In 1Q2022 high oil prices and other export commodities of Kazakhstan against the backdrop of significant expansion of government spending contributed to the acceleration of Kazakhstan’s GDP growth to 4.4% yoy. However, the factors above against the backdrop of the Ukrainian conflict also led to a sharp acceleration of inflation to 12% yoy in March and to 13.2% yoy in April. Rising inflation rates as well as an external pro-inflationary background, contributed to increase in the base rate of the NBK from 9.75% to 14% in April. At the same time, the favorable dynamics of commodity prices led to 2.7 times increase in commodity export earnings and the formation of a current account surplus of $2.2 billion. Reflecting the growth of geopolitical tensions in the region, the movement of the Russian ruble and the exit of nonresidents from the securities of Kazakhstani issuers, in the 1st quarter, there was a high volatility of tenge exchange rate. By the end of March, the national currency weakened by 6.1% since the beginning of the year to 458.2 tenge per US dollar.
In the coming month of this year, the main impact on the economy of Kazakhstan will continue to be exerted by geopolitical tensions, the global acceleration of inflation and the tightening of monetary conditions. We forecast Kazakhstan’s GDP growth this year at 3.3%, inflation at the level of 12-14%, the exchange rate of 460 tenge per US dollar.
High commodity prices and an increase in oil production, while maintaining the fiscal stimulus, will ensure Kazakhstan’s GDP growth by 3.3% in 2022. The negative impact of economic sanctions against Russian Federation, transmitted to the economy of Kazakhstan trough close trade ties between the counties, will be offset by favorable trade price conditions in external commodity markets. The global hydrocarbon market is experiencing a shortage of supply, thanks to which oil quotes are kept at high level. The current situation in the global energy market with oil prices at $100 per barrel will stimulate an increase in oil production in Kazakhstan from 85.7 million tons in 2021 to over 87 million tons in 2022, and this, in turn, will support the growth of Kazakhstani economy at the level 3.3% yoy. High external demand for Kazakhstani exports, support for the economy through a significant increase in state budget spending (+18% yoy), wage and pension increases, and the removal of most covid restrictions will have a positive effect on aggregate domestic demand.
The acceleration of inflation continues. At the end of 1Q2022, inflation reached 12% yoy, almost doubling from the previous year. The acceleration of consumer inflation was facilitated by an increase in prices for food products by more than 15% yoy, and for nonfood products – by almoust11% yoy. The main triggers for the acceleration of global and regional inflation were the consequences of global quantitative easing programs, the protracted transition to tightening of the monetary policy of the US Federal Reserve, the consequences of sanctions against the Russian Federation, adverse environmental conditions, as well as the volatility of regional currencies and supply chain disruptions. This has already resulted in an acceleration of inflation in April, which reached 13.2% yoy. Further dynamics of consumer inflation in Kazakhstan will directly depend on the degree of external geopolitical tension, the dynamics of inflation in the world and the successful implementation of government measures to curb price growth in the country. We believe that the peak of annual inflation will be passed in the second quarter of this year and we expect that consumer inflation at the end of 2022 will be in the range of 12-14%.
Monetary policy – course for tightening. During 1Q2022, the NBK progressively tightened monetary conditions, raising the rate from 9.75% to 10.25% in January and to 13.50% in February, keeping it at 13.50% in March. Such dynamics of the main rates reflects the strengthening of support within the country, as well as the growing external pro-inflationary pressure due to the conflict in Ukraine. The acceleration is provided in the precedent for further tightening of the monetary policy, when the NBK raised the rate to 14%. Taking into account the continued significant inflationary pressure in the economy, geopolitical uncertainty and food shortages in the global market, as well as based on the rhetoric of the NBK itself, we expect that the base rate will be in the range of 13-15% by the end of current year
Tenge in search of balance. During 1Q2022 against the backdrop of growing geopolitical tensions, increased country risks, nonresidents’ exit from government securities, the tenge depreciated by 6.1% since the beginning of the year to 458.2 tenge per US dollar. The weakening of the Russian ruble was accompanied by a depreciation of the tenge against the ruble from 5.33 tenge per ruble to 3.98. The national currency of Kazakhstan, which is not under international sanctions, at the moment reached 512.2 tenge per dollar, while trying to find new equilibrium parity against the ruble (average value of 5.33 tenge per ruble in 1Q2022 vs 5.89 tenge in 4Q2021). In April, the tenge exchange rate approached the average equilibrium value of 5.79 tenge per ruble.
Taking into account close ties between Kazakhstan economy with the Russian economy and our expectations for the weakening of the Russian ruble, as well as our forecasts for the growth of imports of consumer and industrial goods, we expect the tenge to depreciate to 460 tenge per US dollar by the end of current year.