Transcript Kazakhstan

Kazakhstan
Business outlook 2015-18
Quarterly update – April 2015
by Dr Daniel Thorniley
Contents
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Executive summary
Influencers on the eceonomy: good and bad factors
Corporate sales and profits trends
Strategic business issues
Economic outlook
Inflation and interest rate outlook
Currency outlook
Forecast table
Executive summary (1)
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Compared with other CIS and CEE markets Kazakhstan has performed very well and ranks
joint No 1 (with Turkey and Russia) out of 23 markets for the “rate of sales growth” and
ranks No 2 for the same criterion with profits
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It also ranks No 1 in many different business sectors for sales growth
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But the economy is under-going a strong slowdown even if the authorities are willing to
stimulate the economy
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To this end President Nazarbayev ordered at the and of last year that the National Oil
Fund release a further $3bn to be spent on infrastructure projects
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Kazakhstan is doing a better job of trying to stimulate its economy than Russia has done
over the last 20 months
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Perhaps the major concern for executives on the ground is that the tenge is likely to be
devalued after the upcoming elections this month
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Executives are “looking over their shoulder” for the tenge devaluation
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And so some of the enthusiasm for the market is rubbing off
Executive summary (2)
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Once the devaluation of February 2014 had run through the system, the economic
recovery did not turn out to be so sustainable
But as with other CIS markets, the big unknown question is how long will the Russian
rouble continue its current rally
The Kazakh authorities and National bank will be monitoring this daily as it will affect
the rationale or the scale of the devaluation
Prior to the Russian rouble’s recent strong rally, most were expecting the tenge to be
devalued by 15-18% with a few predicting as high as 30% but this latter figure now
looks redundant given the stronger Russian rouble
Inflation will presumably rise from its current very low levels on the back of future
tenge weakening and finish at 6.8% after a slow start to the year
And, as with all other markets, regional and global trends are not doing business any
favors: Russia and Ukraine are in recession, the Eurozone is sluggish and China
continues its managed GDP slowdown which requires fewer raw materials
The global oil price is down more than 50% and copper prices and other commodities
prices are low or worse
But we think the government will seek to prevent a deep slump by kick-starting the
economy through fiscal policy and employing various reserve funds
Executive summary (3)
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Some indicators are already starting to decline markedly with retail sales in January-February
2015 at their lowest in 5-6 years
But consumer confidence until the end of 2014 held steady but we think this will also start
declining in the first quarter 2015 unless the rouble rally means that a tenge devaluation is
postponed or of a smaller nature
Industrial output is trending in negative territory at the start of 2015 and will probably post
another sub-par year after a weak 1.3% expansion in 2014
And business confidence started to fall in December last year
But the non-oil sector is still somewhat strong, backed by an increase in government
spending on wages as well as investments – overall fixed investment growth was 5.0% last
year and will be close to that figure this year as the government pump-primes the economy
But the devaluation of last February (2014) hurt confidence and consumption for several
months
GDP will decelerate this year to 1.8% growth after 4.3% in 2014 and we think the economy
will recover moderately to 3.2% in 2016 and 5.0% in 2017 as Russia recovers, oil prices
stabilise and presuming some resolution (or frozen conflict) for eastern Ukraine and Chinese
growth at 6-7% range
But still, overall Kazakhstan remains the top or second-top CEE market for sales growth and
western business confidence and in comparison with other markets is one of the strongest
Executive summary (4)
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Thanks to another 10% hike to public sector wages in 2014, with inflation at 7% real wages
grew about 3% which assisted household spending to increase by 4.6% last year
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We see nominal wages rising this year and next around 6-7% and we also predict inflation to
be increasing at the same pace so real wages will be either zero or in mild positive territory
which means less stimulus for household consumption which will slumber at 1.3% this year
with some downside risk
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The tenge remains at around its 2014 devaluation rate to the dollar (185) but has regained
about half its level to the Euro and effectively all of its value against the Russian rouble
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But with the Russian rouble rising 20-30% in recent weeks, the tenge must be close to some
level of market parity with the rouble which will only complicate Kazakh decision –making
regarding any potential devaluation
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Also, unlike before the last devaluation, currency reserves have actually been rising and having
released a $2.5bn Eurobond the government is likely to be willing to allow some further
strengthening to prevent a rise in foreign debt
Influencers on the economy:
good and bad factors (1)
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There is little direct impact on Kazakhstan from the Ukraine/Russia crisis but the indirect linkages
are many: loss of confidence, weaker regional growth, less local or foreign direct investment
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The Russia-Ukraine crisis has turned into a messy frozen conflict which will continue to blight
growth in the region and marginally in Kazakhstan until and if it is resolved
Negative factors:
1. The Ukraine conflict will impact growth across the CIS this year but less so later as the situation
normalises and as Kazakhstan continues to diversify its export and investment partners, forging
closer ties with China, Iran, the EU, etc.
