Macroeconomy. July 2009
The macroeconomic overview provided by SigmaBleyzer Company
Although significant downside risks for Kazakhstan's outlook are still present, recent data points to the increased likelihood of economic stabilization in the second half of this year. Indeed, the consumer and producer confidence indexes have moderately improved since February (see chart 1). On top of that, high-frequency statistics on the real sector show that the economy may have already been on track for a smaller output contraction in the second quarter of 2009 compared to the beginning of the year. In particular, in April-May, fixed capital investments were up by about 25% yoy compared to a decline of 4.9% registered during the first quarter of 2009. Industry shrank by 4.7% yoy during the first two months of the second quarter – on par with its rate of decline during the first quarter. This means, that the downturn in industry may be losing speed.
Meanwhile, the construction sector remains beset by tight access to credit and weak investment activity. Indeed, in January-May 2009, investment spending on construction and building maintenance fell by 27% yoy. During the same five months, new mortgage lending fell by half for tenge-denominated loans and by about one third for forex-denominated loans. All told, the volume of construction works, which decreased by 4.2% yoy during the first quarter, fell further by about 10% yoy in April-May.
Weak performance of manufacturing (down by 11.5% yoy in January-May) continues to be a drag on overall industrial performance. Industrial output fell by 4.6% yoy as a response to declining demand for utilities and an ongoing, albeit decelerating, contraction in metallurgy, machinery and sectors producing constructionmaterials, chemicals and fossil fuels (see chart 2).
In January-May, the state budget surplus narrowed to 0.3% (see chart 3) of projected full-year GDP as budget revenues inched up by only 0.9% yoy, while budget expenditures grew by 5% yoy. Fiscal revenues declined by 10.7% yoy on the back of weaker economic conditions and shrinking foreign trade, which continue to exert a toll on the collection of key taxes and customs duties. This means that fiscal policies are increasingly dependent on transfers from the National Oil Fund. During the first five months of this year, these transfers grew by 45% yoy to nearly $3 billion. As a result, almost 32 cents of each dollar spent by the state budget are withdrawn from the National Oil Fund, compared to only 22 cents the year before.
Falling global commodity prices and anemic domestic demand continue to keep inflationary pressures at bay in Kazakhstan. Indeed, in June, the consumer price index (CPI) inched up by only 0.4% compared to the month before. As a result, the CPI grew by 3.9% during the first half of this year or by 7.6% yoy (see chart 4). In particular, prices of foods grew by only 6.1% yoy (compared to nearly 30% yoy the year before), while prices of non-food commodities increased by only 6.9% yoy, restrained by falling retail prices of fossil fuels (in June 2009, prices of gasoline and diesel fuel were 30% below their 2008 level).
Although much of the slower price growth was triggered by the deflation of last year's commodity bubble, wage pressures appear to be in check as well. Indeed, the core CPI, which excludes cyclical volatility of food and fuel prices, stayed on a downtrend as nominal wages continue to decelerate (see chart 5). This means that wage-driven inflation is unlikely to reemerge as workers will find it increasingly hard to demand higher salaries in the weaker economic environment. Furthermore, real wages, which tend to grow significantly faster than labor productivity (see chart 6), appear to be returning to a more sustainable growth path, which is in line with productivity trends. This will help to ease inflationary pressures as well.
Lastly, Kazakh banks continue to face funding constraints on their capacity to create new credit. While domestic credit grew by nearly 90% yoy on average in 2007 fueled by inflows of foreign capital, it inched up by only 3% yoy in 2008. During the first five months of 2009, domestic credit, adjusted with a constant exchange rate, shrank by about 2% yoy as tenge-denominated credit continued to decline (see chart 7). All told, declining output, low inflation pressures and anemic credit growth prompted the National Bank of Kazakhstan (NBK) to cut its key policy rate (from 8.5% to 8%) in July for the fourth time this year.
