Recent Economic Developments
Real GDP growth rose by 4.1 percent in the first half of 2019, reflecting robust expansion in household and business spending. The contribution of net exports, which had provided a substantial addition to GDP during the past two years, faded because of a surge in imports. Private consumption expanded by an estimated 5 percent, supported by higher wages and social benefits and increased bank lending. Investment increased by 3.4 percent. On the supply side, growth was supported largely by non-tradable services, while the contribution of mining remained moderate compared to previous years.
The current account deficit widened to 2.7 percent of GDP in the first half of 2019 from 1.8 percent a year earlier, as higher domestic spending boosted imports and lower oil prices squeezed exports. Net inflows of foreign direct investment (FDI), mostly in the mining sector, fell to 4.4 percent of GDP from 5.6 percent a year earlier. With net capital inflows lower than the current account deficit, the National Bank of Kazakhstan’s (NBK) net international reserves declined to $27.7 billion by the end of June 2019 from US$30.9 billion at the end of 2018. A weaker current account put pressure on the tenge, which fell by roughly 3 percent to a historic low level in August 2019 relative to its record in early January.
Higher revenues largely offset stepped-up spending to keep the deficit of the general government budget (excluding the National Fund of the Republic of Kazakhstan) at about 0.3 percent of GDP in the first half of 2019, little changed from a year earlier. Revenues increased because of improved tax administration and the weaker tenge.
Although the Government supported the banking sector through several bailouts, the sector remains fragile. The NBK plans to conduct an asset quality review of banks later this year, while in June 2019, officially reported nonperforming loans amounted to 9.4 percent of total loans. A continued contraction in corporate lending was more than offset by increased lending to households, in part reflecting the Government’s program of subsidized loans to households.
Twelve-month inflation increased to 5.4 percent in July 2019 from 4.8 percent in March 2018, partly because of a faster increase in food prices and a recent pickup in import prices. After surging in 2016 following the tenge devaluation, inflation has been following a downward trend over the past three years.
A substantial increase in the minimum wage at the beginning of the year and a strengthening labor market resulted in an increase in real wages to 7.4 percent in the first half of 2019. The unemployment rate slightly declined to about 4.8 percent.
Poverty rates have yet to return to their previous lows following the 2014–16 decline in oil prices and the ensuing economic slowdown that pushed the poverty rate above 12 percent (using the US$5.5/day international poverty line). But in the context of rising wages and more generous social assistance, the poverty rate is expected to have continued to fall to 8.5 percent in 2018, marking the second consecutive year of poverty reduction.
Economic activity is likely to slow modestly in 2019 because of softer exports, including of hydrocarbons. Growth is expected to slow further in 2020, reflecting the impact of stagnant oil production and sluggish demand in Kazakhstan’s main trading partners, as well as the diminishing effect of the fiscal stimulus on domestic demand.
Household spending and investment will continue to drive demand, although to a lesser extent than in previous years. On the supply side, growth is expected to be supported by non-tradable services. A weak performance of manufacturing, owing to lackluster FDI and the limited participation of domestic companies in the global supply chains, will weigh down on the economic expansion.
Lower oil prices and higher domestic demand for imports will likely keep the current account in a modest deficit over the medium term.
Inflation is likely to stabilize around its current level. However, rising domestic cost pressure and potential tenge volatility may strengthen inflation expectations and push up price increases.
The Government’s policy actions to support the socially vulnerable, along with solid job creation, are expected to help bring the poverty rate down to near 8 percent by 2021. A significant portion of the population will likely remain close to the poverty line, and any potential shocks to economic activity might reverse the prior gains.