Balance of payments in Q3 2017

Elmira ArnabekovaNovember 13, 2017

According to the preliminary data of the NBRK, the current account deficit in the third quarter deteriorated to $2.1 billion by 42.6% qoq. However, on an annualized basis, in the third quarter there was an improvement of 1.7% yoy. For the period of 9 months of 2017, the current account deficit decreased by 16.4% compared to the same period last year.

Export of goods in the 3rd quarter declined by 5.7% qoq, while imports continued to grow by 1.3% qoq, albeit with a significant slowdown. As a result, the trade balance for the quarter decreased by 19% qoq to $3.4 billion. With a seasonal cleaning, imports of goods and services are declining for the second consecutive quarter.

The current account deficit deepened in the 3rd quarter of 2017 mainly because of a decrease in exports and a consistently high level of primary income payments. Oil exports (which account for more than 52% of total exports), according to the latest data, declined in July and August in physical volumes and revenues mom. The decrease in August to the level of June was almost 1 million tons (-16%) to 5 million tons in August. Revenues for oil exports fell by 21% in August to the level of June, despite the fact that the price of oil for this period grew by 11% to $52 in August. Export of natural uranium and its compounds decreased by 34.9%, ferrochromium by 19.8% in August compared to the level of exports in June (the cumulative share in exports is 6%). In general, almost all the groups of goods exported in August experienced a decline in comparison with the level of the end of the second quarter: raw materials, -20% (59% share), intermediate goods, -13% (27.1%), consumer goods, 5% (10.3%). Import in July fell by 7% mom (more than half of the decline (52%) was provided by capital goods), in August there was a slight recovery - an increase of 1.8% mom. In our opinion, the growth of imports in Q3 was limited due to a rise in price due to the weakening of the national currency (weakening by 5.6% qoq against the dollar and by 2.4% qoq against the ruble) and suppressed activity from demand side.

The outflow of capital from primary incomes payments (86% of which represents dividend payments from direct investments) decreased by 8.5% qoq to $4.1 billion. However, the positive trade balance does not cover all the necessary payments to foreign investors on income (only 85%), they are stable during the year at a level of above $4 billion.

In annual terms, the balance of payments indicators improved compared to last year. In particular, the reduction of the current account deficit for 9 months of 2017 is due to a more favorable price situation in raw materials markets. Export of goods in comparison with the last year for 3 quarters increased faster (+31.1% yoy) than imports (+15.6% yoy). This resulted to a trade balance indicator, which is 80% higher than last year ($11.98 billion).

However, it is worth noting that the increase in payments for primary incomes that are mainly revenues from direct investment, grew more in three quarters - almost 1.5 times for 3 quarters compared to the same period last year to $13.21 billion.

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Inflow on the financial account in the 3rd quarter was $4.1 billion (more than 4 times the previous quarter). The main inflow was observed in portfolio investments, which grew 2 times qoq to $6.3 billion, apparently provided by the sale of NF FX assets. The inflow of direct investments fell to $0.2 billion, down from $1.1 billion in the previous quarter.

In the breakdown by sector of the economy - banks and other non-financial and non-government sectors in the third quarter of this year were mainly engaged in the acquisition of financial assets, and in the net volume, in total, provided an outflow of $1.6 billion.

In annual terms, the inflow of capital on the financial account for 3 quarters of this year compared with the same period last year fell from $11.6 billion to $6.7 billion (-43% yoy). The decrease is due to a 3-fold drop in inflow of direct investment to $4.8 billion compared to last year, when foreign investments were at a record level ($14.9 billion for 9 months of 2016).

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The NBK reserve assets related to a balance of payments operations increased sharply by $1.3 billion in 3rd quarter, this growth is apparently related to the transfer of NF assets to the regulator's accounts and banks operations. In general, following the results of 9 months of the current year, the reserves of the NBK related to the balance of payments operations grew by only $0.5 billion, as in the previous 2 quarters the reserve assets of the regulator were used to finance the balance of payments. However, we note that as of October 1, the reserves of the regulator increased more and amounted to $32.2 billion (as of January 1, $29.5 billion), which is apparently due to the growth of the value of monetary gold, as well as the operations for converting NF currency assets.

Our opinion

The improvement in terms of trade, as well as the physical growth of exports in comparison with the previous year, still has a positive effect on the balance of payments (the average price for oil for 9 months of this year was $51.8/barrel, + 24% yoy). The increase in the trade surplus is due to a faster growth in exports (+ 31.1%) compared to imports rise (+15.6%) in annual terms.

According to our expectations, the trend of the growth rates of export earnings exceeding the rates of import expenditures in conditions of a weak demand will persist until the end of the year. At the same time, the growth of payments for primary incomes negates the positive effect of increasing the trade balance by 50%. As a result, the current account deficit, according to our estimates, will improve to 3.2% of GDP by the end of 2017 against 6.4% in 2016.

The inflow of capital on the financial account allows to finance the current account deficit by easing the pressure on the national currency. At the same time, the drop in the volume of direct investments is a negative factor, while maintaining such a tendency in order to finance the current account deficit, it will become necessary to use international reserves of the country. It is worth noting that the current account turning to a positive zone is still limited, as the inflow of capital through the financial account also contributes to the growth of investment imports and dividend payments to foreign investors. Under these conditions, there is a need to diversify the country's exports, increase non-oil exports and increase production aimed at import substitution.