Kazakhstan

Outlook 2016

MACROECONOMIC outlook

Astana

June 2016

Central Asia Think Tank Development Forum

“Promoting Economic Cooperation for an Integrated Central Asia”

Macroeconomic Environment

Low oil prices, slowdown in FDI, and negative spillovers from slowdown in Russia

and China have been putting downward pressure on economic activity.

2

Source: National Bank of Kazakhstan

2,3

1,7

1,2 1,2

-0,2-0,5

0

0,5

1

1,5

2

2,5

1Q2015 2Q2015 3Q2015 4Q2015 1Q2016

GD

P G

row

th Y

oY, %

Economy shrunk in the first quarter of 2016 Similar situation is observed in the whole region

Negative heritage of global financial crisis has not been eliminated (high share of NPLs)

Fiscal policy is constrained by the weakness of output

Current Account Balances (ECA Region) Foreign Reserves (ECA Region)

% of GDP Months of Import

Source: World Bank

Macroeconomic Environment

3

-30,0%

-20,0%

-10,0%

0,0%

10,0%

20,0%

Consumer PriceInflation, YoY

Producers PriceInflation, YoY

-6,0%

-4,0%

-2,0%

0,0%

2,0%

4,0%

6,0%

Consumer Price Inflation, MoM

Producer Price Inflation, MoM

2

2,5

3

3,5

4

4,5

5

5,5

150

200

250

300

350

400

450

Shift to floating exchange rate in August

2015 led to a sharp tenge depreciation…

USDEUR

USDKZT

USDRUB (RHS)

Source: National Bank of Kazakhstan, Kazakhstan Statistics Committee

… which resulted in plummeting

inflation

External Accounts

The current account was in deficit of 3,2% GDP in 2015, compared to a surplus

of 2,1% GDP on average in 2010-2014

External debt amounted to $153,5 bln (83,3% of GDP) with the public sector debt

accounting for 7,9% of the total external debt

4

Source: Halyk Finance

Downward pressure on trade and current account

FDI

In 2015, the volume of FDI in Kazakhstan dropped by almost 40%…

7 916

12 066

19 41821 301 21 437 22 246

26 46728 935

24 137 23 888

14 829

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Gross FDI inflows to Kazakhstan, 2005-2015

Source: National Bank of Kazakhstan

32,7

26,49,2

8,6

2,6

5,3

3,51,7

1,98,1

FDI Structure in 2005-2015, %

Geological Survey and Prospecting

Mining Industry

Metallurgy

Trade

Manufacturing

Finance

Construction

Transport and Logistics

Information and Communication

Other

Source: National Bank of Kazakhstan

… despite recent success in international rankings

World Bank Doing Business Rank

2015 2016

53 41

WEF Global Competitiveness Report

2014-15 2015-2016

50 4212 8

5

FDI (continued)

During the period of overall investment deceleration

manufacturing turned out to be the most resilient sector

7,3

8,3

2,8

3,7

2,83,5

1,5

2,6

0

1

2

3

4

5

6

7

8

9

Oil and Gas Production Mining Industry Trade Manufacturing

USD

bill

ion

Change in FDI inflows in selected sectors

2014 2015

Source: National Bank of Kazakhstan

– 30%– 47%

– 58%

– 62%

Manufacturing share in total FDI went from 15,4% to 17,3%

6

0

5

10

15

2013 2014 2015 2016f 2017f 2018f

%

Economic Outlook

7

7,3 7,2

4,6

5,8

4,1

1,2

0,1

1,9

3,7

0,11,0

4,9

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

2010 2011 2012 2013 2014 2015e 2016f 2017f 2018f 2021f

%

Statistics Committee World Bank IMF

A rebound is projected in 2017, though in the medium term the growth is likely to remain below its long-run potential

Main assumptions for the rebound…

recovery of commodity prices

rebalancing of the economies of main trade partners

favorable regional conjuncture

easing of geopolitical tensions

…are at large risk

Source: Kazakhstan Statistics Committee, World Bank (April 2016), IMF (April 2016)

Consumer Price Index

-5

0

5

2013 2014 2015 2016f 2017f 2018f

% t

o G

DP

Current Account Balance

Real GDP Growth

0

10

20

30

2013 2014 2015 2016f 2017f 2018f%

to

GD

P

Public Debt

Source: World Bank (April 2016)

Policy Response

8

Rebalancing of monetary policy. General stabilization of financial sector: reduction of exchange rate volatility, decreasing inflation, and building confidence to monetary authorities

Promoting structural reforms. Implementation of the Plan of the Nation “100 steps”, implementation of privatization program, boost for investment attraction

Safeguard for public investment. Implementation of infrastructure projects under “Nurly Zhol” program, fiscal consolidation, securing available fiscal buffers (assets of the National Fund)

Monetary Policy

Since the beginning of the year NBK is easing the monetary policy

Interventions by NBK are significantly lowered; KZT becomes more flexible currency

NBK is keeping the inflation target for 2016 at 6-8% with the projected reduction

to 3-4% corridor by 20209

Source: Halyk Finance

Since the beginning of 2016, pass-through effect of depreciation begins to fade

away, but inflationary trends still persist

Source: Halyk Finance

Structural Reforms

10

The Plan of the Nation “100 Steps” with a package of structural reforms has good

prospects, positive effects are likely to kick in over the medium to long term

“100 steps” is based on ambitious agenda including market liberalization (energy sector

restructuring, lifting price control in agriculture), privatization, and investment climate

improvement

Implementation milestones:

In the first quarter of 2016, income from privatization amounted to KZT 1,9 bn

The new privatization program is extended until 2020

11

Fiscal Buffers: National Fund

Objectives.

Noticeable success in achieving its main objectives: stabilization of the economy; and saving for future generations.

Stabilization Objective.

It is noted that the government used the resources from the National Fund in 2009 to limit the impact of the global financial crisis on the domestic economy. The retrospect reviews by the IMF and World Bank confirm that Kazakhstan responded to the 2008-2009 crisis quite effectively.

Saving Objective.

Has accumulated already exceeding the target of 30% of GDP set to achieve by 2020. Size could reach $200 billion by 2020 that has a particular significance. It could then accumulate all of its principle while transferring to the budget only its annual return (estimated at 4 percent) that would coincide with the amount of $8 billion/year. This (transferring only the annual return to the budget) is in line with the Norwegian “bird in hand” fiscal rule, which is considered best practice.

In 2015, vetoed further spending from NF (aside from basic annual transfer)

60

62

64

66

68

70

Ass

ets

of

Natio

nal

Fund

, U

SD

bn

-6

-4

-2

0

2

Chang

e in a

ssets

Mo

M, %

Source: National Bank of Kazakhstan

Accumulated fiscal buffers allow sustainable public investment

Budget policy revision

12

In 2016, the Government revised the budget;

Public spending volume was increased by KZT 600 bn, including

KZT 240 bn for “Nurly Zhol” program (affordable housing, schools, roads, EXPO-

2017, Winter Universiade 2017)

KZT 60 bn for social projects (education, healthcare, water supply)