BCG outlines $170 billion FDI potential for Central Asia over next decade

19 March 2019 5 min. read

Boston Consulting Group has outlined a $170 billion foreign direct investment potential for Central Asia over the next ten years.

Currently overlooked compared to other developing nations, the Central Asian region –Kazakhstan, Uzbekistan, Turkmenistan, Tajikistan, and Kyrgyzstan – holds a ten-year foreign direct investment potential of $170 billion according to a report from leading American strategy and management firm Boston Consulting Group, with up to $70 billion of that figure in the non-extractive industries.

The report, released in both English and Russian, contends that Central Asia – home to roughly 70 million people and a domestic market estimated at $150 billion – could attract the significant FDI sum over the next decade through greater interregional coordination, such as region-wide infrastructural improvements, the facilitation of cross-border movements, and a harmonised regulatory landscape.Central Asia demographic overviewWith the global balance of economic power shifting rapidly toward Asia, and Central Asia featuring as a core region along China’s massive Belt and Road infrastructure initiative, the report posits the relatively untapped region as a prime strategic location for longer-term investment opportunities – including in areas beyond the traditional extractive industries, such as in petrochemicals and tourism.

According to figures cited by the authors, Central Asia’s collective GDP was around $265 billion in 2017 – equivalent to 0.3% of the world’s GDP and comparable to Central America ($255 billion) and Finland ($252 billion) – with the region accounting for 1% of the world’s population, roughly on par with Thailand or Turkey, while it’s 4 million square kilometer area is nearly the size of the entire European Union.Non-extractive industries FDI to GDP in Central Asia and comparable regionsPointing toward sectors such as agro-processing, petrochemicals and tourism as high-potential opportunities (along with country-specific sectors), the analysts arrive at the $170 billion sum by considering the share of FDI for non-extractive industries to GDP against comparable regions between 2008 and 2016 – with for example the 18.2% figure in Central Asia vs the 47.2% in the Balkans highlighting the sizeable local opportunity.

“Promising industries were selected based on three criteria,” says Vladislav Butenko, Senior Partner and Chairman of BCG Russia; “A relatively low level of existing investments, a low barrier to entry and a priority for the industry for the government. In addition, agricultural processing and tourism will require relatively small investments. And the more capital-intensive petrochemical industry is attracted by the availability of high-quality human resources.”

As a current breakdown, green-field FDI in Central Asia has reached $113 billion since 2008 (representing 1.5% of the world total), with nearly six tenths invested in natural resource extraction and Kazakhstan attracting the overwhelming bulk, at 70 percent of the region’s total, followed by Uzbekistan (16%) and Turkmenistan (8%) – three countries which together featured on a recent McKinsey list of 17 of the world’s ‘outperforming’ economies, those which have grown by at least 5.0 percent annually over the past 20 years.Industries with high and low levels of FDI in Central AsiaAs to the potential on a country-by-country basis, of the $170 billion figure BCG estimates Kazakhstan’s FDI potential over the next ten years at $100 billion, including up to $40 billion into non-extractive industries, while Uzbekistan – where BCG together with McKinsey have been drafted in to aid with economic development – in the same period could see a potential $65 billion FDI boon, with $20 in non-primary areas, having since 2018 only attracted $18 billion in total.

“Today, the region has an opportunity to change the trajectory of development,” said Reza Nuriev, head of BCG’s Central Asian and Caspian regions. “To fully realise the potential of the region, it is necessary to develop coordination between countries, and the success of this process largely depends on two key states – Kazakhstan and Uzbekistan. A strong partnership between them could be the first step towards developing cooperation in the region as a whole.”

“Large-scale reforms are underway in Central Asia aimed at increasing their investment attractiveness, and significant positive changes are already noticeable,” adds Sergey Perapechka, head of BCG’s Public Sector Practice for the CIS region. “Systemic positive changes are critical to maintaining high growth rates: measures to diversify the economy and reduce dependence on oil and other raw materials will help countries in the region improve the investment climate, while ensuring resilience to external shock factors.”