Oil prices this year were significantly weaker and almost $10 lower than the last year. The reason for the negative dynamics of oil prices was the increase in US oil production while global demand experienced a pullback amid an escalation of trade disputes.
Over the first nine months, GDP growth was higher than 4% yoy (excluding only January +2.9% yoy). At the same time, it accelerated to 4.6% yoy in April, and was at 4.8% in July-August, but the service works conducted in the spring and autumn initially at Kashagan, then on Tengiz and Karachaganak had put a brake on the economic growth. Nevertheless, over the first 9 months GDP growth amounted to 4.3% yoy, which is the result of a strong expansion of fiscal stimulus this year amid a slight decrease in oil production by 0.4% yoy and a drop in oil prices by 11% yoy. In October, major works on the fields were supposedly ended and, accordingly, in the remaining two months of the year, industry would stop to limit the economic growth.
This year, as a result of the adopted decision to increase incomes of the population, the state budget expenditures were immediately increased by T2.4 trillion or approximately 3.5% of GDP and, importantly, to stimulate business activity, they were aimed at general economic issues, rather than, saving banks as it was before. Due to the expansion, budget expenditures growth for the first three quarters of this year were approximately two times higher than in the same period last year, exceeding 17% yoy.
Tenge automatically adjusted to the situation in the oil market and demonstrated a fairly high co-movement. So, a decrease in oil prices by 10.8% yoy for 9 months of 2019 was accompanied by an equivalent weakening of tenge by 11.8% yoy. Thus, weak tenge compensated not only for the fall in oil prices, but also for declining oil production, helping to alleviate pressure on state finances.
Our opinion
The growth of Kazakhstan's economy in the third quarter accelerated to 4.6% yoy from 4.4% yoy in the second quarter, which was achieved due to a smaller reduction in oil production during technical works than previously expected, a high level of budget expenditures and investment. The deterioration in the external environment, expressed in a fall in oil prices by more than 10%, was automatically compensated by a corresponding depreciation of tenge, which had a positive effect on the revenue side of the budget. Amid increased economic growth, tax revenues are also showing a high growth rate – above + 15% yoy. In turn, the expenditure side of the state budget increased more than the revenue side – by 17% yoy. At the same time, less than 30% of the state budget expenditures for 9 months of this year was invested in the economic development of the country, while the lion's share of the expenditures was directed for financing the current consumption of the state and the private sector in the form of defense, public services, salaries, and social security expenses. Significant budget allocations of funds toward non-productive sectors will ultimately have only a short-term impact on the economic growth, while a longer-term negative effect will be reflected in the increase in the cost of servicing an increased public debt. For example, if in 2010-2013 debt servicing expenses were at a level of less than 0.5% of GDP annually, then since 2016 they stand at 1% of GDP on average, i.e. the urgent issue is the need to increase economic returns from expanding state budget expenditures, which takes place against the background of a gradual reduction in the National Fund reserves to less than 40% of GDP from 63% of GDP in 2015.
