Report by JSC Samruk Kazyna and The Boston Consulting Group: Accelerated Digitalization Is Key For Kazakhstan's Economy Growth
Backed by a fairly stable macroeconomic situation, Kazakhstan demonstrates positive results in infrastructure development and digital economy engagement. However, digitalization speed in key industries is not sufficient for active growth.
ASTANA, February 6, 2017 г. – JSC Samruk Kazyna and The Boston Consulting Group release a joint survey named “Kazakhstan Macroeconomic Outlook & New Investment Horizons in Digitalization”. According to the report, the country's economy undergoes a fairly stable period; however, the growth is impossible without accelerating the pace of digitalization of key industries, such as manufacturing, retail, agriculture, and transportation.
“We see growth potential for Kazakhstan, it is the largest country in Central Asia and the second largest after Russia in the CIS. GDP growth remains relatively high, averaging at 5,2% per annum between 2010 and 2015. Having started from nearly the same level of GDP per capita compared to neighboring peers, in 2015, Kazakhstan’s GDP per capita of USD10.508 exceeded Russia’s USD9.057. The country also took lead in the CIS region, with GDP per capita of 5 times more than Uzbekistan, 10 times more than Kyrgyzstan and Tajikistan and 2 times more than Turkmenistan. Kazakhstan has one of the best investment climates in the region, and became the first sovereign among CIS countries to receive an investment-grade credit rating from an international rating agency. Since independence, the country has attracted USD237 billion foreign investments.” – comments Baljeet Kaur Grewal, Managing Director, Strategy & Portfolio Investments.
The country is making progress in digitalization: in terms of digital economy engagement level Kazakhstan is on par with Russia, UAE, Argentina and Chile, with the index of 0,72 (UN and BCG analysis in 2016), which is more than world average (0,49). Also, according to BCG e-intensity rating, the broadband penetration percentage among businesses in Kazakhstan is 45%, putting the country on par with UAE (53%) and Malaysia (38%). Digitalization affects such sectors as manufacturing, transportation, agriculture, retail, but the speed of this process is lagging behind the average one globally. For example, overall spending for industry automation comprised only 0,07-0,09% of GDP, which is 2,3-3 times below global average (0,18% of GDP)and 4-5 times lower than in the Americas. As for the e-commerce market, it remains very small, representing only 0,8% of the total retail trade in 2015.
“We believe that further digitalization of Kazakhstan's economy is the key growth factor for many industries in the country, - comments Sergei Perapechka, partner and managing director of The Boston Consulting Group. - Today Kazakhstan is in trend, the country's digital economy is growing with a similar rate comparable to BRICS countries, but this is not enough. What is needed is a breakthrough, which will give a clear advantage to the economy. For example, development of e-commerce opens new sales channels to SMEs, and can potentially reduce 'grey' economy volume. At the moment the share of e-commerce in retail is only 0,5%, in Russia it is 3%, and 8,3% in China. We expect that given the Kazakhstan e-commerce market in retail repeats Russia's growth pattern, it can reach the USD 750-800 million mark by 2020. Speaking of other industries, manufacturing can benefit from faster speed of automation of existing production sites and introduction of 3D printing technologies in manufacturing in such sectors as oil and gas, mining and energy. At the moment, the level of automation in manufacturing (contributing almost 25% of the country's GDP) is clearly insufficient: around 20% manufacturing companies are not equipped with computers and 24% do not have access to the Internet”.
In agriculture producers may adopt so called 'precision farming' technologies, which deploy accurate data and allow decreasing costs related to fertilizers and chemical application. Considering that in 2015 only less than 33% of agricultural companies reported on having computers and only 27% have access to Internet, there is a huge potential here. In transportation area, digitalization can help create a simpler ticket and shipping booking system using mobile applications, automate demand forecasting and planning processes, create predictive analytical solutions for equipment maintenance and so on. These are just a few examples of how various industries can be optimized using digital technologies.
“The digital breakthrough is becoming a 'must' element for every strategy any business is putting forward these days, - continues Sergei Perapechka. – Those who are mindful of this will win in the future, and already in the short term. This topic should also remain high on the agenda of strategic investors”. Other important conclusions of the report include:
GDP Growth vs. Brent Price (2005-2017f)
Source: Ministry of National Economy, Bloomberg, Samruk Kazyna forecasts
- Kazakhstan economy is supported by stimulus measures introduced under the Nurly Zhol program and anti-crisis plan. GDP growth is projected to strengthen up to 2,0% in 2017, attributable to low base effect, expectations of recovery in global oil prices and increase oil output.
- The tenge has stabilized since March 2016, supported by relatively positive developments on the domestic and global fronts.
- Growth prospects have remained uneven among Kazakhstan’s major trading partners, which could negatively impact the country’s exports. Economic recovery in Europe is progressing at a lackluster pace despite aggressive and unconventional monetary policy measures, low oil prices and expansionary fiscal policies, with GDP growth expected at 1,6% over 2016-2017. Russia’s GDP growth is estimated at -0,7% in 2016, recovering gradually to 1,1-1,2% in 2017. Meanwhile, China’s GDP growth is likely to moderate further to between 6,2% and 6,5% over the medium-term as the economy rebalances and reforms are being implemented and calibrated by policy easing.
- Kazakhstan’s economy is highly reliant on natural resources and extractive industries, and the constant change in global economic and sector dynamics has made it more challenging for the country to stay competitive. It is time for Kazakhstan to explore new opportunities and venture into new growth areas, as part of diversification efforts and to enhance sector value add to GDP contribution.
- Digitization offers potential value creation in Kazakhstan’s ‘main business’ – the commodity sector, but also for diversification and unlocking potential of other sectors (e.g. manufacturing,, agriculture, transport and retail sectors), stimulating entrepreneurial activity, amplifying the structure of the economy given the diversity of opportunities.
- According to BCG’s e-Intensity Index, Kazakhstan remains in the group of Aspirants i.e. a group of countries with still developing digital maturity. Despite overall improvements, Kazakhstan’s position relative to other countries in the ranking remain unchanged, stagnating at the 50th-52nd position, indicating potential for further growth in this area.
BCG e-Intensity Index (2015)
Source: BCG analysis
About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 85 offices in 48 countries.
In Russia BCG has been operating since 1990, the Moscow office was opened in 1994. BCG cooperates in Russia with the largest organizations in all the country's economy areas. For more information, please visit bcg.com.
About JSC Samruk Kazyna
Joint Stock Company Sovereign Wealth Fund «Samruk-Kazyna»- the Fund owned by the Government of the Republic of Kazakhstan.
The Fund was established in 2008 in accordance with the Decree of the President of the Republic of Kazakhstan and represents itself as commercial structure - the investment holding company whose mission is to increase the national welfare of the Republic of Kazakhstan, and to support modernization of its economy. The Fund «Samruk-Kazyna» achieves its mission through efficient management of its portfolio companies in order to increase their long-term value and ensure sustainable development, and by making catalytic investments in the priority sectors of the national economy. The value of the Fund’s assets is about US$ 61.5 billion. Samruk-Kazyna group includes companies in oil and gas, transport and logistics sectors, chemical and nuclear industry, mining and metallurgy, energy, machinery building and real-estate sectors.