Oil price shock sparks rapid revision of budget in Kazakhstan
Kazakhstan’s government was on March 9 ordered by the president to cut budget expenditure, ensure financial and currency market stability and focus on protecting jobs as Central Asia’s biggest economy came to terms with the shuddering oil price collapse and some anxieties arose that a devaluation of the Kazakh currency might soon be in prospect. Underlining the urgency of the situation, the country’s central bank early on March 10 announced it had hiked its key rate 275bp to 12.0% and said it stood ready to intervene in the foreign exchange market and take additional measures to protect the cohesion of the market.
The announcement of rapid-response measures from Kassym-Zhomart Tokayev came after Energy Minister Nurlan Nogayev said on March 7 that Kazakhstan was working on cutting costs as the oil price plunged on news that the Organisation of the Petroleum Exporting Countries (OPEC) had failed to reach an OPEC+ deal to cut oil output with Russia. This sent world oil prices plummeting 31% to $31.02 per barrel on March 9, marking the second-biggest oil price drop since the Gulf War in 1991. It was hoped that OPEC and Moscow would agree on lowering oil production amid the new coronavirus outbreak and its impact on the world economy, but it was not to be, prompting the Saudis and Russians to enter into a price war for markets.
“We have a budgeted oil price at $50-$55 (per barrel). If it falls to $40 and below, the government has a plan to optimise costs and we are already working on it,” Nogayev was quoted as saying by Reuters. At the same time, the minister appeared to be holding out hopes that the next round of talks between Russia and OPEC scheduled for later in March could put an end to the disagreements between the two sides.
On March 10, Economy Minister Ruslan Dalenov said Kazakhstan was set to revise its economic growth outlook lower and increase the budget deficit to up to 3.0% of gross domestic product from the previously planned 2.4%. Meanwhile, Prime Minister Askar Mamin said he was barring state-owned companies from buying foreign currency unless it was required to meet their obligations.
“Regarding the fall in oil prices to $32, I would like to note that now the Kazakh government has [sufficient] reserves for fulfilling social obligations, but by the beginning of 2021, when parliamentary elections are planned, [the reserves] may [cease to] exist,” Kazakh political analyst Gaziz Abishev wrote on his Telegram-channel, claiming that at a price of $35 per barrel, Kazakhstan’s state budget would approximately lose out on $6.7bn. The country's budget for 2020 assumes an average oil price of $55bn per barrel.
The government can be expected to tap into the rainy-day National Fund replenished by oil export revenues to fill in unprecedented budgetary gaps. “Our current scenario does not envisage using the National Fund,” Dalenov said in further remarks to reporters, reported by Reuters. “But in an extreme scenario, of course, we have the option to make a small extra transfer from the National Fund.”
Exchange office tensions
Kazakh exchange offices on March 9 sold the national currency, the tenge, at rates as weak as KZT391-KZT395 to the dollar in the capital Nur-Sultan and KZT398 in the commercial capital Almaty. The southern city of Shymkent recorded the dollar price at KZT397. The exchange office rates can be taken as record lows even though the official central bank-set official rate of the tenge only depreciated slightly to KZT382 on the day against the greenback after fluctuating mostly between KZT375-380 throughout the first two months of the year. That changed on March 10 as in the wake of the rate hike announcement the tenge shed 2.9% to reach KZT394.
Exchange offices in Almaty closed early on March 9. The premature closing might have been an attempt by the authorities to prevent the panic-buying of dollars.
The national currency of the ex-Soviet state is sensitive to both changes in world oil prices and changes in the value of the Russian ruble. The ruble also began weakening in reaction to tumbling hydrocarbon prices.
With analysts at Goldman Sachs predicting the possibility of oil prices dropping as low as $20 per barrel, the currency might be expected to take a massive hit in upcoming months.
Some Kazakh experts are not convinced that the Kazakh currency is bound to suffer, however.
Kazakhs are “now subject to panic, but everything will calm down in a week, maybe two,” Kazakh economist Almas Chukin told Forbes Kazakhstan. “We probably won’t return to the level of KZT380 [against the dollar] this year, but there shouldn’t be KZT400 either.”
“To a large extent, [the Kazakh population’s] poverty is the source of support for the dollar. The population simply does not have a large available mass of tenge to ‘turn over’ into dollars,” he added. “And state-owned companies that have tenge reserves will not move anywhere, because they are ‘not allowed to’ [due to the nature of Kazakhstan’s autocratic regime].”
The central bank, the National Bank of Kazakhstan (NBK), announced on March 6 that it sold $557.3mn on the domestic market in February alone as it intervened to combat a spike in demand for hard currency caused by the drop in world oil prices seen at the end of February. The interventions were comprised of $94.8mn from the central bank’s own reserves and $462.5mn from the National Fund.
With oil prices crashing further, the NBK can be anticipated to continue ramping up its interventions in the coming months.
The still oil export-dependent Kazakh economy overall can be expected to take a beating from the oil price wars. While some efforts have been undertaken to diversify the Kazakh economy away from oil export-reliance since it took a hit from very low world oil prices in 2015-2017, much of the adjusted strategy reoriented the economy towards dependence on Chinese demand. This includes a focus on developing modern trade infrastructure as part of China’s Belt and Road Initiative and expanding agriculture and food production. Since neither China nor oil prices are expected to do well in the near future, the Kazakh economy is highly likely to follow suit.
Nevertheless, Russian investment firm Renaissance Capital analysts Sofya Donets and Andrei Melaschenko in a recent note maintained a positive outlook on the Kazakh economy even under a scenario where oil prices fall below $30 per barrel, suggesting that growth would remain above 1%.
The economy went through an oil-slump slowdown in 2016, when Kazakhstan recorded growth at 1%. That year also overlapped with countrywide protests against land reforms that ultimately masked the population’s anger at deteriorating economic conditions. As frequent protesting has become normalised in the past year in the Central Asian nation under the new president who took over after three decades of rule by Nursultan Nazarbayev, economic crises do not bode well for Kazakhstan’s political stability.
The government has shown some awareness of growing tensions and the population’s new push to express dissatisfaction. It has been attempting to carry out social spending policies to quell some of the angst. These social initiatives may be harmed by the government’s need to cut spending under collapsing oil prices, though Tokayev’s announcements so far suggest the authorities have a willingness to commit to these efforts at all cost.
Renaissance Capital’s analysis also sees credit growth as a potentially important growth driver for Kazakhstan as a prolonged deleveraging, set for completion this year, has significantly reduced the corporate sector’s debt burden. But once again, further credit growth in the economy would be undermined by a new economic crisis and could, in turn, affect the still ailing Kazakh banking sector.
The firm’s analysts view present risks in the banking sector as moderate, since the regulator’s recent banking asset quality review (AQR), completed at the end of December 2019, did not find a capital shortage “on a consolidated basis”. Complications may arise from results for individual banks—these results have not yet been presented. Reuters, in December, citing anonymous sources, reported that Kazakh authorities planned to provide over $1bn in aid to at least four local banks after holes in their balance sheets were revealed by the AQR.