Kazakhstan’s economy has entered a period of structural risk realization

main conclusions

• ACRA is has adjusted its macroeconomic forecast for 2022–2024. The Agency has considered the most likely scenario for the development of Kazakhstan’s economy in the medium term, taking into account the impact of both external and internal factors, as well as in the context of the implementation of a number of economic and political decisions in the country, which largely concern the public sector.
• Besides overall growth of uncertainty and the materialization of structural risks, there is a high possibility of realization of new risks of a structural nature, primarily in the external sector. These are technological and logistical risks, as well as risks of changing foreign trade routes. This all impacts the pricing structure of both commodities (exports) and ready products (imports) and consequently may considerably influence potential economic growth, the forex market, and consumer and industrial inflation.
• Real GDP growth will be around 3–4.1% in 2022–2024. This year, growth was driven by oil and gas condensate production, as well as construction. In the future, these sectors will be joined by services and agriculture, although they will make a less tangible contribution. Performance in a number of extractive sectors and the manufacturing industry will constrain growth.

• Tight monetary conditions will remain in place over the forecast horizon and inflation may continue to be heightened over a drawn-out period. The dynamics of the tenge exchange rate, inflation in trading partners’ economies, high inflation expectations in Kazakhstan, and to a lesser extent, fiscal stimulus, will be pro-inflationary factors. ACRA views tight monetary policy and gradual stabilization of transport and logistics schemes as deflationary factors.

• Changes to logistics, as well as in the global structure of supply and demand, will create conditions for restructuring the external sector of Kazakhstan’s economy, geography, and the commodity structure of its exports and imports. This sector will be supported by such factors as the favorable situation for commodities and the inflow of foreign investments. With this in mind, the current account will be in surplus in 2022, and a larger surplus may be recorded in 2023–2024.

Table 1. Base case scenario of the macroeconomic forecast from 2022 to 2024

¹ Real growth rate according to the World Bank’s methodology
² Economically active population
³ National Fund of the Republic of Kazakhstan

economic activity

From 2022 to 2024, GDP dynamics will be supported by the extraction of raw materials, while in some industries the risks of recession will remain. In 2021, economic activity in the country grew by 4.1% and could have gained a foothold at the level of long-term growth potential (4–5%). However, 2022 brought serious shocks, which were mainly associated with weakened external demand and technical difficulties that periodically arose in the mining sector.

At the same time, the consequences of Qańtar⁴ were not a significant negative factor for the economy. Activity in the sectors that were must vulnerable during the events of this January — retail trade and provision of informational and telecommunications services — rapidly recovered in February and March. As a result, for Q1 2022 these sectors recorded positive performance compared to the same period in 2021, with growth in real terms amounting to 8% and 15.7%, respectively.

Despite the challenging geopolitical situation in 2022, in ACRA’s opinion, investments will grow by 3% by the end of the year, and growth may remain at this level over the entire forecast horizon. At the same time, capital investments may be unstable if risks related to the possibility of secondary sanctions materialize or the overall investment climate deteriorates. However, the Agency does not include this in its base case scenario.

Given the tight monetary conditions and growing uncertainty associated with high inflationary expectations, domestic lending will obviously record moderate dynamics.

ACRA estimates that real GDP growth will amount to 3% in 2022, while in 2023–2024 it is expected at 3.9–4.1% (Fig. 1). This year, growth was driven by oil and gas condensate production, as well as construction. In the future, these sectors will be joined by services and (less likely) agriculture. Relatively high prices for oil and a number of exported agricultural goods will have a positive impact on GDP, while performance in extractive sectors (except oil and gas) and a number of manufacturing industry sectors related to orders from Russia and Belarus or transit via these countries will constrain growth.

⁴ Qańtar (also ‘qaraly qańtar’ or ‘qandy qańtar’), which means ‘January’ in Kazakh, is a term used to describe the events that took place in a number of Kazakh cities in January 2022.

external accounts and exchange rate

Moderate dynamics of the tenge exchange rate will be facilitated by a tangible increase of exports, a stable inflow of investments and receipts of international reserves. There has been a significant increase of exports of goods and a more restrained increase of imports in 2022. The trade balance, which in 2021 almost doubled compared to the indicator for the pandemic year of 2020, amounted to USD 29 bln (an increase of 2.2 times year-on-year) according to preliminary results for three quarters of 2022. Net exports may reach USD 41 bln, and the current account may stand at 1.2% of GDP by the end of this year.

