According to the preliminary data, consolidated reserves of the country increased by $191 million to $88.8 billion during the last month of the year. The reserves of the National Bank showed almost a zero dynamics in December, reaching $31.1 billion (+0.1% in a month), the NF assets in view of better tax revenues from the oil sector reached $57.7 billion (+0.3% in December). During the year, the country's total international reserves decreased by $1.9 billion (-2.1% for the year) because of an active spending of the National Fund ($3.5 billion, -5.7% for the year), which was partially offset by the growth of the regulator's reserves ($1.6 billion, +5.4% for the year).
In 2017 the FX part of the NBRK's reserves decreased by $1.3 billion. However, in July, assets in currency jumped sharply up by $2.6 billion, which was mainly due to operations for transferring funds from NF to conclude the agreement between two large banks. From the level of July, the NBRK's foreign exchange reserves have been steadily declining - the fall was at $2.9 billion by the end of the year, including about $500 million were spent on currency interventions (according to the NBRK statistics), ~$1.4 billion is probably due to the reduction in the NBRK’s predetermined obligations (which, in our opinion, include swap lines with banks, so as they expire, the second leg of the transaction is being completed). A further $1 billion decrease is possible due to transactions on transferring funds from NF to the budget, previously a regulator mentioned that it could sell around $1 billion in the foreign exchange market for these purposes.
Assets in gold for the year showed a record growth of up to $12.5 billion, both due to the price factor (+14% yoy), and, according to our estimates, due to the increase in the physical volume of precious metal (+14.5% yoy). Thus, the decline in foreign exchange assets was offset by the increase of reserves in gold, their share in NBRK reserves increased significantly to 40% in the year (against 33% at the end of 2016).
The structure of the NBRK's foreign currency liabilities in November (December data will be available later) shows a significant reduction in the predetermined obligations (repayment of swap operations, -$919 million per month), which was partially offset by the growth of contingent liabilities (in our opinion, include bank deposits in the NBRK, +$590 million). In November, there was again a slight drop in liquid assets of the NBK by $310 million (the share in foreign exchange reserves became 20%, at the beginning of 2017 was 36%), which may be due to the payments of external debt.
Transfers from the National Fund in 2017 were carried out in full planned volume. In December, about $0.8 billion was spent, the amount of revenues from the oil sector was at ~$ 0.7 billion last month. In total, about $13.6 billion was expensed on transfers from the NF, the NF assets fell by $3.5 billion, of which $3.4 - to improve the banking system, without taking into account these expenditures, the NF assets in 2017 would have remained at the level of 2016 with a small increase.
The increase in net external assets (including net reserves of the National Bank, +4.6% for the year) and net domestic assets of the NBRK (mainly due to an increase for non-banking financial organizations) also led to a rise in the monetary base (which is directly controlled by the regulator and includes cash outside the NBRK and term deposits of banks) by 7.2% yoy (for comparison last year, the monetary base grew at almost the same rate, 8.7%). However, the money supply (M3, money that is produced by the banking sector in the course of its activity of issuing loans and attracting deposits) lags behind the growth rate due to prevailing negative trends in the banking system - outflow of deposits, stagnation of lending.
In our view, given the state of international reserves at the end of the year, its level is stable and adequate. Without taking into account the funds for banks recovery, NF assets would have remained at the level of 2016 with a small increase. The NBRK reserves increased due to assets in gold, while a negative factor in the dynamics of reserves, in our opinion, is a decrease in the share of liquid assets.
We believe that the growth of the country's total reserves in 2018 will be possible due to a rise in the NF assets, taking into account plans to reduce the use of funds and an improvement of the tax revenues from the oil sector. In 2017, an increase in oil prices by 22% caused an increase in oil tax revenues by almost 80%. Assuming that the revenue level in 2018 will be around $8.3 billion, excluding investment income (up by 35% yoy, given the increase in oil production and its price to $57, +8% yoy), and the transfer in 2018 will be about ~$7.8 billion, the NF assets may reach $58-59 billion.
Further growth of assets in gold of the NBRK will be unreasonable, while a growth of the currency part of the reserves of the regulator will apparently depend on the situation in the foreign exchange market and external environment. At the same time, despite the continued improvement in the terms of trade, the current account will remain in deficit, so the replenishment of reserves due to the surplus in the balance of payments next year is unlikely.