Economist Gulaikhan Kubaeva analyzes the dynamics and structure of foreign direct investment in Kazakhstan for 2020 – in an article, written specially for the analytical platform CABAR.asia.
Foreign direct investment (FDI) is one of the most important forms of capital inflows and drivers of economic growth in many countries. In particular, developing countries and emerging market economies have recognized the critical importance of FDI in expanding economic opportunities.[1]
The uncertainty surrounding the COVID-19 crisis has negatively impacted economies around the world and has led to a sharp fall in investment activity. According to the UNCTAD World Investment Report 2021, global FDI flows fell by 35% to 1 trillion USD in comparison to 1.5 trillion USD in 2019. This is almost 20% below the minimum level of FDI since the 2009 global financial crisis. A large part of the decline in FDI was in advanced economies, where it fell by 58%, while in developing countries, FDI inflows fell by a modest 8%, and in transition economies, by 77%. As a result, the share of FDI inflows to developing countries in global inflows rose to two-thirds, up from half in 2019.[2]
Central Asia is seen as a strategic region for investors due to its location and mining potential. According to the World Bank (2017), all five Central Asian countries have high investment potential in sectors such as agriculture, food export and mining.[3] Before the pandemic, namely in 2019, the growth in gross FDI inflows to Central Asia reached 10% (32.2 billion USD), exceeding the global growth in FDI inflows, which amounted to 3%. However, in 2020, FDI inflows to Central Asia fell by 36% compared to 2019 (32.2 billion USD) and amounted to 20.7 billion USD. International organizations note that attracting FDI can be a key factor in the recovery from the 2020 crisis for the region.
Kazakhstan is a leader in attracting foreign investment in the Central Asian region and is in second place after Russia in the CIS. The favorable investment climate in the country is confirmed by various indicators, such as the Global Competitiveness Index, the Ease of Doing Business Index, the Index of Economic Freedom, etc.
Despite this, the pandemic and the decline in oil prices negatively affected the dynamics of FDI in the economy of Kazakhstan in 2020. According to the data of the National Bank of Kazakhstan and as shown in Figure 2, last year the inflow of FDI to Kazakhstan decreased by 30% compared to 2019 and amounted to 17.1 billion USD. Over the past 10 years, on average, Kazakhstan has attracted 22-24 billion USD annually, with the exception of the 2015 and 2020 crises.[4] Figure 3 shows that the largest fall in investment activity occurred in the first and third quarters of 2020.[5] The recession was also associated with restrictive measures and, accordingly, a slowdown in current investment projects.
In the sectoral context, the mining industry remained the most attractive for investors, accounting for 48.11% of the gross inflow of FDI. FDI inflows to non-mining industries remained modest. However, if in the pre-pandemic 2019 the mining industry attracted a record volume of investments of 13.7 billion USD, then in 2020 the volume of investments decreased by 40% to 8.2 billion USD. This decline was due to structural changes: in particular, it can be observed that the inflows of FDI in coal and lignite production decreased by 51% and investments in the extraction of crude oil and natural gas decreased by 47%. Nevertheless, there was an increase (20%) in FDI inflows in technical services in the mining industry, and a significant increase in other industries in this sector of the economy. According to UNCTAD’s 2021 Global Investment Report, most of the FDI in the oil and gas industry was associated with a megaproject in Tengiz with Chevron (USA), which is due to be completed by 2022.[6]
The manufacturing industry was in second place in terms of investment attractiveness. Attracting investment in the manufacturing industry is a priority area of development for the economy of Kazakhstan. In general, investments in this sector decreased by 9% in 2020 and amounted to 3.16 billion USD. However, it is important to note that there was a significant increase in FDI inflows in food, beverage, and tobacco (50%), textiles, and coke and refined products compared to the previous year. A tangible decline in FDI inflows was observed in the production of electrical equipment and machinery and equipment not elsewhere classified.
