selling pressures, we
believe that they will have to weaken the tenge to correct growing external imbalances.
TABLE: Economic Activity
Chapter 1.3: 10-Year - Kazakhstan
The Kazakh Economy To 2024
Developing Non-Oil Sectors Key To Sustaining Growth
The Kazakh government's drive to diversify the non-oil sector and invest in developing strategic industries and national infrastructure
supports our favourable long-term outlook for the economy.
TABLE: Long-Term Macroeconomic Forecasts
Chapter 1.4: Operational Risk - Kazakhstan
SWOT Analysis
Operational Risk
TABLE: Operational Risk
Availability Of Labour
TABLE: Europe - Availability Of Labour Risk
TABLE: Labour Force Employment By Sector ('000)
TABLE: Top Ten Source Countries For Migrant Workers
Crime Risk
TABLE: Emerging Europe Crime Risks
Chapter 2.1: Political Outlook - Kyrgyzstan
Domestic Politics
Central Asia: Grim Macro Outlook Compounding Islamist Threat
We believe the deteriorating domestic demand outlook for Central Asia will make the region more susceptible to Islamist radicalisation.
Out of the five Central Asian states - Kazakhstan, Turkmenistan, Uzbekistan, Kyrgyzstan and Tajikistan - we believe the latter two to be
most exposed to the threat of radicalisation.
Chapter 2.2: Economic Outlook - Kyrgyzstan
Economic Activity
Limited Inflation Costs Of Gradual Som Depreciation
We expect the Kyrgyz som to remain on a more gradual depreciatory trajectory in 2015 than its Tajik counterpart.
TABLE: Economic Activity
Chapter 3.1: Political Outlook - Tajikistan
Domestic Politics
Regional Headwinds Fomenting Domestic Instability
Tajikistan's social and political environment will become increasingly unstable in the coming quarters, as the country grapples with the
shock stemming from Russia's economic crisis.
Chapter 3.2: Economic Outlook - Tajikistan
Economic Activity
Inflation To Rise On Gradual Somoni Depreciation
Tajikistan is experiencing growing inflationary pressures as a result of exchange rate pressures arising from Russia's currency crisis.
We expect the Tajik authorities to adjust to the new reality of a weaker rouble by managing a gradual depreciation of the somoni in an
effort to avoid a sharp devaluation. Consequently, inflation will rise in 2015, dimming the outlook for domestic demand.
TABLE: Economic Activity
Chapter 4.1: Political Outlook - Turkmenistan
Domestic Politics
Policy Response To Bolster Regime's Hold On Power
While the devaluation and rollback of state subsidies implemented in the wake of falling gas export revenues in Q414 will have an
adverse impact on living standards in Turkmenistan, the threat of a popular uprising is limited.
Chapter 4.2: Economic Outlook - Turkmenistan
Economic Activity
Limited Fallout From Lower Hydrocarbon Prices
The policy responses of the Turkmen government, alongside a ramp-up in natural gas production have partially offset the negative price
effect of collapsing oil prices, meaning the country will remain a regional outperformer in the coming quarters.
TABLE: Economic Activity
Chapter 5.1: Political Outlook - Uzbekistan
Domestic Politics
Karimov To Remain At The Helm, But Continuity Is Not Assured
Uzbekistan's President Islam Karimov is almost certain to win his fourth term in power in March, but signs of ongoing internal struggles
in the country's political and security apparatuses suggest that continuity is by no means assured.
Chapter 5.2: Economic Outlook - Uzbekistan
Economic Activity
Regional Headwinds Weighing On Growth Outlook
We have revised down our 2015 forecast for real GDP growth in Uzbekistan to 6.1% from 6.8% previously as the recessionary
outlook for Russia and the weakening growth outlook for China - Uzbekistan's two major export markets - will weigh on exports.
Domestic demand will also suffer, as weaker remittances inflows from expats working in Russia will reduce households' disposable
incomes.
TABLE: Economic Activity
Chapter 6: BMI Global Assumptions
Global Outlook
Weaker EMs To Weigh On Growth
Table: Global Assumptions
Table: Developed States, Real GDP GrowtH, %
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
Table: Emerging Markets, Real GDP Growth, %

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