Ceemea by murvit

MORGAN STANLEY RESEARCH January 15, 2014 CEEMEA 2014 Outlook

production of about 175,000 bopd on average or 65 million barrels of oil in 2014, worth about 2.5% of GDP. Now, we think that likely production is anywhere in the range from zero to half the previous target, or 1.5% of GDP, around 35 million barrels of oil. Taking the base case as the middle point of this range, we now mark down our GDP forecast for 2013 by 0.8pp from 6.8%Y to 6.0%Y. Exhibit 3

2014 Oil Export Scenarios Oil exports, mmbopd

Oil export earnings, US$bn @ US$100/bbl

Oil export earnings, % of GDP

1.45

52.93

24.1%

1.48

53.98

22.5%

1.53

55.81

23.3%

1.58

57.63

24.0%

Estimated 2013 oil export baseline Bear case: 2014, assuming no Kashagan and trend growth at 2% Base case: 2014, assuming Kashagan at average 50,000 bopd and trend growth at 2% Bull case: 2014, assuming Kashagan at average 100,000 bopd and trend growth at 2%

Source: Morgan Stanley Research estimates

External account strength: In 9M13, oil exports grew at a robust 4% in volume terms, to a large extent offsetting the lower oil price and the sharp contraction in metal exports (including iron ore down 30%, ferro-alloys down 50% and precious metals down 41% after 9M13), while import growth slowed sharply from 22%Y in 2012 to 6%Y in 9M13. While there was a net drag from trade, with an estimated 4% of GDP reduction in the trade surplus in 2013 (to a still large 15% of GDP) and a 1% of GDP reduction in the current account balance (to -0.7% of GDP), we continue to see a strong external position, with reserve assets, including the Oil Fund, growing by US$9 billion or 4% of GDP in 2013, and likely to grow by a similar amount in 2014.

Trend to real KZT appreciation: Kazakhstan has been able to deflect the strong pressure on the tenge to appreciate from the high and rising oil revenues by paying high dividends to oil companies – currently running at US$25 billion per annum – and by saving surplus oil revenues in the Oil Fund and investing them in foreign assets. Overall, we believe that this tight fiscal policy – running a surplus of about 3% of GDP in 2013 – is largely responsible for restraining strong tenge appreciation despite the large external surplus. Over time, we do expect the tenge to appreciate in real terms, with the nominal KZTUSD rate weakening by less than the inflation differential. However, given the sensitivity of the exchange rate, we believe that the Kazakh authorities will continue to have a bias for stability. Timing of transition to a flexible KZT is unclear: We look to the NBK under Governor Kelimbetov’s leadership to provide more clarity in 2014 on the proposed transition to an inflation-targeting monetary policy regime. Following in Russia’s footsteps, Kazakhstan intends to move to a flexible exchange rate regime, and to use interest rates in future to target inflation. However, the pace and sequencing of measures are not yet clear. For instance, although the exchange rate regime was de jure liberalised in spring 2011, the tenge has still not weakened de facto beyond the previous 145-155 corridor. At the same time, domestic interest rates were suppressed for three years post-crisis, largely we think to provide cheap funding for Kazakhstan’s banks, burdened with 35% NPLs, and then allowed to rise this summer, even though the NBK has not yet developed a repo facility to provide funding to banks on an auction basis. Exhibit 5

The Summer Jump: KazPrime Now Positive in Real Terms

Exhibit 4

Kazakhstan Strong External Position: Reserve Assets Up 11pp to 44% of GDP in 2013 100

US$ billion

60 5

40 20 0 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 NBK FX reserves

Oil Fund assets

0 Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

KAZPRIME 3 month rate, %

Mar-13 CPI

Source: NBK, Morgan Stanley Research estimates