After all, difficulties in the Kazakh banking sector imply that credit driven inflationary pressures are unlikely to rekindle in the medium term, which may justify a looser monetary stance to support ailing banks. Indeed, two of the ten largest Kazakh lenders (BTA Bank and Alliance Bank, which jointly owe about $18 billion to foreign creditors) have already defaulted on foreign loans and entered debt restructuring talks. During 2007-2008, the BTA Bank alone generated nearly one third of the total 54% credit growth in the banking system of Kazakhstan. Meanwhile, over the first five months of 2009, the share of non-performing loans in the credit portfolios of these two banks surged to over 61%. At present, BTA Bank and Alliance Bank account for 68% of all non-performing loans in the banking system. Furthermore, the increasing amount of bad loans of these two banks contributed nearly 75% of the 3x increase of bad loans in the banking system to about 30% of all loans by the end of May 2009. All this means that credit growth is unlikely to return to its pre-crisis level, which further dampens inflationary pressures.
However, this also means that a sluggish recovery of the banking sector may prolong the economic downturn. On a positive note, the orderly and prompt execution of the debt restructuring process should help mitigate the impairment of the banks' credit creation capacity. Alliance Bank has already signed a Memorandum of Understanding (MoU) with foreign creditors on the restructuring of its external debts. Proposed restructuring options include a limited cash-out option with a fixed price of $0.225 per each dollar of debt and $500 million available for this option; a 50% haircut and debt repayment over a 3 year period following a 4 year grace period; no haircut and debt repayment over a 3 year period following a 7 year grace period; as well as several equity conversion options. This MoU opens the way for the Samruk-Kazyna NationalWelfare Fund JSC to take control of the bank. Samruk-Kazyna is to inject $860 million into the bank's capital. This recapitalization and debt restructuring process is to be completed by the beginning of November 2009.
Finally, policies to ease credit constraints will continue to shield the banking system. The government has already spent about $5 billion out of $8 billion allocated to stabilize the economy (see chart 8). By the end of June, the total forex reserves of Kazakhstan (including assets of the National Oil Fund) stood at $42 billion, which is still a decent buffer against extreme adverse economic developments in the financial sector.
International Trade and Capital
During the first four months of 2009, Kazakhstan's exports declined by 50% yoy to $10.8 billion. Meanwhile, a smaller decline of imports (by 16.3% yoy to $8.4 billion) caused the foreign trade balance to narrow to $2.4 billion, compared to $11.4 billion the year before. In April alone, the foreign trade surplus hit a four year low, totaling $340 million (see chart 9). Essentially, this contraction of Kazakhstan's export revenues was triggered by the sharp downward correction of the prices of staple export commodities (namely, crude oil and non-ferrous metals). As a result, despite growing volumes of crude oil exports (up by 9.5% yoy), Kazakhstan continues to earn less foreign currency than a year ago (see chart 10). Indeed, during the first four month of 2009, international crude oil prices were on average 50% lower than a year ago. Prices of copper and ferro-alloys experienced an even deeper retreat from their peaks in July 2008 on fears of a significant global economic slowdown. On a positive note, a recent moderation of economic contraction in the developed economies and the resilient performance of the largest developing nation – China – injected a dose of optimism into the global commodity markets. Indeed, prices of key commodities regained footing during the last two months ofthe second quarter of 2009. This may help set the stage for a slower decline of Kazakh exports in the second half of the year.
However, as crude oil prices remain significantly below last year's level, the current account balance is likely to stay in the red this year. Indeed, during the first quarter of 2009, the country registered a current account deficit of $1 billion, compared to a surplus of $2.8 billion a year ago. On a positive note, currency devaluation and weaker economic activities may curb the size of the current account gap. First, lower oil prices ate into the profits repatriated by the foreign oil companies. As a result, during the first three months, the incomes deficit narrowed to $1.8 billion (compared to $4.3 billion a year ago) as income withdrawn by non-residents fell by 47% yoy. Meanwhile, the trade in services deficit decreased by 22% yoy to $1.1 billion, as imports of services declined by 11.8% yoy and exports of services grew by 3.4% yoy. Imports of services fell following the completion of several large projects in construction and oil industries as well as weaker demand for transportation services on the back of diminishing imports. Exports of services remained resilient, supported by pipeline and railroad transit transportation services. Lastly, imports of goods dropped by 16% yoy as weaker currency made imported consumer goods and industrial raw materials more expensive. Indeed, all import groups, with the exception of investment goods (which grew by 15% yoy thanks to an ongoing pipeline construction in the oil and gas sector), posted double digit declines. In particular, imports of industrial raw materials and consumer goods fell by 35% yoy and 28% yoy, respectively. All this points to long-lasting limiting forces that may help keep the current account balance within a manageable range despite lower prices of oil.