ACRA notes that these results were achieved largely thanks to a favorable situation for Kazakhstan’s traditional commodity export goods. In H1 2022, 75% of growth of goods exports was generated by oil and gas condensate, of which 66 pps of growth was down to higher average annual prices and only 8.5 pps was due to higher physical volumes of exports.

In the forecast period, the general focus on the formation of a positive trade balance and a weak positive current account balance will remain unchanged — according to ACRA’s estimates, this indicator will amount to 2.7–3.2% of GDP in 2023–2024 (Fig. 2).

The country’s external accounts, as well as short-term currency shock episodes, influenced the tenge exchange rate throughout the year. Over the period since the start of the year there has been a slight (8%) weakening of the USD/ KZT exchange rate, while Kazakhstan’s currency has weakened more significantly (16%) against the Russian ruble. The Agency assumes that the national currency will perform in a similar way in 2023–2024, and the average annual revaluation of the exchange rate will be 6–10%. This will be driven, on the one hand, by steady growth in exports of goods and services, and on the other hand, by restrained demand for imported goods and services, taking into account the moderate dynamics of domestic demand.

The possibility of serious currency shocks taking place in the forecast period remains, given the risks of revaluation of the tenge exchange rate against the ruble, as well as against the dollar and the euro. Nevertheless, the aforementioned risks can be seen as moderate, given the possibility of the country using its monetary reserves to smooth out particularly significant episodes of volatility.

The basic structural changes in the Kazakh economy in the analyzed period are likely to affect the external sector, since it acts as a sort of conductor of transformations in commodity and logistics routes, as well as in the structure of supply and demand in the global economy. Sporadic bursts of foreign investment inflows are possible in the coming years, mainly depending on trends in the Russian economy, which are difficult to predict at the moment. It should be noted that the national economy of Kazakhstan is in any case a net recipient of foreign direct investment, the inflow of which has ranged from USD 15 to 24 bln per year over the past decade.

MONETARY POLICY AND INFLATION

Monetary policy will remain tight amid record inflation supported mainly by imported inflation. Over the past period of 2022, consumer inflation broke the record of 2016 and in October it reached 18.8% year-on-year, which ACRA estimates as the peak of the current inflationary surge. However, in December and January, price growth may slow down slightly due to seasonality and a time lag in the manifestation of the effect of using monetary tools.

The main inflationary factors in 2022 are the volatile exchange rate of tenge and its weakening against base trade currencies (by 8% against the US dollar, 16% against the ruble, and 4% against the yuan), an increase in prices for agricultural products (the FAO Food Price Index amounted to 135.9 points in October with an upward influence of prices for cereals), imported inflation from the Russian Federation, and difficulties in making logistical decisions against the background of the current geopolitical situation.

For more details, see ACRA’S commentary Kazakhstan’s Monetary Policy: on the Way to Long-Term Tightness from July 4, 2022.

Kazakhstan’s monetary authorities partially mitigated the inflationary surge by applying rather tight monetary policy (Fig. 6), and the government has postponed inflation to some extent thanks to measures regulating prices for gas and utility services: in the first case, a moratorium on price increases was introduced until the beginning of 2024, and in the second case — until July 2022.

In ACRA’s opinion, the accumulated result of the measures taken by the National Bank of Kazakhstan (NBK) and the government of the country will manifest itself in the fact that in 2023, average annual inflation will return to the level of 11–12%, and in 2024 will be about 7–8%.

Pro-inflationary factors in the analyzed period include the dynamics of the tenge exchange rate, inflation in the Russian economy, high inflation expectations in the Kazakh economy, and, to a lesser extent, fiscal stimulus. Among the deflationary factors, ACRA notes tight monetary policy that has a restraining effect on domestic demand in 2022–2024, as well as stabilization of transport and logistics chains.

The NBK’s target inflation band of 4–6% will become relevant again no earlier than H2 2024, provided there are no new shocks in the monetary sector, while the NBK’s base interest rate will be in the double-digits and remain a key instrument of tight monetary policy — according to ACRA’s estimates, the rate will be 12% in 2023 and 10% in 2024.

