For the last three months, analysts predict a slowdown in economic growth, while waiting for its final figure at year-end. They assume that inflation in this period will not exceed the target range set by the National Bank at 6-8%, and the average level of the dollar will be 335-338 tenge. The main attention to the market, in their opinion, in the last quarter will be focused on reports on the level of oil production, developments in the banking sector and the development of the situation in the fuel market. They are also waiting for the adoption of new tax and customs codes, approval of the Strategic Development Plan of Kazakhstan until 2025 and the law on the state budget for the next two years. Among the possible risks, they highlight a further drop in oil prices and the volatility of the tenge, which may arise from an unexpected weakening of the rouble.
According to the Ministry of National Economy, Kazakhstan's GDP has increased by 4.3% over the past nine months. The calculation of the breakdown of economic growth, carried out by the TALAP centre, again showed that half of it is caused by two sectors - mining (11.3%) and manufacturing (6.1%). Their productivity continues to support the oil projects of Kashagan and Tengizchevroil, as well as favourable conditions on commodity markets. At the same time, growth in agriculture slowed down to 1.9%, and that in construction to 0.1%. In general, through the year the Ministry of Economy expects GDP growth at the level of 3.4%, to KZT 51.85 trillion
The economic recovery, which began in the second half of 2016, has slipped into a slowdown since the second quarter of this year, says senior analyst of Halyk Finance Asan Kurmanbaev. First of all, it concerns the productivity of two sectors of industry, namely construction and transport. "We associate the decline in business activity ever since the second quarter with the achievement of a local peak in oil production in March, after which trends became less dynamic."
The analyst characterises the current growth as unstable and does not see any potential for its serious acceleration: "According to our expectations, following a minor slump in 2016, GDP growth this year will be 2.9%. At the same time, we believe that the slowdown in sector dynamics the present moment will be overcome, and economic activity will continue to recover, although this will happen slowly."
However, Tengri Capital analyst Dmitry Sheykin sees reasons for a stronger performance: "According to our latest projections, in 2017, GDP growth in real terms will be 3.1%, increasing to about KZT50.84 billion in nominal value ($155.82 billion at the average annual rate dollar in 326.3 tenge). Our previous growth forecast was 2.75%."
Aigul Berdigulova, economist at the Eurasian Development Bank, also mentioned an upward revision of the estimates for annual growth. This is due to the stabilisation of the external economic conditions and high volumes of exports. "Nevertheless, we still expect that in the autumn and early winter months, GDP growth will slow down. In the IV quarter, it may increase by 2.3% compared to the same period in 2016".
According to the Ministry of Economy, during the first 9 months inflation was at 4.2%, and the year-to-date level reached 7.1%. Its slowdown was in line with conservative inflation expectations, the stabilisation of the foreign exchange market and the growth of food products output. The National Bank expects that by the end of the year inflation will not exceed the target corridor of 6-8%, and public opinion polls show an expected level of 6.5%.
"But according to polls, almost half of respondents believe that inflation will be above 11%. In this regard, it is necessary to publish more detailed calculations of the quantitative assessment of inflation expectations," the TALAP centre emphasises.
At Halyk Finance they believe that the current slowdown of inflation only creates an impression of price stabilisation, while the potential for a sharp increase of prices cannot be excluded and is additionally fueled by the weakened tenge rate in recent months, especially its rate to the Russian currency. This year, analysts expect a decline in crop volumes compared to last year, which may cause the fall in food prices in July to be short-lived. "Based on these and other factors, we continue to adhere to our inflation forecast of 8% by year-end," Kurmanbaev explained.
According to Tengri Capital, inflationary pressure on the economy is now being put by the weakening of the tenge, which was especially observed in August and September: "The mechanism of bolstering inflation through the currency channel is simple: economic agents relate the value of assets denominated in national currency to the value of assets in foreign currency. The more significant the devaluation of one currency, the clearer the desire to compensate for the loss of this value through adjusting the price of goods and services. This is particularly clear to see among local producers importing raw materials for the production of goods."
In this regard, Mr Sheikin expects the average annual inflation rate to be within the range of 7.3-7.4%, and from there on to fall next year to 6.2%. In addition, in the next three months the analyst does not forecast any significant changes in monetary policy: "In October, it was decided to leave the base rate in Kazakhstan at the same level of 10.25%. We believe that the National Bank of Kazakhstan takes inflationary pressures on the economyinto account and therefore it is in no hurry to further lower the rate."
"Under the condition of increased volatility of the tenge exchange rate observed in the summer months, annual inflation will somewhat accelerate in the fourth quarter of 2017 (up to 7.7%), but will remain within the target corridor," as emphasised by the EADB.
According to the EADB's expectations, the average value of the dollar in the fourth quarter will be 335 tenge. Halyk Finance, in its turn, forecasts it at the level of 338 tenge.
Tengri Capital expects an average annual dollar rate at 326.3 tenge. Their forecast is based on the target value of the Ministry of Economic Development of Russia at a rouble exchange rate of 59.7 per dollar in 2017, as well as on Bloomberg's consensus forecast for oil prices at $54.5 per barrel for the fourth quarter.
