Economic Analysis
Kazakhstan

Kazakhstan

Population 18.9 million
GDP per capita 9,071 US$
B
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 4.5 -2.6 3.3 4.3
Inflation (yearly average, %) 5.3 6.8 8.9 6.5
Budget balance (% GDP)* -1.5 -8.0 -5.4 -4.1
Current account balance (% GDP) -4.0 -3.7 -2.0 -1.5
Public debt (% GDP) 19.0 24.0 25.4 26.0

(e): Estimate (f): Forecast *Including transfers from the NFRK sovereign fund

STRENGTHS

  • Significant oil, gas and mining potential
  • The State enjoys a net creditor position and has a well-endowed sovereign wealth fund thanks to hydrocarbon production
  • Abundant FDI
  • Floating exchange rate
  • Member of the Eurasian Economic Union (EAEU) and China's Belt and Road Initiative (BRI)
  • Strategically located between Europe, Russia and China

WEAKNESSES

  • Highly dependent on Russia (main partner in diplomacy and security) and China
  • Highly dependent on commodities (oil, gas, uranium, iron, steel, copper): under-diversified economy
  • Inadequate road, port and electricity infrastructure
  • Weakly competitive market structures (high concentration in key sectors and significant government presence)
  • Banking system still fragile and significant dollarization (37% of deposits and 13% of loans in 2020)
  • Weak governance (corruption, politicised court system, deficiencies in collective proceedings, economic power concentrated with the elite)
  • Landlocked, low population density, relatively far from major world markets, significant non-tariff barriers despite World Trade Organization (WTO) membership

Risk assessment

Growth driven by hydrocarbons and private consumption

Economic growth will strengthen significantly in 2022, thanks to higher hydrocarbon prices and strong growth in private consumption.

The continued global economic recovery will keep energy demand high, contributing to increased exports of goods and services (35% of GDP), of which hydrocarbons account for 65%. World Brent Blend prices will average USD 75/b in 2022, compared with USD 70/b in 2021. Rising demand, particularly from China, along with the loosening of the production cap contained in the OPEC+ agreement, will contribute to an increase in hydrocarbon output. The oil potential of the Tengiz field will be significantly tapped. Private consumption (62% of GDP) will grow. President Tokayev has also ordered increases for some public sector wages (20% increase between 2022 and 2025) and the minimum wage (41% increase as of 1 January 2022). The positive impact of these changes on consumption will be eroded by high inflation. Moreover, such a strong increase in wages could accentuate inflationary pressures. Accordingly, inflation will tend to moderate, but is set to remain above the central bank's target corridor of 4%-6%. There is a risk of heightened price volatility, as inflation expectations are weakly anchored and the monetary policy framework is not well developed. The policy rate could well be tightened further by at least 50 basis points (it was 9.75% in October 2021) as real rates are close to zero.

 

President Tokayev wants to end public bailouts of state-owned banks. He originally indicated this intention in 2019, but bailouts have continued since then. Despite the injection of KZT 6.3 trillion (USD 14.8 billion) in economic stimulus during the pandemic, commercial banks are not financing small projects, especially in rural areas. He has asked the government to develop measures to support microfinance projects. Credit to the private sector occupies a small place in the economy (22%).

 

Fiscal tightening to spare the sovereign wealth fund

In 2022, the current account deficit is expected to narrow further due to an increased trade surplus from hydrocarbons and a sharp rise in remittances from expatriates in Russia. It will be largely financed by central bank (NBK) reserves and the assets and income of the NFRK sovereign wealth fund (USD 92 billion in total at the end of the first half of 2021, or 46% of GDP), amid declining net FDI flows (3.3% of GDP in 2022). Unlike during the 2015 crisis, foreign exchange reserves, excluding gold (USD 24 billion, equivalent to 7.5 months of imports), have not been systematically used to bolster the floating tenge, even if occasional interventions by the NBK have provided support.

 

Reflecting heavy fiscal pressures, the president has instructed the government to refine the rules for drawing down the NFRK in order to limit the impact of the fiscal deficit on the fund’s assets, which shrank from USD 62 billion in 2019 to USD 55 billion in 2021. A counter-cyclical fiscal rule will be introduced, which is expected to restrict transfers from the wealth fund as well as the rate of growth of government spending, in order to reduce the fiscal deficit. Nevertheless, fiscal policy will remain expansionary in some areas, such as social assistance and wages, while curbing spending in others, such as support to large enterprises. A privatisation drive has been underway since 2014, so far with mixed results. The president has asked the Supreme Reform Council to draft a new privatisation plan. The government has set a goal of reducing the state's presence in the economy to 14% by 2025, after hitting the target of 14.9% in 2019.

 

Violent socio-political crisis 

Violent protests began on January 2, 2022, in the oil-producing city of Zhanaozen, quickly spreading to the country's largest city, Almaty. The reason: a change in pricing policy for liquefied petroleum gas (LPG), reducing subsidies for the fuel, and letting markets determine its cost. However, this is not the only reason for the protests. The socio-political environment has long been unchanged: low wages, late payments, poor working conditions, environmental devastation and corruption, exacerbated by the health crisis that exposed an inefficient and corrupt health care system. In response, President Tokayev reversed the increase in gasoline prices, extended subsidies to diesel, gasoline and other essential goods. He also announced a freeze on civil servants' salaries, wage increases in some sectors and the creation of a fund to solve social problems, to which the rich would contribute. Former President Nursultan Nazarbayev, who has been acting as an unofficial leader behind the scenes, resigned as head of the country's Security Council. As the violence continued, Tokayev declared a state of emergency and asked for support from the Collective Security Treaty Organization (CSTO), the Russian-dominated regional security bloc, to restore order. With tensions eased, Russian troops completed their withdrawal on January 19. A resurgence of protests is possible, as further radical structural reforms are unlikely. The Russian intervention reaffirms its influence and strategic interests in the region. China has been cautious about the Russian intervention, but once the situation stabilized, it seems to have approved of it. Sino-Kazakh commercial ties have remained intact. 

 

Last updated: February 2022

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