At the end of 2020, the inflow of FDI in wholesale and retail trade, repair of cars and motorcycles amounted to 2.54 billion USD, or 15% of the gross FDI to Kazakhstan, in transport and warehousing – 0.87 billion USD, in financial and insurance activities – over 1.0 billion USD, FDI inflows to agriculture, forestry and fisheries decreased by 13% to 12.6 million USD. As part of global operations in project financing, the QazTechna bus factory project with the participation of Chinese capital was put into operation at the end of 2020. Moreover, with the participation of Chinese capital, the construction of a factory for the production of rubber and tires DoubleStar was started.[7]
In 2020, the inflow of FDI in accommodation and catering services sharply decreased by 42% (by 81 million USD), in real estate transactions – by 2.1 times (by 172 million USD), in professional, scientific, and technical activities – by 60% (by 311 million USD), and in construction – by 26.8% (by 192 million USD). It is worth noting that the decline in FDI inflows in these sectors was offset by an increase in investment in information and communications, which attracted 68% more FDI, compared to the previous year in the amount of 214 million USD.
In 2020, 41 investment projects with foreign participation in the amount of 1.6 billion USD were implemented in Kazakhstan. Key foreign investment participants included Turkish construction companies YDA Holdings and Sembol Construction and Engineering, French electricity producer Total Eren, German engineering company Linde Group, Dutch venture capital fund Food Ventures and South Korean car manufacturer HYUNDAI. In the first quarter of 2021, 9 projects were launched in the amount of 665 million USD. These are projects in the field of alternative energy, oil and gas, metallurgy, production of building materials and tourism. By the end of the year, another 36 projects are expected to be commissioned in the amount of 4.4 billion USD.[8]
In 2020, the Netherlands became the leader in investments in Kazakhstan
As can be seen in Figure 4, the main contributors to Kazakhstan in 2020 were the Netherlands (5.1 billion USD, 30.1%), the United States (2.24 billion USD, 13.12%), Switzerland (1.7 billion USD, 10.4%), Russian Federation (1.2 billion USD, 7.09%), China (0.96 billion USD, 5.62%) and the UK (0.85 billion USD, 5%). In addition, a significant volume of FDI was observed from Belgium (0.8 billion USD, 4.64%), France (0.7 billion USD, 4.06%), Cyprus (0.44 billion USD, 2.6%), South Korea (US $ 0.46 billion, 2.7%) and Turkey (US $ 0.36 billion, 2.1%).
Figure 5 shows the structure of FDI inflows to Kazakhstan by region. In 2020, the largest amount of FDI went to the Atyrau region: 5.5 billion USВ, which amounted to 32.2% of the total in the country. Almaty ranked second in terms of FDI inflows: 5.06 billion USD, or 30% of the total. The East Kazakhstan region attracted 2.03 billion USD, or 12% of the total. The five leading regions in terms of FDI inflows also included West Kazakhstan and Pavlodar regions: 1.15 billion USD and 0.77 billion USD, respectively. The listed regions together attracted 85.5% (14.5 billion USD) of all foreign direct investment in Kazakhstan.
Despite measures to prevent the consequences of the crisis, experts’ forecasts for 2021 remain cautious for countries with economies in transition, which can include Kazakhstan. According to preliminary UNCTAD estimates, FDI flows to countries with economies in transition could increase by 10-15%, given further stabilization of health systems, effective vaccination, and economic recovery in general. Under the pessimistic scenario, zero growth in FDI flows is possible.
[1] Ashurov, Sharofiddin et al. “Determinants of FDI in the Central Asian Region: A Case Study of Tajikistan, Kazakhstan, Kyrgyzstan, Turkmenistan, and Uzbekistan (Quantitative Analysis Using GMM)”. Russian Journal of Economics 6 (2020): 162.
[2] UNCTAD’s report ” World Investment – 2021 “
[3] World Bank (2017). Central Asia: Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, Uzbekistan. Regional Program, December
[4] What is the dynamics of the inflow of foreign investment in Kazakhstan over the past 10 years
[5] Direct investments in the direction of investment, National Bank of Kazakhstan
[6] UNCTAD’s report ” World Investment – 2021 “
[7] UNCTAD’s report ” World Investment – 2021 “
[8] Kazakh Foreign Ministry Predicts Rise of Foreign Direct Investment to Pre-Pandemic Level in Next Two Years