Kazakhstan's constitutional referendum, on 5 June, transfers political power from the presidency to parliament. It was passed with 77% of votes in favour and with 68% turnout (on preliminary data from the election commission).
In practical terms, it institutionalises the removal of the Nazarbayev family from power, which in our view was the root cause (and effect) of the mass protests in January 2022, and it takes the first step towards more sincere economic liberalisation and non-commodity diversification.
The referendum is, therefore, a rare instance of structural reform in the emerging and frontier markets in an era of disruption from Covid, policy stimulus, and high inflation.
If there is follow-through on structural economic reform, eg accelerated privatisation, then the Kazakhstan equity investment case becomes very appealing, given the tailwind from high commodity prices and attractive valuation.
Very poor starting point on political risk
As a result of the concentration of power under 81 year-old Nursultan Nazarbayev, president from April 1990 to march 2019, and the powerful eminence grise behind Tokayev until the mass protests of January 2022, the starting point in Kazakhstan for politics interfering with free market economics is very poor.
Democracy score of 3.1 (on a scale of 0 to 10, where 0 is least democratic, on the EIU index), closer to Russia's 3.3 than Georgia's 5.3.
Liberal Democracy score 0.13 (on a scale of 0 to 1, where 0 is least democratic, on the V-Dem index), closer to Russia's 0.10 than Georgia's 0.51.
Corruption score of merely 37 (on a scale of 0 to 100, where 0 is most corrupt, on the Transparency International index), closer to Russia's 29 than Georgia's 55.
Financial secrecy score of 63 (on a scale of 0 to 100, where 100 is most secret, on the Tax Justice Network index), closer to Russia's 60 than Poland's 46.
Press Freedom score of 48 (on a scale of 0 to 100, where 0 is the most restricted, on the Reporters Without Borders index), between Russia's 39 and Georgia's 59.
Governance score of -0.32 (on a scale of -2.5 to +2.5, where -2.5 is the weakest, on the World Bank index), closer to Russia's -0.65 than Georgia's 0.40.
Private sector regulation score of 0.14 (on a scale of -2.5 to +2.5, where -2.5 is the weakest, on the World Bank index), closer to Russia's -0.44 than Georgia's 1.11.
Political reforms approved via referendum
Constitutional reform was first mooted by President Tokayev in March 2022, as a response to the mass protests of January, and the June 5 referendum was proposed at the start of March.
The constitution has been amended before, but often in order to strengthen the explicit and, latterly, the implicit role of Nazarbayev.
This time round, constitutional changes which shrink the presidency will still rely on the establishment of behavioural norms. It remains to be seen whether Tokayev cultivates this. The institutional ejection of the Nazarbayev family, de facto, increases Tokayev's own grip on power.
Nevertheless, at least, a clear signal is being sent, given the range of changes which dilute presidential control.
Top-down equity investment appeal
If there is follow-through on the implementation of long-awaited structural economic reform, eg transport, education, and energy infrastructure upgrade (the Nurly Zhol plan announced in 2014), privatisation (the Comprehensive Privatisation Plan approved in 2020), then the Kazakhstan investment case becomes very appealing, given the following:
Commodity price tailwind (commodity exports are c30% of GDP in total, with 50% of this in crude oil, 20% in copper and iron)
Attractive valuation relative to history (forward PE of 6.9x, alongside dividend yield of 8.8%, and a real effective exchange rate close to 100 and near its 10-year median)
Potential benefit from long-term Belt and Road infrastructure investment to facilitate China to Europe transport (perhaps, made more urgent by disruption related to the Russia-Ukraine War).
Thus far, Kazakhstan appears to have found a foreign policy path between the US-EU condemnation of Russia and its deep trade ties with Russia (10% of exports, 35% of imports). It has not faced any significant repercussions since abstaining in the March 2022 UN vote to condemn Russia and voting against expelling Russia from the Human Rights Council in the April 2022 UN vote.
Kazakhstan protests but key risk remains succession, January 2022