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Foreign Investment In Renewables And Beyond: The Last Best Hope For Central Asia’s Economic Recovery

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Central Asia’s economies have been hit hard by the COVID-19 pandemic, with demand for the region’s prolific oil and gas supplies down substantially over the course of 2020. Relative to last year, global oil demand is expected to contract by 9 million barrels (about 10 percent) and crude prices remain at an anemic $48/bbl. International natural gas prices are at multiyear lows. This is bad news for gas giant Turkmenistan, hydrocarbon rich Uzbekistan, and OPEC+ member Kazakhstan, which all rely on oil and gas revenues to fill government coffers.

Due to COVID-19 the region’s GDP is projected to shrink by an average 1.7% in 2020, a massive reversal from pre-pandemic projections of 4-6% growth made in October 2019 by the World Bank. Global lockdown measures deployed in May 2020 led to a sharp decline in the region’s commodity-heavy exports, with subsequent contractions in services and manufacturing. In reality, the GDP slump may be even worse.

Foreign investment will play a key role in getting the region out of its economic slump. To learn more about the investment picture of Central Asia, please tune in to the International Tax and Investment Center (ITIC) panel on Thursday, December 10 at 9:00 am EST where experts will discuss findings from a newly published report authored by me and my colleague, James Grant. I’ll be joined by Kazakhstan’s Ambassador to the United States Erzhan Kazykhanov, one of the IMF’s foremost Central Asia experts Madina Zhunusbekova, and Deputy Minister of Foreign Affairs for Kazakhstan Almas Aidarov.

As we have seen over the course of 2020, Central Asian economies with the closest trade, commodity, and remittances relationships with the Eurozone, Russia, and China felt a disproportionate impact from the COVID downturn. OPEC+ production cuts to buoy crude oil prices in tandem with collapsing demand for transportation fuels compounded national revenue shortfalls in hydrocarbon exporters like Kazakhstan and, to a lesser extent, Turkmenistan and Uzbekistan.

Price and demand drops for feed stocks (natural gas and petroleum) and industrial power sources (natural gas and coal) further hurt national economies. In Kazakhstan and Uzbekistan, robust fiscal stimulus packages of 9% and 1.5% of GDP respectively helped curb economic slowdowns and better positioned those countries for recovery.

COVID-19 also highlights the vulnerability of the extractive/remittance-dependent economic model, a system that brings with it the slew of social, political, and economic risks that remain barriers to outside investment. Concerns over governance, protectionist trade policies, and private sector competition are also front-and-center in the eyes of potential investors.

If there is a silver lining to the global pandemic, it is the clarity in barriers to economic development and the reinvigorated interest in accelerating Central Asia’s economic transition away from fossil fuels, raw materials, and remittances towards knowledge-based industries. While the strength of regional recovery is uncertain amidst the pandemic, the World Bank is anticipating 3.1% growth throughout 2021, providing for a moderate rise in commodity prices. A “downside scenario” of sustained low commodity prices and weaker than anticipated demand could mean growth closer to 1.5%.

Diverse natural resources, plentiful human capital, a burgeoning small and medium-size enterprise (SME) sector, are beginning to draw investors’ attention. In the wake of COVID-19, Central Asia’s more advanced economies are pursuing policies of economic diversification and advancement accompanied by structural reforms intended to invite further investment. With and emerging tech and financial centers springing up, some countries making annual progress in the World Bank’s “Ease of Doing Business” index.

The region is in the early stages of an energy transition, with renewable energy sources (RES) beginning to crop up. High solar irradiance and strong winds across the Kazakh Steppe, for example, make the country well suited for the deployment of green energy technologies. The potential for wind power in the landlocked country is estimated at 920 billion kWh/year, and solar power could provide 2.6 billion kWh/year, with another estimated 4 GW of geothermal power that could be drawn from water in artesian pools.

Neighboring Uzbekistan, which relies on hydropower plants for 10% of its energy mix, has plans for the expansion of its renewable energy sector: low carbon power generation facilities totaling over 8.4 GW are planned to be completed by 2030. Plus, construction of Uzbekistan’s first nuclear power plant with a capacity of 2.4 GW began last year. Once online, these projects will contribute to Uzbekistan’s goal of a 25% renewable energy portfolio within the decade.

How the nations of Central Asia manage the post-COVID recovery, and the extent to which they embrace economic diversification and market-oriented policy reform, will determine the future of their foreign investment profiles. ‘Green growth’ and post-industrial economic projects will play a pivotal role in this process.

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