Kazakhstan holds one of the leading places in the world with its oil reserves (12th in the world, 1.8% of world reserves). In CIS region, the country is also one of the leaders by the volume of oil reserves and production level, ranked second only after Russia. BP estimates that at current oil production levels, reserves are adequate for around 49 years. Oil and gas industry is one of the main drivers of the country's GDP growth, reflecting significant dependence of the economy on the industry's revenues. The decline in world oil prices (from $98 in 2014 to $53 in 2015 and $44 in 2016) and a considerably small decline in its production contributed to a slowdown in economic growth from 4.1% in 2014 to 1.2% and 1% in 2015 and 2016.
Kazakhstan holds one of the leading places in the world with its oil reserves (12th in the world, 1.8% of world reserves). In CIS region, the country is also one of the leaders by the volume of oil reserves and production level, ranked second only after Russia. BP estimates that at current oil production levels, reserves are adequate for around 49 years. According to BP's report, natural gas reserves amount to 1 trillion cubic meters, 0.5% of the world's reserves, while at the current gas production level, reserves will last for 75 years. Possessing significant hydrocarbon development potential, the country attracts foreign investors and is one of the major players in the world market.
Oil sector of Kazakhstan is represented by more than 200 fields, concentrated mainly in the west of the country. The country annually produces about 78-80 million tons of oil (~1.6-1.7 million barrels per day), with the completion of expansion projects, the maximum production level by 2025 is projected to reach 110 million tons (at this volume, daily production will exceed 2 million barrels per day).
Oil and gas industry is one of the main drivers of the country's GDP growth, reflecting significant dependence of the economy on the industry's revenues. The decline in world oil prices (from $98 in 2014 to $53 in 2015 and $44 in 2016) and a considerably small decline in its production contributed to a slowdown in economic growth from 4.1% in 2014 to 1.2% and 1% in 2015 and 2016.
In general, the dynamics of GDP growth in Kazakhstan can be divided into three separate periods: from 1990 to 1999, characterized by practically zero growth; the period from 2000 to 2014, when positive dynamics of oil prices, investment inflows and production growth contributed to an annual increase in Kazakhstan's GDP on average by 7-8% (except for the period of the global crisis in 2007-2009); and the period of 2015-2017, when a steady and sharp drop in oil prices, a decline in production and investment in the sector are observed.
It should be noted that from 2000 to 2004, despite relatively low oil prices, the inflow of foreign investment into the oil and gas industry (in 4 years gross direct investments in the sector grew more than twice) ensured a rapid increase in oil production in the country and a rise in export revenues, and, as a result, GDP growth reached double-digit values.
The inflow of foreign direct investments in the following years increased (especially in geological exploration), and the growth in oil production and the economy stabilized. Following the dynamics of oil prices in 2008-2009, the country's economy slowed sharply, then in 2010-2014, again rebounded to a level of 5% in annual terms, when the price of oil reached its maximum values, exceeding $100 per barrel. Thus, during the entire period of Kazakhstan's independence, the main catalyst for an active economic growth was the oil and gas sector. In turn, the main factors of the sector's progress were oil price, foreign direct investments and oil production increase. Other sectors of the economy could not provide such a strong and sustainable growth in GDP.
The rapid development of the country's oil and gas industry over the course of the decade led to a significant dependence of the economy on oil exports and oil prices. Exports of oil and gas in 2013 and 2014 accounted for 70% of the country's total exports. The share of oil and gas sector in GDP reached 30% in 2011. Taking into account additional financing of state budget expenditures from the National Fund (NF), the contribution of the oil and gas sector to GDP was even greater. In the past few years, on average, the share of direct investment in oil and gas industry has taken just over half of the gross inflow of foreign investment into the country, falling from record levels of the earlier periods.
The current period (from 2015) has revealed the weakness of the commodity-oriented economy, which caused the deterioration of macroeconomic indicators. After a decrease in oil prices and in volumes of oil production, GDP growth sharply fell and fiscal imbalances arose that depleted the NF's currency assets - a decrease from the peak of $73.2 billion in 2014 to $61.2 billion by the end of 2016 (a decrease of $12 billion). Due to unfavorable external environment, the consolidated state budget moved from a surplus to a deficit and the non-oil deficit grew even more.
As the result of a net export decline more than threefold since 2014, the current account balance turned from a surplus of 2.8% in 2014 to a deficit of 6.3% of GDP in 2016. At the same time, record inflow of direct investments in the financial account of $14 billion in 2016 offset negative consequences of the decline in export revenues, covering the current account deficit (51% of the gross inflow of investments in 2016 was directed to the oil and gas sector).
