Consolidated international reserves grew in November due to an increase in NF assets

Elmira ArnabekovaDecember 13, 2017

According to the preliminary data of the NBRK, the consolidated reserves of the country after a 5-month negative dynamics increased by $0.5 bn (+0.6%) to $88.4 bn in November. The increase was due to the growth of NF assets by $0.56 bn (+1%) to $57 bn, while the gold and foreign currency reserves of the National Bank continued to decrease by $0.06 bn (-0.2%) to $31.4 bn.

The dynamics of the NBRK's reserves shows that the regulator has been actively increasing assets in gold this year - a record growth of $2.6 bn (+27%) occurred over the year, the share in the total reserves of the National Bank reached a maximum of 39%. This level was achieved both due to the increase in the price of the precious metal (+8.7% over the year in November), and, according to our estimates, due to an increase in physical volume by 14% since the beginning of the year.

NBRK currency assets during 2017 were characterized by spikes (in July, a jump of $2.9 bn, a decrease of $1.5 bn over the next three months), mainly related to transactions on the conversion of NF transfers and currency interventions in the second half of the year in the amount of $620 million. In general, since the beginning of the year, the currency part of the National Bank's reserves has decreased by $673 million (-3.4%), which is comparable to the level of interventions conducted during the year.

Based on the IMF data on the currency structure of the NBRK's liabilities in October, the reduction in the short position in financial instruments (which include swap operations) was offset by the growth of contingent liabilities (in our view, which include bank deposits in foreign currency). However, in October, liquid assets (21% of the regulator's gold reserves) fell again by $0.78 billion, while only a $0.38 billion of that decrease is due to currency interventions. A decline by another $0.4 bn of the liquid reserves of the NBRK, partly, may be due to Government and National bank’s external debt servicing (in the fourth quarter of 2017, according to the payment schedule – in total amount of $0.28 bn), as well as, operations related to transfers from NF (sale of currency).

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As a result of the seasonal growth in tax revenues from the oil sector in November (~1bn) and insignificant spending of funds in the form of transfers (~$ 0.1bn), the NF assets increased by $0.56bn in November. According to the planned level of transfers, the use of funds until the end of the year should not exceed $0.8 billion (about 94% of the level of targeted and guaranteed transfers was spent in 2017).

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Our opinion

If in the first half of 2017 the level of NF assets remained relatively stable, then with the beginning of transfer allocation since July, the funds of the NF were rapidly falling. Despite the fact that the improvement of the tax revenues from the oil and gas sector in the current year occurred by 86% (~2.7 billion compared to January-November 2016) in view of higher prices in commodity markets, NF assets decreased significantly by $4.2 billion ytd. Оf which about $3.4 billion was directed to one-off payments for the recovery of the banking sector. Without taking into account this expenditure, the decrease was less significant, by $0.8 billion (for comparison, in the same period last year, NF assets fell by $2.4 billion).

Thus, a one-time allocation of funds from the NF towards the support of the banking sector this year has affected the deeper decline in the country's consolidated international reserves (by $2.3 billion since the beginning of the year) compared to the previous year (by $0.7 billion by November 2016).

We believe that, amid the improvement of business activity, the growth of tax revenues to the budget will probably allow a smaller than planned amount of transfers (~13.6 billion planned, ~$ 12.8 billion used). Therefore, in view of better tax revenues from the oil and gas sector, we expect the continued growth of the assets of the National Fund in December at the level of November (by $0.6 billion to $57.6 billion).

In our opinion, the gross reserves of the regulator are characterized by relative stability, providing a comfortable level of reserves. However, there are significant changes in the structure: a decrease in foreign currency part of reserves (by the amount of interventions conducted) is offset by an increase in reserves due to assets in gold. We also note the negative dynamics of the structure of the National Bank's liabilities - the regulator's obligations to banks have increased, while the share of the most liquid reserves continues to decline.