Macroeconomic report Q2 2017

Halyk Finance ResearchJuly 11, 2017

In the first half of this year, the main economic indicators in industry, trade, transport showed strong performance against the backdrop of low base in the first half of last year. Significant support is provided by the commodity sector, where large investment are being directed and consequently it increases production. This in turn, pushes the construction, transport and other industries.

In the first half of this year, the main economic indicators in industry, trade, transport showed strong performance against the backdrop of low base in the first half of last year. Significant support is provided by the commodity sector, where large investment are being directed and consequently it increases production. This in turn, pushes the construction, transport and other industries.

The average price for Brent crude oil in the first half of this year rose to $52 per barrel from $40 per barrel in the same period last year or up by 30%. It may be noted that at the end of first half of this year, oil prices fell below $50 per barrel. Metal prices in the international market for five months of the 2017 rose by 28% yoy.

Oil production at Kashagan has reached a level of 180,000 barrels per day. The share of production at Kashagan approached 10% of the total production in Kazakhstan, and have brought oil production in the country to the historical high. The volume of oil exports in January-April 2017 amounted to 21.2 million tons, below even the 2016 number in the respective period.

Despite notable improvements in the economy, there is cause for concern. Industrial production in April and May on a monthly basis declined. Together with some weakening of investment activity, construction slowed somewhat, as large projects in Astana have been completed.

Real wages continue to fall, while the share of low-paid workforce increases. Counting employed in State-owned companies and quasi-government organizations, the number of people employed in the public sector exceeds 2 million, which corresponds to a quarter of the total employed population. Given the stressed situation of State budget, there are limits to salary increase in State institutions.

As a result of increased oil revenues pushed by higher commodity prices, along with increased use of funds from the National Fund and the backlog of expenditure plan, there is a small size of official budget deficit in the first 4 months of 2017. However, due to the implementation of the planned State budget expenditures in the second half of the year, the budget numbers will more adequately reflect its imbalance.  General Government debt remains at a low level not exceeding a quarter of GDP. Under moderately strict monetary policy, fiscal stimulation of economy continues to expand.

Rehabilitation of the banking sector should accelerate amid the announced acquisition of the Kazkom by the Halyk Bank. At the same time, there is an outflow of deposits from the system, while lending remains depressed.

At the end of the second quarter, the NBK lowered the level of the base rate to 10.5%, maintaining the corridor of +/-1pp. It is worth noting, in our view a significant modification of approach of the regulator regarding the base rate. Thus, the National Bank imposed a benchmark for the base rate - the real rate, comparable to the long-term potential growth of economy at no more than 4%. Despite the decreasing rates and yields on money market, liquidity absorption continues to rise.

The National Bank have noted supply-side cost factor which has an impact on prices currently, while demand is still depressed. We add, that the supply side costs are largely determined by the structure of the economy and requires appropriate measures by the Government. In addition, no less important is the costs of State regulation, the effects of which are still being felt on a background of deregulation of fuel market.

In the currency market there has been a significant strengthening of the nominal exchange rate of the national currency nearly 20 tenge from the end of 2016 to 315 tenge for US dollar on average for the second quarter. There appears a stronger peg of tenge to ruble, than to changes in oil prices.

Inflation in May fell to 7.5% yoy, inflationary background remains elevated, although within the NBK target. All components of the consumption basket continue to rise, and the food prices the most, as the share of food consumption increased.

The country's export revenues grew faster than spending on imports (30.4% vs 19%) in the first quarter, thus contributing to the improvement of trade balance surplus by half. The export growth is entirely driven by the price factor, while the quantity of exported products remained virtually unchanged. 

The current account deficit, though reduced, continues to be offset by capital inflows on financial account. 

International reserves of the country (NBK reserves + foreign currency assets of the National Fund) moderately increased from the beginning of the year to $93 billion, in annual terms contraction is still evident.

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