TEXT-S&P report on Central Asia's commodity boom

(The following statement was released by the ratings agency)

May 7 - Soaring commodity prices are affording Central Asia a real opportunity to create lasting economic success, says a report titled "Will Central Asia's Commodity Boom Help Pave The Way For A New Silk Road?," published yesterday by Standard & Poor's Ratings Services. It's not all good news, however. The region's leaders need to consistently improve the quality of the business environment and prepare their countries for the inevitable transition of leadership.

"Geography has long shaped Central Asia's destiny," said Standard & Poor's credit analyst Moritz Kraemer. "Far away from the large population centers, underdevelopment starved the region of the investments it needed to escape poverty and isolation.

"Now, following the demise of the Soviet Union and the boom in commodities, Central Asia is in the driver's seat, steering its own future. But although vast resource endowments are a necessary condition for economic advancement, they are not sufficient on their own. The real test is to get the products to the markets."

As the report points out, oil (especially in Kazakhstan) and gas (predominantly in Turkmenistan and Uzbekistan) are the most valuable natural assets in this vast region. Overall, Central Asia's hydrocarbons deposits are modest by global standards, amounting to just over 3% of the world's proved reserves for both oil and natural gas. The region's population, however, is even smaller in relative terms (1% of world population), which suggests that sustained high energy prices should provide an excellent springboard to prosperity. Kyrgyzstan, where gold is a dominant export, and Tajikistan (cotton, minerals, and aluminum), have drawn the short straws. Having missed out on the hydrocarbons boom, they remain relative economic backwaters, despite the dynamism of recent years.

Growth in the region is robust, averaging between 5% per year in Kyrgyzstan and almost 10% per year in Kazakhstan over the past five years. Improved terms of trade lie at the heart of this growth, generating domestic demand among consumers and business communities. Investment has reached unprecedented levels as politicians rush to transform formerly backward economies, abetted by foreign direct investment and knowledge transfer through international oil and gas companies eager to get a foot in the door.

If this all sounds too good to be true, that's because it is. Despite the recent boom, policymakers face tough conditions that will endure for years to come. Standard & Poor's believes it will take more than the good luck of rising export prices to firmly root sustainable growth and development in what remains an environment characterized by weak institutions, sub-par governance structures, social problems, a worsening income distribution, and a land-locked location far from the major markets for Central Asia's exports. In the near term, the largest threats to stability and prosperity arise from the consequences of irrational exuberance during the resource boom. And they are most evident in Kazakhstan, where rampant credit growth and an unprecedented construction bonanza have created serious economic imbalances.

This article will appear in a special issue of Standard & Poor's CreditWeek devoted to Central Asia. The issue coincides with the annual meeting of the European Bank For Reconstruction And Development in Kiev on May 18-19. Other articles in the issue will cover Kazakhstan's metals and mining and banking sectors, plus the republic's planned hydrocarbons investments, and economic development in Turkmenistan, Uzbekistan, Kyrgyzstan, and Tajikistan. All of the articles in this issue of CreditWeek, the global authority on credit quality, will also be available in a special report on RatingsDirect, the real-time Web-based source for Standard & Poor's ratings, research, and risk analysis.