The main barometer of the state of Kazakhstan economy – oil prices increased by 30% in 2018 from an average of $54 per barrel to $70, while rising above $80 in autumn, but dropping to $50 by the end of the year. Such significant growth of the main item of Kazakhstan exports did not fail to have a positive impact on public finances and external accounts of the country where the movement toward balance was observed for the first time since 2014, when oil prices started to fall from $100 per barrel.
Even with the strong rise in oil prices, economic growth in 2018 has remained at the level of the previous year at 4.1% in 2017, indicating the lack of drivers for further acceleration. Thus, the peak of the growth in the current economic cycle had already passed. It also says about weak impact of economic policy of the State that continues to rely on the commodity sector.
An increase in oil production to the new maximum of 90 million tons in 2018 supported industry growth above 4%, for a similar amount increased activity in the transport sector (4.6%), construction (4.1%) in agriculture weaker growth at 3.4%.
Investment growth in 2018 peaked over the past 10 years, for most of the year held higher than 20%, with more than 40% of the investment growth in the extractive sector, where major volumes formed expanding capacity at Tengiz oilfield. Development mainly in the commodity sector reinforces the tendency of dependence on mineral resources and, as practice shows, even high prices of raw materials are not able to provide a stable inclusive growth of the economy with concomitant increase of welfare of population.
Consumer activity has grown significantly and has outstripped most industries with expanding retail sales above 6%. High growth of retail sales was partly financed by borrowed monies, consumer lending significantly outstripped growth in real wages – 5.9% versus 1.8% in 11M2018.
There was an increase in the demand for labor in 2018, the number of employed rose to 8.7 million in the 3rd quarter – the highest rate in history. The main increase occurred due to persons previously economically inactive and older people tha remained longer in the labor market. At the same time the main growth in employment occurred in low productive services sectors where the proportion of employed persons for increased by 1pp to 66% in the total.
Consolidation of budgetary expenditures with relatively high oil prices led to an improvement in public finances, however, the practice of tapping extra-budgetary funds (the NBRK, ENPF) constrains the consolidated budget balancing, resulting in the size of its deficit, though it fell 5 times in a year, but amounted to 1.3% of GDP in 2018. Due to the reduction in the use of funds of the National Fund asset accumulation again resumed last year after a continuous reduction since 2015, and their total volume is >40% of GDP.
Inflation in 2018 was unusually restrained, reaching the lows over the last 5 years at 5.3%, and ignored negative impact of weak tenge, record levels of inflation expectations, nominal wages growth above 7%, trade turnover of more than 8%, double-digit growth in investment, that all formed strong pro-inflationary picture.
Monetary conditions remained neutral, despite the base rate hike in 4Q2018 to 9.25%. The NBRK regularly reduced the base rate until 3Q2018 along with the decline in inflation. However, in the fourth quarter of 2018 the NBRK decided to raise the base rate while inflation ended the year at 5.3%. We believe that such a decision might be viewed by the market as a beginning of monetary policy tightening. In 2018, FX rate of the national currency weakened from 318 tenge to 384 tenge per US dollar as the end of the year, while RUBKZT FX rate was at 5.5-5.6 tenge per Russian Ruble.
External trade of Kazakhstan in 2018 increased due to energy prices recovery resulting in growth of nominal value of exports within 10 months 2018 by 41%. Trade balance widening improved current account deficit that radically decreased compared to 2016-2017 and amounted to less than 1% of GDP in 3Q2018.
KASE index showed upward growth from 2 155 to 2 325 at the end of December 2018. Such growth dynamics of KASE index was driven by on the one hand increase in commodity prices, and on the other hand, the continued tightening of Fed policy that caused the outflow of capital from emerging markets, as well as geopolitical uncertainty regarding Russian Federation and trade wars between United States and China.
Scenario forecast
At the end of 2018 under the influence of negative factors on external markets oil prices fell to $50 per barrel, although the average price of Brent oil amounted to $70 per barrel. At the beginning of this year, oil prices began to adjust upwards, and forecasts of oil prices stand at the level of $70 per barrel. In this regard, we have revised the forecast of oil prices this year toward a small decline to $68 per barrel on average.
Scenario projections of major macroeconomic indicators we implemented with symmetrical deviation from baseline scenario assuming average annual oil price of $68 per barrel in 2019 and 2020 (based on the assessment of the expectations of the international organizations and market participants and our more conservative approach to the evaluation of oil quotations). Pessimistic – the average annual price of $58 per barrel in 2019 and 2020 and optimistic – the average annual oil price of $78 per barrel in 2019 and 2020.
Kazakhstan's economy in 2019 we expect to grow by 3.6%. Oil prices since 2016 rose by almost 60%, their growth is limited by the growth of the world economy that reached the plateau. In our assessment, the average oil price will be $68 per barrel. In view of the slowing down of the extractive industries contribution of services to growth will moderately increase. The State budget will improve significantly, however, the use of funds of the National Bank and ENPF will retain the consolidated deficit within -0.5% of GDP in 2019.
Rise of the minimum wage will support a small increase in wages. Limited supply of workforce due to demographic factors will have a positive impact on employment.
Foreign trade conditions in 2019 will form favorably in general, because the cost of energy will be only slightly below 2018 ($68 per barrel).
In 2019 we expect a slight expansion of the current account deficit through increasing imports of investment goods for major oil projects, as well as due to deepening deficit accounts of primary income of foreign investors.
We believe that the level of exchange rate will stand at 375 per USD and follow the Russian ruble movements, which will suffer from the effects of sanctions and the budget rules.
Inflation will be closer to the middle of the NBRK target corridor at a level of 5.4% and will largely be determined by the delayed effect of the weakening of tenge in 2018, which did not materialize, though resulted in significant growth of inflation and devaluation expectations since last fall. The NBRK will keep monetary conditions at a neutral level in 2019, and by the end of the year will reduce the base rate to 9%.
