The government's stimulus measures, the influx of pension savings, and the growth in the cost of raw materials provided significant support to the economy, which moved from a recession in the first quarter to an increase of 2.2% yoy in the first half of the year. Faster economic recovery is hindered by the continuation of quarantine measures, as well as restrictive quotas under the OPEC+ agreement and the continuing decline in investment in the oil and gas sector. After the slowdown in inflation at the beginning of the year to 7.0-7.2%, the rate of price growth accelerated significantly to 7.9% yoy in June (8.4% yoy in July). The NBK kept the monetary conditions unchanged during 1H2021 but raised the base rate by 25 bps in July to 9.25%. The exchange rate of the national currency has weakened by 1.7% since the beginning of the year to 427.79 tenge/$, despite a 45% increase in the oil price. Consolidated reserves for 1H2021 decreased by 2.1% from the beginning of the year (+1.9% yoy) to $92.4 bn. By the end of 2021, we forecast GDP growth of 3.2%, inflation at the level of 8.5-8.7% yoy, and the tenge exchange rate at the level of 435 tenge/$.
State support of the economy contributes to the improvement of the economic situation. In the second quarter, there was a slight easing of quarantine restrictions, which affected the dynamics of recovery processes in the economy. Under these conditions, the expansion of state spending and the inflow of pension funds of citizens in 1H2021 (1.4 trln) provided significant support to the economy. In the second quarter of this year, double-digit growth in nominal wages continued, while an increase was observed not only in the public sector but also in the private sector. Household consumption has grown significantly, judging by the growth of retail sales in the field of domestic trade in 1H2021 by 7.6% yoy, but it is still below pre-crisis values.
The positive impact of rising oil prices is limited by production quotas. In the second quarter of this year, most sectors of the economy emerged from the crisis. Double-digit growth was recorded in the construction sector (+11.9% yoy) and telecommunications (+12.2% yoy). Despite the more than twofold increase in the average oil price to a three-year high in the second quarter, restrictive quotas under the OPEC+ agreement are holding back a potential recovery in the extractive sector of the economy, which showed a 3% yoy decline according to the results of 1H2021. Nevertheless, the peak of the decline in oil production has been passed, and its recovery will begin in the future. Industrial production for 1H2021 showed an increase of 1.5% yoy, primarily due to the high growth rates of the manufacturing industry (+5.6% yoy).
The reduction in capital investment has reached an annual minimum. The slump of investments in the second quarter amounted to 1.8% and was at the lowest level over the year. Projects postponed due to the pandemic began to be actively implemented this year. As a result of which, an increase in investments in the manufacturing industry amounted to 88.3% yoy, in agriculture 45.9% yoy, in construction 157.6% yoy, in domestic trade 54.1% yoy, and in telecommunications 50.5% yoy. Investment decline in 1H2021 in the oil industry has not yet been overcome (-38.1% yoy), however, double-digit growth in capital investments is expected for large oil and gas projects this year.
Acceleration of inflation. After a temporary slowdown in inflation in the first quarter of this year to 7% yoy, the inflation rate accelerated sharply in the second quarter and reached 7.9% yoy in June. The acceleration of inflation was provoked by rising prices on foreign markets, the resumption of the weakening of the tenge and the increase in prices for motor fuel against the background of a stimulating budget policy.
Interest rate policy – tightening of monetary conditions is inevitable. During 2Q2021, the regulator did not change monetary conditions, keeping the base rate at 9% (+/-1%) against the background of disinflationary processes observed from January to May of this year (the slowdown in inflation from 7.5% in December 2020 to 7.0% yoy in April and 7.2% yoy in May). However, against the background of sharply accelerated inflation, on July 26, the National Bank tightened monetary conditions in the country, raising the base rate by 25 bps to 9.25% while maintaining the interest rate corridor for liquidity management at the level of +/-1%.
Tenge — the rate of weakening. As of the end of 2Q2021, the national currency weakened by 1.7% from the beginning of the year to 427.79 tenge per US dollar, while the tenge lost 5.9% of its value over the year. The average value of the exchange rate increased from 419.70 tenge in 1Q2021 to 428.36 tenge per US dollar in 2Q2021. The weakening of the national currency exchange rate occurred against the background of an increase in the cost of oil by 18.2 qoq (45% for 6M2021) to $75 per barrel, an increase in foreign currency sales from the National Fund of the Republic of Kazakhstan by $574 mn (+30.9% qoq) to $2.4 bn and a quarterly reduction in the nominal holding of portfolio investments of non-residents in the State securities of the Republic of Kazakhstan by T8.4 bn to T791.4 bn in June. The outstripping quarterly dynamics of export volume growth in 2Q2021 by $4.0 bn (+35.1% qoq, +3.4% yoy for 6M2021) against the background of import growth by $2.3 bn (+30.0% qoq, +9.2% yoy for 6M2021) did not lead to a noticeable strengthening of the Kazakhstani tenge against the US dollar.
Growth of the current account deficit in 1H2021. The current account of the Republic of Kazakhstan for 1H2021, according to the preliminary assessment of the NBK, developed with a deficit of $1.7 bn compared to a surplus of $801 mn in 1H2020. The expansion of the current account deficit was primarily facilitated by a reduction in the trade balance by 5.9% yoy to $9.4 bn, an expansion of the primary income balance deficit by 36.1% yoy to $10.1 bn, as well as the existing deficit of the secondary income balance at $195.5 mn (the deficit in 1H2020 at $32.9 mn). According to the financial account, there was a decrease in the volume of capital inflows from $6.1 bn in 1H2020 to $4.3 bn in 1H2021. The positive dynamics of capital inflows in the Republic of Kazakhstan was facilitated by the expansion of capital inflows in the portfolio investment account by 98.7% yoy to $7.2 bn.
Consolidated international reserves are declining. Kazakhstan's consolidated reserves for 1H2021 decreased by 2.1% (+1.9% yoy) to $92.4 bn due to a 1.7% reduction in the volume of the NBK's gross gold reserves to $35.0 bn (+6.6% yoy) and a 2.4% reduction in the volume of the National Fund's assets from the beginning of the year to $57.3 bn (-0.7% yoy). In the structure of the NBK's assets, there is a decrease in assets in gold by 7.5% since the beginning of the year to $21.8 bn (+1.2% yoy). The decrease in the NBK's gold assets is primarily due to the decline in the value of gold on global markets (6.8% since the beginning of the year) and their revaluation by the NBK. The share of assets in gold at the end of 1H2020 amounted to 62.2% of the gold reserves, having decreased from 66.2% since the beginning of the year.
Forecast for 2021: GDP growth of 3.2%, inflation of 8.5%-8.7%, the FX rate of T435 per US dollar. According to our forecasts, the pace of recovery of the Kazakh economy this year will be restrained. According to our forecast, Kazakhstan's GDP growth will be 3.2% in 2021. The expansion of government spending this year, along with the influx of pension savings into the economy and the increase in prices for "black gold" will have a positive impact on the growth of the economy of Kazakhstan. On the other hand, the continuing difficult epidemiological situation, both in the world and in Kazakhstan, will have a negative impact. The rate of vaccination against COVID-19 shows moderate dynamics, with the share of vaccinated people at 17% of the total population at the end of July 2021, which is not enough to lift quarantine restrictions. According to our assessment, large budget allocations, increasing external inflationary pressure, unanchored inflationary expectations of the population, together with the inefficiency of state regulation of prices of natural monopolies, will lead to an acceleration of inflation to 8.5%-8.7% by the end of this year.