2. Global economic trends such as the sluggish Eurozone, decelerating China and weak average oil
price will be the big influencers in the next 2-3 years
3. The government is pump-priming infrastructure spending but other sectors will face budget cutbacks of up to 10%
4. And a future devaluation will push prices upwards and consumer spending and confidence
downwards
5. The banking sector and non-performing loans of at least 20% of the total loans remain a drag on
bank lending
Influencers on the economy:
good and bad factors (2)
But there are at east 4 positives for Kazakhstan to suggest that the slowdown will be moderated:
1. Kazakhstan ought to be become self-sufficient in oil from around 2017 when the Kashagan oil
field should come fully and finally on stream in that year after a false start in 2013
2. The global economy will recover moderately in the next 2-3 years and Russia ought to climb
out of its recession
3. The authorities will ensure that they pump-prime the economy (see notes on economy
below) and the National Bank is keeping the key refinancing interest rate at low 5.5%
4. This involves the National Bank drawing from its sizeable forex reserves and the oil fund –
which together total $104bn
Influencers on the economy:
good and bad factors (3)
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Along with Belarus and Armenia, Kazakhstan is set to join the new Eurasia Economic Union
(the successor to the current Customs Union) in January, but as with the other partners it has
stopped short of agreeing to any further political or institutional ties and most businesses
have already factored in the pros and cons
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The Eurasian Economic Union is making some western companies in the pharmaceutical
sector for example think of registering products in Kazakhstan so as to get qauick access to
the Russian market
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To demonstrate it is not “choosing sides” over Ukraine, Kazakhstan also plans to sign a
cooperation agreement with the EU in 2015
Business outlook (1) – 2015 sales projections
2015 Sales projections Main CIS Markets (in local currencies)
Growth of 10%+
Growth of 5-10%
Growth of 1-5%
Zero growth
Decline 1-10%
Decline of 10%+
Russia
41%
23%
9%
10%
12%
5%
Ukraine
14%
8%
8%
24%
25%
21%
Kazakhstan
40%
20%
16%
25%
6%
3%
Belarus
24%
28%
12%
25%
10%
1%
Source: Business Russia/CIS Group Surveys
Corporate sales and profit trends (1)
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We conduct two Surveys of the Kazakh market: one which compares another 22 CEE and CIS
markets and one which compares it with just CIS markets. The latter version is the most
recent taken at the start of February (and will be updated later in April). The figures in the
previous table are from this most recent Survey
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The table shows that even in early February Kazakhstan ranked co-equal with Russia but
these figures relate to rate of sales growth and not to volume: Russia accounts for some 75%
to 85% of the volume of CIS business for most western manufacturing companies
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But as Ukraine has collapsed as a market, so too Kazakhstan has seen its proportion of the CIS
market rise from 3-4% to 8-10% (admittedly of a currently smaller cake)
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With the some sort of tenge devaluation envisaged, lower domestic growth, regional risk in
CIS and moderate slowdown in the major trading and investment partner, China, it might not
be too surprising to note that executives expect some business softening this year in
comparison with 2013-14
Some 10% of respondents predict negative sales expansion in 2015 while one quarter
forecast flat sales
Some 36% forecast single-digit sales with a mix between low and high singles
And this leaves a hefty 40% forecasting double-digit sales in 2015
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Corporate sales and profit trends (2)
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As with all other forecasts made last November/December in other CEE markets, there is
probably a bit of downside risk to the numbers, but Kazakhstan has the least risk except for
any devaluation threat which does concern executives
Profit trends in both 2014 and those planned for 2015 mirror very closely those of sales
Taken all together this places Kazakhstan within the CEE and CIS region as co-equal with
Russia in No 1 slot head of Turkey and in No 3 slot for profits behind Russia and Turkey
The lead sectors for growth are food and beverages, where all companies expect to grow this
year, and healthcare and pharmaceuticals
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Consumer product companies have typically done well in Kazakhstan on the back of everincreasing wages, but with the February 2014 devaluation, expectations for 2015 became
more sober during last year and slower real wages this year will make companies consider
affordable innovation and less of a push of top-end premium products
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But the 2014 devaluation effects have evaporated and for 2015 consumer product firms
expect steady/strong year with just 15% looking for flat sales, 48% forecasting single digits
and a big 37% budgeting for double-digit sales
