Current account deficit at 3% of GDP in 2017

Elmira ArnabekovaFebruary 07, 2018

A negative value of the current account fell by half to $4.7 billion (3.2% of GDP), compared to $8.9 billion in 2016 (6.2% of GDP), which is in line with our expectations. In the 4th quarter of 2017, the current account for the first time in the last two years reached a balance of almost zero ($80 million, 0.1% of GDP). However, despite the reduction in the current account deficit, the value of the errors and omissions also hit a fairly high level, almost 1.7% of GDP, which may be caused by the outflow of capital that is not registered in the balance of payments.

Exports of goods in 2017 increased by 32% compared to previous year. In the structure of exports, there is a significant growth in export of raw materials; its share amounted to 69.5% of all goods traded abroad (for comparison, 59% in 2016). The main contribution to it was made by crude oil export, as there was a rise in prices and an increase in physical volumes. Out of the 72.9 million tons of oil produced in the country, about 68.5 million tons (+11.5% yoy) were exported during the year, in 2017 the average price of Kazakhstan oil was $387 per tonn, ~$53 per barrel (+25% yoy).

Revenues from non-primary exports (petroleum and chemical products, copper products) increased by 12% yoy, while physical volumes decreased by 15%. At the end of the year, the share of non-primary exports was about 38% (against 41% in 2016).

Imports of goods according to NBRK increased by 13.1%, which, amid the suppressed demand and lack of financing from the inflow of direct investments, showed a slowdown from the second half of 2017. The largest increase in the structure of imports, according to our calculations, showed consumer goods (+$1 billion to $8.8 billion), accounting for about a third of all imports into the country.

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The trade balance amounted to $17.5 billion (10.9% of GDP), which is twice as high as in 2016 ($9 billion, 5.7% of GDP). As a result, net exports completely compensated the payments to direct investors ($17.3 billion), which rose by third and remained the main outflow in the current account. The negative balance of services practically did not change, $4.7 billion, which contributed to the overall deficit of the current account.

The inflow of capital in the financial account decreased by one third to $5.5 billion in 2017. The inflow of direct investments decreased by 74% at once to $3.5 billion, while the sale of NF assets ensured an inflow of $5.5 billion in the portfolio investments of the financial account. Banks during the year mainly were engaged in repayment of liabilities, providing an outflow of $0.9 billion.

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We note a negative value of the error and omissions item, which may be the result of an unregistered outflow of capital and is a negative factor in the dynamics of the balance of payments. In 2017, the value widened to $2.7 billion, or 1.7% of GDP (-$0.2 billion in 2016).

The NBRK's reserves decreased by $1.6 billion as a result of operations related to the balance of payments, which is apparently caused by a decline in the NBRK's liabilities in foreign currency to banks. At the same time, the increase in the volume of monetary gold and its value, as well as due to operations for NF assets conversion, this decrease was compensated (reserves of the National Bank increased for the year by $1 billion). The overall balance of payments totaled -$1.6 billion.

Our opinion

According to our calculations, an increase in the average price index of export goods by 19% yoy (indirectly reflecting the increase in world oil prices), outpaced the growth rate of the import goods index (+5% yoy). As a result of that, terms of trade improved by 13% compared to 2016 (while, on average, the index decreased by 8% yoy in previous year).

In general, the 1% yoy improvement in terms of trade (TOT), according to our estimates, contributes to the growth of the trade balance by 1.5% yoy; hence, an approximate contribution of TOT is at the level of ~20%. Therefore, other factors, such as an increase in the physical volume of exports, as well as a slowdown in the dynamics of imports in the second half of 2017, in our opinion, are important factors for the trade balance improvement by almost twofold (+90% yoy).

We also note that despite the growth of the reserves of the National Bank in 2017 by $1 billion to $30.7 billion, the reserve assets of the NBRK of $1.6 billion were used to finance the operations of the balance of payments, which is the maximum for the last three years. Despite the reduction in the current account deficit in 2017, the value of the errors and omissions also reached a fairly high level, almost 2% of GDP, which may be caused either by understating the outflow (understating imports, payments of primary income to foreign investors; unaccounted increase in assets, decrease in liabilities), or overstatement of the influx (overstatement of exports, income gained; unaccounted increase in liabilities, reduction of assets).

Therefore, there was a dual picture of the country's balance of payments. On the one hand, a rise in prices for commodity and an increase in export volumes helped to reduce the current account deficit, but, on the other hand, a rather high value of unaccounted capital outflow is of concern. In these conditions (with a comfortable level of reserve assets of the country), the main fundamental factor affecting the course in the medium term is the trade balance. Accordingly, oil prices (as one of the main components of exports), which generally retain favorable prospects in 2018, in our view, will have a direct impact on the exchange rate.