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FEDERATION OF EURO-ASIAN STOCK EXCHANGES ANNUAL REPORT JUNE 2010STATE COMMODITY & RAW MATERIALS EXCHANGE OF TURKMENISTANECONOMIC AND POLITICAL DEVELOPMENTSPolitic and Economic EnvironmentMr Berdymukhamedov has presided oversome modest reforms, taking steps to redresssome of the more damaging policiesimplemented by his predecessor, SaparmuradNiyazov. However, prospects for afundamental shift towards a more liberalpolitical system seem remote. Reforms are notexpected to result in a more transparent ordemocratic political process. The number ofdeputies in the Mejles (parliament) wasincreased, ostensibly to ensure betterrepresentation of the population, but it enjoysno greater authority than its predecessor.Crucial to Mr Berdymukhamedov's survival inoffice will be rewarding officials and balancingcompeting interests–ensuring the flow of gasexports, and hence inflows of foreignexchange–which underpin the patronagenetwork. This will require a resolution to thedispute with Russia stemming from theshutdown (due to an explosion in early April)of the main gas export pipeline to Russia,halting most Turkmen gas exports for at leastthree months, and evolving into a dispute overthe price of Turkmen gas exports to Russia.The administration is considering takingTurkmenistan some way along the pathfollowed by Kazakhstan: making the countrymore welcoming to foreign investment, butkeeping political liberalisation to a minimum.Although Russia will remain Turkmenistan'slargest gas export market in 2009-10, it willface growing competition from China, the EUand, potentially, the Middle East. However, withglobal energy prices set to remain depressedfor some time, doubts over the commercialviability of such projects will persist, and willmake it more difficult to find the necessaryfinancing, particularly given that many of theEU's larger economies are expected to postnegative growth in 2009. For this reason,Russia is expected to remain Turkmenistan'slargest gas export market for the foreseeablefuture. China and Turkmenistan areconstructing a gas pipeline that will connectthe two countries. Turkmenistan says that it willbe ready to start pumping gas at end-2009,with China eventually expected to import up to30bn cu metres annually from Turkmenistanalong this route. Turkmenistan will alsopromote closer links with countries in theMiddle East, such as Jordan, which will give itfurther leverage.Economic PerformanceThe IMF has praised the authorities' "prudent"macroeconomic policies, but the loss of asizeable part of gas export revenue is likely tobe placing serious strains on the budget.Despite Mr Berdymukhamedov's statedwillingness to contemplate economic reforms,he has in practice presided over few reformistmeasures in his two years in office. The stateretains a dominant role in all sectors of theeconomy, and relies on subsidies, pricecontrols, and the free provision of utilities, tokeep the economy afloat. State control overthe leading economic sectors remains tight,the public finances remain opaque, andmonetary policy remains rudimentary. Somepolicy changes are possible in thehydrocarbons sector; recognising the country'stechnological and financial limitations indevelopment of the sector, the president hasbeen more receptive to foreign oil and gascompanies wishing to invest in the industry.Companies from countries such as Russia andChina, having greater experience of operatingin Turkmenistan, will be well prepared to workwithin existing constraints. Serious restrictionson liquidity, especially in 2009, are likely to limitRussian investment. Owing to likely losses tobudget revenue from the disruption to gasexports from early April, it is forecast a deficitequivalent to 1% of GDP in 2009, up from ourprevious forecast of 0.1%. The deficit isexpected to decline moderately in 2010, to0.5% of GDP.Despite evidence that the global economy isstabilising, the outlook remains extremelysubdued.After posting estimated growth of 3% in 2008,the economy is expected to contract by 5% in2009. Russian investment will be lower than inrecent years. Chinese investment into theTurkmen hydrocarbons sector will providesome support for the economy, but investmentfrom other sources will remain minimal.Agricultural output should improve from 2009owing to the weak base established in 2007-08, but the sector will continue to experienceserious difficulties because of the lack ofreform.Estimated inflation in 2008 accelerated to 13%due to large increases in prices of fuel andpublic transport, as well as higher prices forimported foodstuffs. The rate is expected toaccelerate further in 2009, to 15%; althoughglobal non-oil commodity prices are forecastto fall, the price of imported goods will bepushed upwards by the devaluation andredenomination of the manat. Base effectsshould allow consumer price inflation todecelerate to around 12% in 2010.A current-account surplus was estimated atUS$4.7bn in 2008, equivalent to more than50% of GDP, and is expected to continue topost substantial, although smaller, surplusesthroughout the forecast period. Price trends forimports of capital goods are favourable, andthe devaluation of the official exchange rateand restrictions on access to foreignexchange, in conjunction with tariff and nontariffbarriers, will keep import growth muted.Export revenue will be lower. Reliance onimported services in sectors such asconstruction and hydrocarbons will result inmoderate growth in services debits. Transittrade will provide only limited services credits,ensuring that the services deficit remainsrelatively large. Gas exports will keep theoverall current account in strong surplus—albeit substantially lower than previouslyforecast.** The Economist Intelligence Unit Limited, July 2009REAL GDP(TMM millions)CONSUMER PRICES (% CHANGE PA; AV)(%)252015105062005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 201013121110987PAGE 143