"The National Bank will face a very difficult task to find the optimal ratio of the dollar-tenge parity in the external and the domestic market. A weak national currency stimulates the sale of Kazakhstan's exports. Given the record deficit in the current account, which in 2016 stood at the level of $8.9 billion, the regulator is forced to weaken the tenge and thereby stimulate the trade balance in Kazakhstan’s favour. By the way, in the current account remains the only tool to do so, as in the account of services, primary and secondary incomes, Kazakhstan has a negative balance. Through this mechanism, the National Bank will gradually reduce the current account deficit. On the other hand, a significant easing of the rate or its volatility within the country can put the National Bank's policy of de-dollarisation of the economy at risk. Most recently, we observed that the rate of the dollar dollar-tenge parity did not react to any change in quotations for energy resources and the strengthening of the dollar dollar-rouble parity. Therefore, we believe that this was the NBK's attempt to manage the current account deficit," Sheikin said.
According to Halyk Finance, one of the most important events of the current quarter will be information on whether the Kashagan field will reach the planned production level of 370,000 barrels per day. This can give a better comprehension of the medium-term prospects of production at the field and the development of Kazakhstan's economy as a whole. "In the banking sector, the contours of the future banking system will become clearer after the efforts of the regulator to increase the capitalisation and stability of the second-tier banks," Kurmanbaev said.
At Tengri Capital, on the contrary, people do not expect significant events in the banking market. Sheikin specified that since the beginning of the year the National Bank is already conducting an assessment on the quality of bank assets. One of the first signs on the wall was the situation with Delta Bank, whose non-performing loans rose from 1.86% in January to 96.5% in February.
"We believe that the banking sector will continue to be audited in the current quarter. We understand the National Bank's desire to give a clear assessment of the quality of bank assets. [...] The situation with Bank RBK will be gradually resolved, as it is on the list of the nine largest banks of the country and the National Bank will not allow the collapse of such a large establishment. The bank has significantly increased its assets and has become a recognisable brand over the past few years. In 2017, we have seen a deterioration in the quality of its loan portfolio, but also see that the bank is making efforts to improve it. In February, its share of overdue loans was 40.8%, but by the end of August it decreased to 18.8%. Also this year, the bank has posted a positive net income figure and we believe that this may indicate that the shareholders are interested in continuing the work of the enterprise," Sheikin said.
In addition, he drew attention to the situation in the fuel market of Kazakhstan, which will continue its trend into the last quarter. The analyst associated the emergence of problems on it with the adjustment of world energy prices, including Russian ones, and the reduction in the supply of petroleum products. Not the least important role was played by the weakening of the tenge's exchange rate against the dollar, which affected the sales prices of petroleum products inside the country. "Will there be a price correction in the fuel market after the normalisation of supplies in the short term? We think, yes. But within the framework of the Eurasian Economic Union, the participating countries will bring the price of fuel to a middle-of-the-road level. This medium-term trend will be followed by Kazakhstan. Consequently, prices for petrol will grow."
The EADB expects that in the next three months there will be a consolidation of budget expenditures. According to Berdigulova, the recovery of the banking sector following the results of seven months of this year increased the budget deficit to 5.3% of GDP from 0.4% at the end of the first half of the year. And its indicative indicators for 2017 are set at 3.1%, the implementation of which will require a reduction in costs. "However, consolidation will not affect socially-oriented sectors. The government's measures to step-by-step increase in the amount of benefits paid from the budget will be implemented," the analyst believes.
At Tengri Capital they also believe that the budget deficit will return to the level of 3-3.1% of GDP: "This year the budget was under considerable pressure because of the deal with Halyk Bank and Kazkommertsbank to buy back non-performing assets. At the beginning of the year, the budget was adjusted a second time, taking into account the tasks from the President's message. We believe that next year the budget will also witness a deficit at a level of not less than 2%"
Halyk Finance drew attention to the pending adoption of the law on the state budget for 2018-2020, which should reduce the expenditure and allow an increase in revenues to achieve an official deficit of 1% of GDP. Analysts also expect the approval of the Strategic Development Plan of Kazakhstan until 2025 and new versions of the Customs and Tax Codes. "In our opinion, these documents create prerequisites for the development of simpler and more understandable relations between state and business. How serious the consequences of the innovations provided by the drafts will be is difficult to say," Kurmanbaev observed.
The TALAP centre is also waiting for the adoption of the new Tax and Entrepreneurship Codes. "There are no fundamental, profound changes in them at first sight, meaning they will preserve the status quo," the analysts believe. They also allow for the possibility of announcing new initiatives that will require an increase in budget expenditures and an increase in the targeted transfers from the National Fund in the first quarter of next year
According to Halyk Finance, the main risk for Kazakhstan’s economy in the last quarter of 2017 will continue to be the fall in oil prices - more than half of the hard currency revenue and more than a third of budget revenues depend on the export of raw materials. Another potential risk is associated with the Russian rouble, which may weaken irrespective of the dynamics of oil prices or for any non-economic reasons. "In connection with the slowdown in productivity of individual industries, there is a risk of a slowdown in economic growth if the increase in oil production in Kashagan goes at a slower pace. Kazakhstan has no sources of growth in the non-primary economy," Kurmanbaev underlines.
In TALAP centre they predict acceleration of measures to improve banks and the allocation of additional liquidity to banks in the event of another aggravation of the situation in the financial sector. "New initiatives to introduce pseudo taxes, fees, and payments can also arise again. At the same time, it is also possible to tighten the tax management policy to add revenues to the budget," analysts believe.
The EADB believes that the processes of mergers and acquisitions of banks are able to limit lending to the economy, since the main resources of institutions will go to increase their own capitalisation.
By Dmitry Mazorenko for Vlast