Macroeconomic report 1Q2017

Halyk Finance ResearchApril 13, 2017

Due to improvement in the most economic indicators at the beginning of this year, along with the continued influx of foreign investment, accelerating oil production at Kashagan, we revised our forecast for GDP growth this year from 2% to 2.5%. It should be of note that the contribution to economic growth is generated predominantly by the real sector, whereas in the service sector we mostly see stagnation due to low household incomes. Our still conservative view on the prospects of the economy is based on the fact that current economic growth is actually driven by the two factors: the Kashagan and inflow of investments mainly in the extractive sector. It is no doubt, the sustainability of the economy was supported by the considerable infusion of sums from the National Fund, but their influence is less pronounced and leveled out by the devaluation of the national currency and the tight monetary policies of the NBK. 

The economic performance continued to improve at the beginning of this year, the sources of growth were the same factors that determined the dynamics of the second half of last year, mainly localized in the real sector. An increase were observed in investment, construction, accelerating industrial production, transportation, recovery of retail trade turnover. This was made possible on the background of improving external demand for raw materials. Positive developments in the oil market reflected in the growth of the average oil price in the first quarter of this year to $54 per barrel or by 50%, from $36 per barrel in the first quarter of 2016.

Currently, oil production at Kashagan is about 180 thousand barrels per day. According to press reports, second million tons of oil was produced in the second half of March. Accordingly, this has very large positive impact on the improvement of macroeconomic indicators of the country.   

Anti-crisis measures of the State expanded significantly this year due to additional allocation of about T0.5 trillion to the real sector, social welfare and infrastructure. Pouring of public funds continue going into infrastructure construction, agriculture, the organization of EXPO-2017.

T2.1 trillion (4% of GDP) is planned to be directed towards rehabilitation of banking sector. The early signs of banking system consolidation including with the regulator’s backing began to materialize, which should have a positive impact on the stability of the financial sector due to dealing with the bad loans problem and increasing of liquidity. 

Amendments to the budget implemented in February strains the burden of public finances. The consolidated budget deficit by our assessment, will rise to almost 9% of GDP from 5.7% of GDP in 2016. Government debt, however, remains at a low level, not exceeding a quarter of GDP.

On the currency market there has been a significant strengthening of the nominal exchange rate of the national currency nearly by 20 tenge from the end of last year to KZT315 per USD. At the same time, oil prices stayed virtually unchanged, thus there is more apparent relationship of appreciating tenge, following the Russian ruble with a lag.

Inflation in March had dropped to 7.7% yoy. Nevertheless, although the high base effect is almost exhausted, the inflation pressure remains elevated. Since the beginning of the year, inflation was 2.3% due to increase of 0.8% in January, 1% in February and slowing down to 0.5% in March. Prices for all components of the consumer basket continue to go up, and especially for food.

External factors, the commodity sector, foreign direct investments, as well as the National Fund have all a positive impact on the state of the economy. Also of note is a low base last year, which currently secures the high rates of growth of individual sectors of the economy. Given the recovery of the banking system, with softening monetary policy, one can expect a gradual improvement of the economic situation in the non-oil sector. While lingering concerns are the inflationary risks and possible slide in oil quotations against in view of high oil reserves in the world. The effect of increase in volumes of extracted oil at Kashagan will be realized mostly this year, whereas in subsequent years, incremental growth of oil production will decrease.

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