Macroeconomy. April 2009
The macroeconomic overview provided by SigmaBleyzer Company
Finally, the risk is that the recovery of domestic demand may be longer and weaker because businesses have reduced investment spending as well. In January-February, fixed capital investments declined 9.7% yoy as fixed capital investments into industry and real estate, renting and business activities (economic sectors that account for over 75% of all fixed capital investment) fell by 25.4% yoy and 14.9% yoy, respectively. Weak investment spending may be associated with two key factors. First, falling crude oil prices reduced the profit margins of oil producing companies, which depressed capital outlays in the mining industry and investments into geological exploration. Second, tight credit conditions continue to block the flow of funds to the construction sector. As a result, in January-February 2009, less than 10% of all fixed capital investment was financed with borrowed funds compared to more than 25% a year ago. On the positive side, the share of foreign investors in capital spending doubled to 41% from 20.6% in January-February 2008. After all, foreign oil producing companies continue to expand their production capacities in
In February, industry lost 4.7% yoy, following a downtrend that stretches back to November. As a result, in January-February 2009, industrial production declined by 3.2% yoy compared to 3.4% yoy growth a year ago (see chart 2). The manufacturing sector continued posting double digit production declines, shrinking by 11.4% yoy in January-February. On a positive note, in February output in key manufacturing sectors (with the exception of fuel processing, which is facing a reduction of demand from construction and trade) fell at a slower rate than the month before. However, a comparison of industrial performance during the first two months of 2008 and 2009 shows that output contraction decelerated only in sectors producing construction materials (primarily due to the sharp downward adjustment of output in that sector in 2008). Meanwhile, performance of other manufacturing sectors visibly weakened. This means that manufacturing output will continue to slide until global and domestic demand stabilizes. In particular, fuel processing (where output fell by 6.7% yoy in January-February 2009) may see its pace of decline stepping up as demand for gasoline and other fossil fuels falls on the back of the anemic transportation industry. Indeed, in January-February 2009, the volume of freight transportation declined by 4.1% yoy (up by 3.1% yoy a year ago), while the volume of passenger transportation inched up by only 0.5% yoy (up by 4.9% yoy a year ago).
Finally, it appears that economic weakness is spreading beyond the manufacturing industry into the extracting sector. In particular, in February, output in the mining industry stalled for the first time in more than a year, marginally shrinking by 0.3% yoy. Although oil and gas extraction grew by 4.7% yoy, a sharp reduction in coal production (down by 21.4% yoy) and falling extraction of metal ore (down by 5.4% yoy) offset positive growth in other mining industries. However, if lower output of metal ore may be associated with falling global demand for steel, falling coal production may be rooted in decreasing output of utilities (down by 7.8% yoy). Indeed, in January-February, electricity generation shrank by 9.6% yoy, which may have caused a reduction of demand for coal since about 80% of electricity is produced by fossil fuel-fired plants, while more than a third of all locally produced coal is consumed by the utilities sector.
The government of
During the first two months of 2009, the state budget registered a surplus of KZT 92 billion or 0.55% of projected full year GDP (see chart 3). State budget revenues fell by 9.2% yoy as tax revenues decreased by 10.7% yoy. A decline in tax revenues is most likely driven by lower VAT revenues on the back of decelerating retail trade and imports.
In January-February, state budget expenditures inched up by 1.2% yoy as the government cut spending on transportion, the energy sector and public housing. Meanwhile, expenditures on agriculture, social security, education and healthcare continued to grow. Obviously, this trend illustrates a shift in budget priorities, as tighter financial constraints induce the government to cut or delay some investment projects while maintaining vital public services and supporting social protection. Indeed, in January-February 2009, the portion of fixed capital investment funded by the state budget narrowed to 3.7% compared to 6.1% the year before.
In February, the consumer price index (CPI) increased by 0.8% compared to the month before (mom). Essentially, prices of non-food products (up by 1.8% mom compared to a drop of 0.4% mom in January) were driven by the 22% currency devaluation in February, which inflated prices of imports. As a result, prices of non-food products grew by 6% yoy (see chart 4), offsetting a deceleration of the growth of service tariffs and prices of foods. All told, in February, the CPI grew by 8.7% yoy.
However, the exchange rate pass-through to higher prices of imports is likely to continue pushing up domestic inflation in the near term. Indeed, the core CPI (which excludes prices of foods and fuels) appears to exhibit a strong correlation with lagged exchange rate (see chart 5).
On a positive note, prices of Kazakh imports have been falling since September, following global deflationary trends. Furthermore, weak consumer demand will almost certainly limit the power of local retailers to pass on the full impact of the weaker Tenge to consumer prices. Indeed, according to the Customs Control Committee, retail margins over the prices of imported foods, fruits and vegetables tended to shrink in February. At the same time, retail margins for non-food household products slightly increased. This may imply that the exchange rate pass-through to consumer prices is likely to be more visible in sectors with limited capacity for import substitution (for example, consumer electronics and household products) compared to sectors where local competition is stronger such as food processing and agriculture.
In February, currency devaluation brought in a 25% nominal increase in forex-denominated liabilities of banks’ borrowers. However, the total stock of forex denominated credit inched up by only 1% mom to $27.6 billion as new forex loans in the amount of $1.7 billion were offset with $1.4 billion of repayments of outstanding loans, including $1.1 billion and $0.3 billion paid back by companies and households, respectively (see chart 6). Meanwhile, the stock of KZT denominated loans dwindled by 2.2% mom in February (or by 3.3% yoy) as during the first two months of 2009, the volume of newly issued KZT denominated credit fell short of the amount repaid by both households and the corporate sector.
As a result, in February, the stock of domestic credit inched up by only 1.7% yoy to $54 billion and was primarily driven by corporate borrowing in foreign currencies. Slower growth of domestic credit and currency depreciation looks certain to elevate credit risks in the banking system. First, slower expansion of credit portfolios deprive banks of future interest income, which may lower profit margins and erode banks’ capital. Second, both households and companies remain exposed to currency risks, as about 40% and 50% of all loans issued to households and the corporate sector, respectively, are denominated in foreign currencies. This means that borrowers who earn income in Tenge and repay loans in foreign currencies may be forced to delay debt service payments or even default. As a result, more forex-denominated loans will turn sour as households face higher unemployment and lower wages and corporate profits dwindle (see chart 7). On an optimistic note, the impact of the recently launched bank bailout program should become visible during the next several months. If this program helps to unfreeze the banking sector and revive bank lending, the ratio of bad loans kept on banks’ balance sheets may stabilize. However, it is likely that further efforts will be required to help the banks clean up their books by encouraging private investors to purchase troubled assets.
International Trade and Capital
Falling global commodity prices continue to exact a toll on
As a result, in January the foreign trade surplus amounted to $0.75 billion or nearly 4 times lower than a year ago (see chart 9). This means that the current account deficit may exceed $0.5 billion in the first quarter of 2009. However, the weaker Tenge, falling domestic demand and a possible stabilization of crude oil prices in the second half of this year may help contain the widening of the current account gap beyond 4% of GDP in 2009.
According to the National Bank of
Sergey Kasyanenko, Edilberto L. Segura
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