Meanwhile, the developments of the financial and capital account remain driven by the repayment of foreign loans by Kazakh banks. During the first quarter of 2009, external liabilities of the banking sector were reduced by $3.6 billion. This capital outflow was partially covered with $2.1 billion of net foreign direct investment (up by 15.5% yoy compared to the first quarter of 2008). Meanwhile, increased depreciation pressures forced the NBK to sell about $6.6 billon of its forex reserves during the first quarter of 2009. However, this was almost entirely offset by a conversion of $5.9 billion of the foreign assets of the National Oil Fund, which were used to purchase bonds of the Samruk-Kazyna JSC (with the purpose of funding Kazakhstan's economic stabilization program). This means that the NBK lost only $550 million of its forex reserves during the first three months of 2009, although the total foreign assets of Kazakhstan (NBK gross forex reserves plus assets of the National Oil Fund) were still down by $6.5 billion.
All told, a combination of the current account deficit and sizable repayments of foreign loans may rekindle devaluation pressures. Still, there are several reasons to believe that these pressures are manageable. First, according to the NBK, bank repayments of foreign liabilities peaked in the first half of 2009 and will amount to only $5.3 billion in the last two quarters. Meanwhile, in the second quarter of 2009, foreign currency reserves of the central bank declined by only $360 million (total forex reserves of Kazakhstan were up by $1.34 billion thanks to growing foreign assets of the National Oil Fund). This means that despite large scheduled debt repayments by banks (about $3.3 billion in the second quarter of 2009) and a default on foreign loans by two large Kazakh lenders (which account for nearly half of all foreign liabilities of the banking sector), the NBK has been able to maintain exchange rate stability without incurring a substantial loss of foreign reserves or the erosion of investors' confidence. Second, weak domestic demand is likely to limit the widening of the current account gap. Finally, Kazakhstan's foreign reserves are nearly four times larger than the amount of foreign loans to be repaid by all sectors of the economy in the second half of 2009 (about $11.4 billion, including $2.8 billion in intercompany lending). As a result, Kazakhstan is still capable of meeting its foreign obligations even if foreign capital inflows remain low. On the last count, the countrycan still manage to achieve a net foreign capital inflow in 2009. Essentially, foreign oil companies will continue to fund direct investments to complete the development of the largest Kazakh off-shore oil field – Kashagan, as well as to upgrade existing oil extraction facilities. On top of that, the head of the NBK expects additional capital inflows following recent bilateral investment agreements with a number of foreign governments, including about $3 billion from South Korea (as a joint venture to construct a thermal power plant in the Almaty region) and $10 billion from China (to fund projects in the oil and gas sector).
Nevertheless, the lingering debt restructuring of BTA bank, the high volatility of crude oil prices and the fragile nature of the recent upturn in global economic activities are adding an extra layer of uncertainty to the exchange rate outlook of Kazakhstan.
Sergey Kasyanenko, Edilberto L. Segura
SigmaBleyzer is a private equity firm focused on investing in regions that are making the transition to free market economies – specifically countries of the Former Soviet Union and Eastern Europe. With a strong presence on the ground in the selected countries of operation, SigmaBleyzer takes an active, hands-on role in the management of the funds’ investments.In addition to working actively with portfolio companies, SigmaBleyzer engages the governments of the countries in which it invests to help them carry out the reforms necessary for economic growth and development. SigmaBleyzer leverages a strong infrastructure of local and Western talent to manage and improve our holdings, while working through our think-tank The Bleyzer Foundation, to help the countries in their transition to a market economy.
 In January-May 2009, electricity generation declined by 7.8% yoy.
 BTA bank is still in restructuring talks with its creditors. The departure of Goldman Sachs as a key advisor on debt restructuring in July was a temporary setback for the bank. However, BTA has just hired investment bank Lazard Ltd. to advise it on a $15 billion debt restructuring. Lazard will join UBS to come up with restructuring options by the end of July. According to the head of the National Bank of Kazakhstan, after the conclusion of the debt restructuring negotiations, the government, which owns 78% of BTA Bank, may consider selling a controlling stake to a strategic investor, including Sberbank – a state-controlled Russian lender.
 According to the latest NBK reports on the current account in the first quarter of 2009, only 4%of the 49% yoy decline in exports was caused by lower volumes of exported commodities. The rest came as a result oflower export prices.