While still recovering from the 2014 devaluation, low oil prices, and ruble depreciation, Kazakhstan’s economy suffered a further shock from the early move to a freely floating exchange rate and the resulting depreciation of the tenge. Over the medium term, however, gains from a more competitive exchange rate are likely to materialize.
|Selected economic indicators (%)||2015||2016|
|ADO 2015||Update||ADO 2015||Update|
|Current Account Balance (share of GDP)||-1.0||-5.2||-1.3||-3.2|
Source: ADB estimates.
In a surprise move, Kazakhstan instituted a freely floating exchange rate on 20 August 2015, abandoning its earlier narrow currency band linked to the US dollar and adopting a monetary policy that targets inflation. As a result, the local currency depreciated by more than 21%, an even larger decline than the 16.2% devaluation in February 2014.
Growth in the first half of 2015 is estimated to have slowed from 3.9% a year earlier to 1.7%, its slowest rate since 2009. Industry grew by only 0.6% as nearly stagnant 0.3% growth in manufacturing largely negated growth in oil production at 1.3%, metallurgy at 5.6%, and chemicals at 1.8%. Agriculture expanded by 3.0%, and construction, which benefitted from ongoing government projects, by 5.1%.
Inflation was modest at 5.3% in the first half of 2015, down slightly from 6.1% a year earlier, mainly because of weaker aggregate demand and cheaper imports from the Russian Federation after ruble depreciation. Food prices rose by 6.0%, up from 5.7% in the first half of 2014, and other goods rose by 4.4%, down from 5.8% the previous year. Price increases for services slowed to 5.1% from 6.9% a year earlier, partly reflecting regulatory restrictions on utility tariffs.
While the 2015 budget has been revised several times to reflect lower oil prices, the government is committed to continuing some stimulus expenditure despite sharply declining revenues. Real growth may suffer from lower private consumption in response to higher import prices, and from diminished private investment as commodity producers see profits fall.
In 2016, a projected rise in exports and preparations for Expo 2017 will promote a recovery in growth despite continued weak private consumption and investment and possible downside risks from a rise in interest rates to contain inflation. The growth forecast is lowered for 2015 and 2016.
In the second half of 2015, tenge depreciation will directly spur import prices, especially for nonfood imports with limited scope for substitution, and thus quicken inflation. While the government is trying to contain price increases by, for example, applying price controls and delaying to 2016 the expected salary increase for public servants, inflation is now projected to be higher by half in 2015 than the ADO 2015 projection.
The newly introduced inflation targeting regime will need to strike a balance between high interest rates, which could mute economic growth, and high inflation rates, which could force further tenge depreciation and thus higher import prices. Low oil and metal prices caused export revenues to fall by almost 47% in the first quarter of 2015 and the current account to turn negative.
As commodity prices are expected to remain low in 2015 and 2016, lower export earnings outweigh lower merchandise imports, the decline in net service exports, and reduced net investment income. Exports are expected to recover modestly in 2016, which will ease the current account deficit despite slightly larger demand for imported goods and services in preparation for Expo 2017. The projected current account deficit is nevertheless raised from the earlier forecast.
Production at the Kashagan oilfield is now expected to begin in 2017, which should boost growth and strengthen the current account balance over the medium term.
Excerpted from the Asian Development Outlook 2015 Update.