The Agency’s base case assumptions for the forecast period regarding sources for replenishing reserves and the low probability of more active usage of the country’s total reserves (through currency interventions and/or transfers from the NFRK to the state budget) do not imply significant use of international reserves or NFRK funds. In this regard, the volume of total reserves, which is the sum of international reserves and NFRK assets, may amount to USD 87–97 bln in 2022–2024, thus reaching the levels of 2021 and H1 2022. After the peaks of 2018 and 2020, when total reserves amounted to 66% and 55% of GDP, respectively, the indicator stabilized at around 40–42% of GDP. This is due to lower average oil prices over the past five years compared to previous periods (Fig. 5). 

fiscal policy and public debt

Fiscal policy continues to be stimulatory and public debt remains stable. From January to September 2022, Kazakhstan’s budget revenues increased by 31% year-on-year, while expenditures increased by 19% year-on-year, which indicates faster growth of revenues over expenditures. ACRA expects the budget deficit to be 2.6% of GDP in 2022, which reflects the still active role of the public sector in stimulating the economy.

In ACRA’s opinion, one of the main trends in the budget of both recent years and the forecast period (2022–2024) is the increased volume of public spending, facilitated by, in addition to fiscal factors, a 41% increase in the minimum wage in 2021. In general, taking into account expectations for budget revenues and expenditures, debt servicing expenses in the range of 7–8% of GDP, and the amount of transfers from the NFRK at KZT 2–4.6 tln per year, the state budget of Kazakhstan should be in the range of 2.6–3.7% of GDP and remain in deficit.

Fiscal rules will come into effect from 2023, creating or strengthening restrictions on NFRK transfers to the budget, growth of budget expenditures, debt servicing expenses, terms of the use of NFRK funds in budget formation, and so on. Being an extremely positive factor, at the moment, the parameters of state accounts do not imply immediate restrictions by these rules.

Due to steady budget deficits, ACRA expects Kazakhstan’s public debt to grow to KZT 32 tln in nominal terms (excluding NBK debt) in 2022–2024, although, relative to the country’s GDP, public debt will remain almost at the current level of 24–26% of GDP. In general, the Agency considers that Kazakhstan’s public debt will remain moderate and relatively stable.

forecast scenario risks

Structurally speaking, Kazakhstan has a small open⁵ economy, which makes it highly vulnerable to external shocks. ACRA notes that this year, Kazakhstan’s economy has faced certain structural risks like import of inflation, failures in the transportation of raw materials to foreign markets, and pressure on the tenge exchange rate caused by an imbalance in the Russian foreign exchange market.

ACRA sees three main risks in the forecast period. First, the negative consequences of a weaker global economy, high likelihood of stagflation in the United States, and growing uncertainty in China will be more significant than expected for the dynamics of demand for goods exported from Kazakhstan. This, in turn, will weaken the country’s current account, increase pressure on the tenge, and slow economic growth down to a level significantly below its potential. Other sources of this risk may be a complicated COVID situation in China, aggravation of the geopolitical situation, and disruptions of logistics chains in international trade.

Second, in ACRA’s opinion, the protracted nature of inflationary waves is a risk that will prolong the impact of high inflation on the country’s economy, aggravating the situation with respect to real disposable incomes, aggregate demand, and the investment climate.

And, finally, third, ACRA notes the risk of weakening interest in KZT-denominated assets due to tighter monetary policies in a number of major economies, especially the United States, as well as due to the growing uncertainty in the region in general. This risk will directly affect the tenge exchange rate and inflation and, to a lesser extent, the growth and value of Kazakhstan’s public debt, as well as the country's total reserves.

⁵ ACRA expects the global share of Kazakhstan’s economy to amount to 0.2% and the ratio of external trade turnover to GDP to be 59% by the end of 2022.

Figure 1. GDP growth is supported by the construction and mineral extraction industries and, in the forecast period, by the services sector

Source: ACRA

Figure 2. Current account: key components are growing after a decline in 2020, USD bln

Sources: NBK, ACRA

Figure 3. Kazakhstan’s budget revenues are relatively low

Sources: Ministry of Finance of the Republic of Kazakhstan, ACRA

Figure 4. (а) NFRK transfers to state budget will be stable from 2023 relative to budget revenues and GDP growth, (b) NFRK assets are also stable relative to the size of the economy

Sources: Ministry of Finance of the Republic of Kazakhstan, ACRA

Figure 5. Stabilizing total reserves amid moderate oil prices

Sources: NBK, ACRA

Figure 6. Monetary policy has tightened as inflation has grown and STEI⁶ has turned around

⁶ Short-term Economic Indicator amounting to about 60% of GDP.
Sources: NBK, Bureau of National Statistics of the Agency for Strategic Planning and Reforms of the Republic of Kazakhstan, ACRA