The State budget in 1H2017

Assan KurmanbekovAugust 09, 2017

The recovery of economic activity, supported by rising prices for oil and metals at 30% yoy in the first half of 2017, has had a positive impact on the State budget revenues.

The State budget revenues in the first half of this year (excluding National fund transfers) rose by 11%, due to increased tax revenues by 14% and the growth in other income. The National Fund transfers increased by 51% yoy. The breakdown by tax revenues, demonstrate the rise of CIT by 7.7% yoy, PIT +9.6% yoy, social tax +10.2% yoy, VAT +11% yoy, at the same time VAT receipts on goods and services produced in Kazakhstan virtually unchanged, and the growth of VAT from imports was up by 17.3% yoy. The total tax revenues in the first half of this year have reached 48% of the planned volume for this year, the National Fund transfers, reached 36% of the plan.

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The increase of revenues from PIT and social tax is accompanied by a rise in nominal wages in the economy by 8% yoy in the 1st quarter. VAT revenue growth of 17% is comparable to the increase in imports at 10.7% yoy in January-June of this year 2017, and with a turnover of retail trade at 15% yoy in the first half of this year.

The corporate income tax receipts have grown due to an increase in advance payments and overall improvement in the economy. In our assessment, the growth of nominal GDP in the first half of this year amounted to 15%.

The increase of oil prices by 30% yoy in the first half of this year had a positive impact on the inflow of oil revenues after the low 3.8% of GDP in 2016, it inched up to 4.7% of GDP in July 2016-June 2017. At the same time, in view of slower recovery of non-commodity sectors, non-oil revenues decreased by around 1pp of GDP.

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The state budget expenditures increased by 8% in 1H2017 as compared to the same period last year and stood at 37% of the planned for this year. This lag is caused by significant sums, provided for the rehabilitation of the banking system through the State budget. In early July, the funds were allocated to the banks and the lag on the expenditure side should be eliminated respectively.

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The spending on education, health and culture in the period of January-June 2017 have increased by 13% yoy compared to the analogous period of the previous year and in line with the annual schedule. It may be noted that the combined costs for these items are comparable to the size of the transfer from the National Fund in the same period.

The expenditures on the social security have increased by 11.5% yoy, that includes an increase in pensions by 9% since the beginning of this year, the total growth of pensions for the year is predetermined at up to 28%. Due to the increase of pensions, to some extent, the decline in real wages of employed population was leveled, as the real wages stuck in the negative zone since 2015.

The financing of public services such as defense, public order and others have increased by 7% yoy with a slight lag from the plan for this year.

A strong growth of nearly 30% of expenditures in the economy is observed and include such spheres as: agriculture, infrastructure, industry, housing and utilities, etc., but the allocation amounted to only approximately a third of the plan. The major articles are represented by the transport, housing and utilities, due to the implementation of the State program "Nurly Zhol". On the implementation of this program almost half a trillion tenge were allocated since 2015 on average per year from the budget.

The debt servicing costs have decreased by about 11% yoy. Given that more than a third of the State debt is represented by the external loans the strengthening of tenge apparently had an effect on this outcome. 

The “other costs” have decreased by half due to the termination of funding of preparatory activities of EXPO-2017.

The volume under the budget category "budget credits" rose by 64%. The main items are the financing the Agrarian Credit Corporation to support agricultural producers (T60 bn) and lending to Baiterek (T116 billion) for various State programs.

Expenditures under the budget category "acquisition of financial assets" increased by three quarters. A T118 billion was allocated to increase the capital of State-owned companies in the space, military, infrastructure and finance. Also, for T11.7 billion the shares of international financial organizations were acquired.

The State budget deficit (excluding the National Fund) still stands at a low level and in the first half of this year totaled T92 billion, while T1.7 trillion is planned for the year as a whole. Such a low number for budget deficit is explained by higher funding from the National Fund and the backlog of expenditures. The deficit was mainly financed through the Ministry of Finance bonds placed in the local market. The size of the Government debt for the first half of the year increased slightly by 4%, but due to faster economic growth its level fell below 24% of country's GDP.

The consolidated budget balance (taking into account the National Fund) in July 2016-June 2017 moderately improved to -3.6% of GDP, from -5.2% of GDP in 2016. However, as is already noted, significant budget expenses still lie ahead in the second half of the year and, accordingly, this improvement is only temporary. According to our estimates, the general government deficit will reach 6.2% of GDP this year, which is close to the number for 2015. In near term, if there would be sustained favorable level of oil prices and the implementation of the planned reduction in the use of funds of the National Fund, one can expect some improvement in public finances.

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The non-oil budget deficit in July 2016-June 2017 has not changed significantly and stood at the level of 9% of GDP. Due to the increase in expenditure in the second half of the year, non-oil deficit, by our assessment will increase to 12.6% of GDP.

The revenues of the National Fund fell by 78% yoy in the first half of 2017, due to the FX currency assets revaluation caused by strengthening tenge and in spite of $1.3 billion investment income in the first quarter and its increase to $2.4 billion for the first half of the year.  Excluding investment income, the tax revenues of the National Fund in the first half of the year rose by almost three quarters that significantly outpaces the growth in revenues from oil exports at 45% yoy in the same period and modest growth in export of physical volumes of oil by 3.5% yoy.

The receipt of funds was significantly lower than expenditures in the first half of this year, without taking into account the investment income. So revenue barely exceeded T1 trillion, while the use of funds of the National Fund was up by T600 billion higher. The total amount of transfers for the year is planned at T4.4 trillion. At the same time, the maximum amount of revenue of the National Fund didn’t exceed T3.5 trillion prior to the devaluation of 2014.

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Our opinion

The recovery of economic activity, supported by rising prices for oil and metals at 30% yoy in the first half of 2017, has had a positive impact on the State budget revenues. As a result of improvement in tax and non-tax revenues, along with increased use of funds of the National Fund and the backlog of expenditures, there was a small size of the official budget deficit. Faster nominal GDP growth affected the relative reduction of the public debt load.

More agile growth of the oil and gas sector in the medium term will determine a strong dependence of the State budget revenues on the oil industry. In our assessment, the size of the non-oil deficit this year will reach a double-digit at 12.6% of GDP, previously similar high budget imbalances were observed, only in 2009 and 2015, respectively.