October 2020. Republic of Kazakhstan: trends and forecasts

The Kazakh economy faced challenging external economic conditions in the first half of this year. The COVID-19 pandemic resulted in an unprecedented decline in global economic activity and volume of international trade. Lockdown restrictions weakened consumer and investment demand considerably and fostered a slowdown in inflation along with a fall in energy prices. These conditions compelled monetary regulators in both developed and developing countries to ease their monetary policy, while fiscal bodies unveiled large-scale anti-crisis packages to help individuals and business.

June–July 2020 performance indicators heralded the beginning of a recovery in global economic activity amid an easing of lockdown restrictions and companies resuming work, primarily in the service sector. Due to differences in the epidemiological situation and government support across countries, this process has been gradual and varied. The EDB’s baseline scenario assumes a slow recovery of the world’s major economies with unused capacity at production facilities in 2020–2022 to drive only moderate external demand for Kazakh exports in the medium term. These conditions will lead to external inflationary pressure remaining weak.

Oil prices remained depressed by weakened global demand in the first half of the year, while the OPEC+ agreement to reduce oil extraction reached in April was instrumental in limiting their fall. The EDB’s projections assume that oil prices will grow moderately as global economic activity gets back on its feet.

In such circumstances, the Kazakh economy contracted by 1.8% YoY in January–June 2020. Among the key factors influencing economic trends were the domestic health restrictions, reduced external demand and transportation difficulties, falling oil prices and slowing growth of production volumes under the OPEC+ agreements, increased uncertainty and a deterioration in business sentiment. That resulted in a considerable decline of consumption, investment and both individuals’ and businesses’ incomes. The aftermath of the coronavirus pandemic is now mostly embodied in a cyclical economic recession, although potential GDP growth rates have also decreased. We believe the negative output gap to have amounted to some 6–8% in 2Q2020.

According to the EDB’s baseline scenario, the easing of lockdown measures in the second half of this year and continued support from expansionary monetary and fiscal policies will generate conditions fostering economic recovery. Government anti-crisis support is expected to continue in 2021; the funding volumes will start decreasing gradually from 2022, which will mitigate the pandemic’s adverse effect on the economy. As a result, we expect GDP to decline by 2.5% over 2020 and to recover, at an average of 4.7% per year, beginning in 2021–2022. However, we expect the process to be lengthy due to the increased uncertainty, social distancing, moderate external demand and weakened investment; a return to the pre-crisis production levels is expected in 2021–2022, while the output gap will remain negative for the entire forecast period.

In the first half of 2020, the Kazakh tenge weakened against the world’s key currencies. The highest pressure was seen in the second half of March, when the coronavirus outbreak grew into a pandemic, while the OPEC+ countries failed to reach an agreement regarding the extension of oil production restrictions. In May–June, the tenge regained some of the lost ground and appreciated to 397 per U.S. dollar, which was encouraged by the beginning of economic recovery at home and abroad, as well as by oil price growth. In the second half of August–early September 2020 pressure on the tenge grew due to increasing geopolitical risks; should these risks remain, the national currency is unlikely to strengthen by as much as its potential. The exchange rate is expected to adjust to an equilibrium level during 2021 as the coronavirus spread slows and the geopolitical situation normalizes.

Consumer price index growth rates increased somewhat in the first half of this year due to the exchange rate pass-through effect, temporary feverish demand for certain products and increases in prices of fruit and vegetables. We expect the inflation rate to grow to 7.1% YoY by the end of 2020, mainly due to national currency depreciation and the fiscal momentum effect. Moderate domestic and foreign economic activity will be a considerable constraint on inflation in the medium term. As a result, if the exchange rate stabilizes, consumer price index growth will slow down to 5.6% YoY in 2021 and then keep within its target range (4–6%).

Monetary policy in the first half of the year aimed to maintain macroeconomic stability amid inflation overshooting its target, an economic growth slowdown and sharp tenge depreciation. The NB RK held six meetings on monetary policy, including two extraordinary ones. By the end of the first semester, the base rate was 9.5%, which, given the increased inflation, points to monetary policy’s stimulative nature. According to our estimates, the indicator’s decrease potential has largely been realized, and the rate will stay at the 9.0% level till the end of the current year.

The State budget posted a deficit of 2.9% of GDP in the first half of this year. Expenditures increased significantly, mainly due to two anti-crisis economic support packages totaling some 6 trillion tenge (about 8.7% of GDP). Income fell in January–June 2020, primarily owing to the fall in the prices and exports of hydrocarbons as well as reduced domestic economic activity. As a whole, fiscal policy was of a stimulative nature, thus limiting the scale of decline in production and demand. In the medium term, we expect a gradual weakening of the fiscal momentum as support for the economy decreases.

Heightened and negatively skewed risks to our forecasts remain, since the anticipated economic recovery is not of a stable nature, on the back of a potential second wave of the pandemic, increased tensions between the USA and China, and additional sanctions rhetoric regarding Russia, whose adverse effect may be transmitted to the Kazakh economy via trade and financial channels.