Just Published: "Kazakhstan & Central Asia Country Risk Report Q2 2016"

In light of the extreme oil price weakness into 2016, the macroeconomic and social stability outlook for Kazakhstan - the biggest oil exporter in Central Asia - has deteriorated even further, prompting us to take an even more bearish outlook on the country's growth prospects. Nevertheless, the possibility of economic and/or banking sector collapse remains limited due to the strong sovereign risk profile.

While the Kyrgyz som has been stable in recent trading against the US dollar, we expect the currency to depreciate significantly in 2016. The National Bank of Kyrgyzstan, which has propped up the som through heavy FX intervention, will discontinue this policy due to limited FX reserves. As a result, mounting depreciatory forces in the form of lower remittances from Russia and reduced gold exports will come to the fore, significantly weakening the som.

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Following the latest round of measures restricting currency convertibility in Tajikistan in early December, we expect the Tajik authorities to continue ramping up forms of capital controls due to limited FX reserves and unwillingness to embark on a path of structural reform. While these measures will likely stave off a collapse of the Tajik somoni, this will come at the expense of a deep economic crisis in 2016.

The possibility of a devaluation of the Turkmen manat has significantly increased in light of Russian gas conglomerate Gazprom's decision in early January to discontinue purchases of Turkmen gas. As such, we believe that the Turkmen authorities will resort to devaluing the manat most likely in Q116, in light of rising depreciatory pressure on the currency, stemming from reduced gas export volumes and lower gas prices.

Uzbekistan's economy will remain under pressure in 2016 stemming from lower commodity prices, depreciating currency and weak external demand. Nevertheless, it will remain a regional outperformer due to its relatively well-diversified export commodity base and strong banking sector.

MAJOR FORECAST CHANGES

We have downgraded our forecast for Kazakhstan's real GDP growth for 2016 in light of the pronounced oil price declines in the beginning of 2016. As a result, we have downgraded our forecast for real GDP growth for Kazakhstan for 2016 to 1.0% from 1.6% previously.

KEY RISKS

In the event that one of the long-standing Central Asian leaders (Kazakhstan's Nursultan Nazarbayev, Uzbekistan's Islam Karimov and Tajikistan's Emomali Rahmon have ruled their countries since 1990, 1991 and 1992 respectively ) departing the scene without a clear succession plan it could lead to significant political upheaval. This would not only impact economic activity in the immediate aftermath, but potentially deter foreign direct investment.

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