April 2020. Republic of Kazakhstan: trends and forecasts

06 April 2020

In 2019, GDP growth in the Republic of Kazakhstan accelerated to 4.5% YoY, thereby exceeding even optimistic expectations. Strong consumer and investment demand, supported by a stimulative fiscal policy, helped offset the adverse effects of the external environment (a weak price situation in global goods and commodity markets and the global economic slowdown). Zero growth in the oil industry, after production was suspended at key oilfields for planned repairs, was also a constraint.

Domestic consumer demand was stimulated by growing social expenditures from the Republic’s budget and by an expansion of retail lending. Investment activity remained concentrated mainly in the mining industries.

Inflation stayed within its target range (4.0–6.0% as of the end of 2019). Its temporary slowdown in 1Q2019 was caused by the reduction of utility charges. Starting from 2Q2019, inflation accelerated again as world food prices grew and domestic demand expanded, and was 5.4% as of the end of 2019.

The current account deficit increased, largely due to a trade balance deterioration. The weak price situation in the world oil and metals markets manifested itself in a decrease in export revenue, while growth of imports resulted from increased domestic investment demand.

The State budget deficit was 1.9% of GDP in 2019 according to our estimates, vs. 1.3% of GDP the year before. Income growth was driven by greater transfers from the National Fund and increasing tax revenues. Expenditures grew mainly on account of additional funds allocated for the implementation of the Government’s social initiatives.

The monetary policy measures taken in 2019 aimed to maintain price stability. In April 2019, the National Bank of Kazakhstan reduced its policy rate by 25 basis points, to 9.0%, as consumer price growth slowed down at a quicker rate than it had expected. In the second half of 2019, inflation risks increased, and the monetary regulator responded by raising its policy rate to 9.25% in September 2019. The National Bank estimated the monetary conditions to be slightly contractionary towards the end of 2019.  

Economic activity is projected to slow down in 2020. The fall of world oil and metal prices and the adverse consequences of the coronavirus spread will both weaken demand for Kazakh exports and restrict domestic economic activity. Monetary policy tightening will also put downward pressure on the economic growth rate. The economy will be supported by a stimulative fiscal policy and by Government measures aiming to maintain macroeconomic and financial stability. Economic activity will recover in 2021 and 2022 as the world economy and commodity markets stabilize and the Government’s development programs are implemented.

The inflation acceleration trend of 2019 will intensify due to the sharp weakening of the Kazakh tenge in March 2020. According the EDB’s baseline scenario, 2020 inflation will find itself near the top of the target range. In the medium term, domestic price growth is expected to gradually weaken as the pass-through of tenge weakening to inflation peters out and a contractionary monetary policy is pursued.

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