NOTE: Our Spring 2020 Regional Economic Update was published on 8 April 2020, and includes analysis of the economic impact of COVID-19 (Coronavirus) on countries in the region.
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Recent Economic Developments
Preliminary estimates suggest that real GDP grew by 4.5 percent in 2019, driven by buoyant consumer spending and mining-related investment. Higher wages, social transfers to low-income households, and rising retail credit supported a 6- percent expansion in consumer demand. Meanwhile, investment rose by 12.9 percent, driven by foreign direct investment (FDI) in the oil and gas industry and investment in residential construction. On the supply side, non-tradable services remained the main driver of growth, though the contributions of mining and manufacturing were moderate due to sluggish oil production and weak demand for processed metals.
Lower exports, higher remittance outflows, and rising imports widened the current account deficit to an estimated 3.3 percent of GDP in 2019 from a near balance in 2018. Higher household demand and capital investment in an ongoing mining project boosted import spending. Net inflows of FDI fell to 3.5 percent of GDP from 4.3 percent in 2018. Due to a wider current account deficit and higher outflows of portfolio investment, foreign exchange reserves fell to US$29 billion at the end of 2019 from US$30.9 billion a year earlier. The tenge lost 11 percent of its value against the U.S. dollar in 2019.
The fiscal stance was expansionary in 2019, with a government budget of 1.9 percent of GDP, higher than that in 2018 even as GDP growth increased. The non-oil fiscal deficit increased to 8.1 percent of GDP from 7.3 percent a year earlier, as higher expenditures outpaced revenues despite improved tax collection and additional transfers from the Oil Fund. Spending reflected the sizable increases in welfare support programs to socially vulnerable households. Public debt remained unchanged at roughly 20 percent of GDP.
The active role of subsidized credit support programs in Kazakhstan distorts credit markets and reduces the effectiveness of monetary policy. The National Bank of Kazakhstan (NBK) has continued to remove excess liquidity by issuing short-term notes.
In February 2020, 12-month inflation hit the upper limit of the NBK’s 4–6 percent target range. Higher increases in food and utility prices and exchange rate pass-through from the depreciated tenge were key factors pushing up inflation. After abrupt declines in oil prices, which put strains on the exchange rate, the NBK raised its policy rate by 275 basis points to 12 percent in March 2020.
The NBK’s asset quality review of bank assets showed a capital shortfall of US$1.2 billion for the 14 banks participating in the assessment. Lending to the corporate sector has continued to fall, largely on account of bad loan write-offs, risk aversion due to the high stock of NPLs held by the banks, and weak lending demand from small and medium enterprises (SMEs). The officially reported NPL ratio was 8.1 percent in January 2020.
GDP is projected to contract by 0.8 percent in 2020, as external demand for crude and manufactured goods fall notably and the COVID-19 mitigation measures sap consumer demand and investment. To contain the rapidly expanding coronavirus, the authorities have implemented extreme measures by locking down the country’s two key cities.
Prior to the COVID-19 outbreak, the draft budget for 2020 assumed a slight increase in the deficit, but considering plummeting oil prices and the standstill in economic activity, the deficit is likely to be significantly higher. In response to the economic crisis, the authorities have announced a fiscal stimulus package in the amount of KZT 4.4 trillion, equivalent to 5.6 percent of GDP.
Although a large part of the announced fiscal stimulus is expected to come from central bank resources and state-owned enterprises (and thus not from the central budget), the authorities intend to reallocate budget resources to the sectors most in need.
The current account deficit is expected to widen to 6 percent of GDP in 2020, in large part owing to the collapse in oil prices and deteriorating terms of trade. Inflation is likely to move up above the central bank target on the back of the depreciation of the tenge, which has lost almost 15 percent of its value against the U.S. dollar since the beginning of 2020.
The strict and prolonged lockdown measures could paralyze economic activity. If the pandemic continues to spread and the external economic environment deteriorates further, GDP could contract by as much as 3 percent in 2020, which would significantly increase the poverty rate.