The National Fund (in line with a countercyclical policy of using the National Fund) had to play an important role in absorbing the negative consequences of dependence of the economy on commodity sector. In the period of high oil prices, in order to prevent overheating of the economy, the National Fund was supposed to perform the functions of sterilization and accumulation of petrodollars (with an aim to reduce the volatility and dependence of budget expenditures on the oil and gas sector). In the period of falling prices for oil, NF assets were to serve a stabilization function for directing the funds to stimulate and sustain economic growth.
In our opinion, the use of funds from NF did not correspond to countercyclical policies and was of a certain procyclical nature. So that in years of fairly high oil prices (2010-2014) NF assets’ expenditure continued and remained practically at the level of spending during the crisis 2008-2009. Thus, petrodollars surplus revenues, received in years of a favorable price environment, did not have time to accumulate sufficiently, while the dependence of state expenditures on the use of the National Fund resources grew. After the crisis of 2007-2009, the non-oil deficit of the state budget remained at an unacceptably high level.
Also, in the past few years the state has been actively attracting funds from the NF not to directly support the economy, but to ensure the financial stability of certain institutions. For example, in 2009, the NF provided a purchase of Samruk-Kazyna bonds (comparable in size to 3.7% of GDP), which in turn were mainly used to support the nationalization of banks. In 2015, the NF finds were used for Samruk-Kazyna bond purchase (comparable to 1.8% of GDP), which provided coverage for external liabilities of NC KMG. In 2017, the NF's funds are planned to be spent at the banking sector improvement (comparable to 4% of GDP).
Currently, there are signs of a process for a more rational use of funds from the NF. Measures to reduce the level of transfers and reduce the dependence of the economy on oil revenues are reflected in the new concept of NF, agreed last year. However, the document is far from the best world practice on the accumulation and use of sovereign funds of the country.
According to our calculations, the oil price at which the consolidated budget of the country will be neutral should be $55 in 2017 (not taking into account the one-time use of funds for the improvement of the banking sector this year), which roughly coincides with our forecasted oil prices in 2017. In these conditions, one can expect the construction of an acceptable fiscal balance of the country.
In the first half of this year, an unexpectedly high GDP growth (4.2%) is noted. The main growth driver was again the oil and gas sector, as well as the mining sector (metal production). Compared to the first half of 2016, the average price of oil increased by 30% to $52, and due to Kashagan, oil production increased by 10%.
Price turbulence in the oil market has led to the fact that oil production is now barely on the verge of profitability. According to our calculations, the operating cost of producing one barrel of oil in Kazakhstan's fields, with the exception of Kashagan, fluctuates between $7- $48/bbl. Such a wide range is explained by different stages of maturity of deposits.
The field of exploration and development of new deposits in recent years is characterized by the departure of investors from projects and the direction of the main part of the investment in the extraction of existing deposits. Therefore, the hopes of the industry are mainly associated with the increase in production at the three giant deposits of Karachaganak, Kashagan and Tengiz.
In general, the commodity-dependence of the economy and the volatility of the price of oil are one of the key risk factors for Kazakhstan's economic stability. Negative shocks of fluctuations in prices for oil adversely affect the main components of the gross domestic product: consumption, investment, and state expenditures decrease.
Moreover, positive shocks also have negative consequences for the country's economy: the structure of the economy is being rebuilt into the sector of non-tradable goods (construction, services, etc.), while the traded goods sector is stagnating (manufacturing industry, agriculture). Also, improperly pursued countercyclical policies are the reason of growing consumer and investment imports.
Thus, local production cannot compete with cheaper imports during high oil prices, but at the same time, production is also experiencing difficulties in the period of low prices due to a general decline in business activity and lack of financing.
Among other disadvantages of the commodity-oriented economy, we note an increase of public investment in business in the period of high oil prices, which leads to the predominance of the public sector over the private sector. A small share of the private sector in the economy is one of the main reasons for the weak development of market relations and the weak competitiveness of local businesses. In Kazakhstan, large proportion of the employed population works in state structures and receives income financed by volatile oil revenues. In the long term, stable employment in this sector is unsustainable, it is necessary to reduce this share for more efficient use of oil revenues. We should also note that the oil sector is characterized as quite capital-intensive, so it is not a sector that actively creates jobs.
All these facts speak of the urgent need to diversify the economy to reduce the dependence of the country's revenues on fluctuations in oil prices and improve the policy on the use of the National Fund. From the point of view of diversification, the early implementation of structural reforms, the denationalization of the economy, the development of market relations and the private sector will be the main drivers of this process.
Please download the PDF version to access full report.