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But for now the consumer product outlook is reasonably good in the circumstances and
much now depends on the course on the tenge
Corporate sales and profit trends (3)
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The IT sector is very mixed depending on sub-sector and customers, but overall the vast
majority of companies expected to see growth last year and in 2015
Industrial B2B companies as usual have the lowest expectations, in-line with regional trends,
but still Kazakhstan sticks out positively here as well: almost 55% of respondents forecast
single digits with 28% planning for double digits which makes Kazakhstan the best B2B
market in the CEE region and quite significantly so with only Turkey getting anywhere near
these numbers
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But when it comes to the pharmaceuticals and health sector, Kazakhstan is not in the top-3
markets and in fact ranks 10th with a wide spread of expected results for sales in 2015 with
companies spread evenly across flat sales and single digits as well as double digits
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As is usual in this sector, it depends on product category, government priority reimbursement
lists and OTC/retail trends and usually as governments cut back, retail sales perform relatively
better
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So in summary, business is steady to good but now expected to boom for fewer companies
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But again, in comparison with most other markets, Kazakhstan remains a solid/steady market
for now
Kazakhstan
Latest estimates: revenue and profit results by sector, 2015
From our December 2014 survey
Strategic business issues (1)
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The operating environment is generally good by CIS standards and executives often speak
warmly of operating trends compared to neighbouring countries
Perceptions of corruption are lower than in Ukraine and companies say the amount of red
tape is less burdensome than in Russia
In our latest survey, Kazakhstan is 4th behind Russia, Turkey and Poland among 23 markets in
the CEE region in terms of strategic priority (a mid-term priority market for 22% of
companies)
Given current economic and political trends, more companies will be turning to Kazakhstan
rather than Ukraine for growth prospects, but Ukraine remains bigger usually for volume.
But for a large majority of western companies Kazakhstan is now a larger volume market than
Ukraine
For most companies Kazakhstan will be the biggest market in the CIS behind Russia in 201416
Kazakhstan ranks equal 2nd (behind Russia) for companies’ hiring plans, with 14% of
companies raising headcount this year. This number is slightly lower than the one from last
summer which also suggests that the market could be slowing or that companies have
already hired the staff they require for 2015 budgets
Strategic business issues (2)
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Kazakhstan ranks 6th among companies thinking of modifying their distribution and route to
market, with some 17% of companies reviewing this and this is down on previous scores
probably because companies have already implemented the changes
Route to market is crucially important in Kazakhstan which still represents a growing market
and with clients and consumers spread over a large geography
Few companies report a lowering in staff turnover because of course the market remains hot
The problem of supply and demand for local or expatriate staff is one of the key challenges
cited by investors
Some companies employ young expats who want some exotic excitement early in their
careers but the balance with experience is then hard to find
Few companies (9%) are planning to reduce headcount and this number probably reflects
churn and re-allocation of posts
And as one would expect, few companies (8%) are looking to cut their marketing and sales
activity in this country
A slight sign of strain in the market is the growth in the number of companies reporting
downtrading and whereas this was insignificant in the past, now almost 20% of firms report
this trend
And similarly when issues with receivables were negligible, now 19% report this as an issue,
which still paces Kazakhstan in the bottom half of the table for this indictor in our Survey
Economic outlook (1)
GDP and growth drivers
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Kazakhstan’s economy has survived recent global and regional headwinds reasonably well
but continued downward trends in Russia and the weak oil price will ensure slower GDP
growth his year
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After growth of 4.3% last year, GDP will slow to 1.8% this year and then climb back to 3.2% as
global and regional demand recovers and the shock of the oil price collapse is absorbed
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In 2017-2020 GDP growth will average 5.5% with some small upside risk
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The economy did survive the February 2014 devaluation after some initial glitches and a
figure of 4%+ growth in 2014 was “not bad” but other factors apart from the February 2014
devaluation have since set in
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The big worry hanging over the economy is the possibility of another devaluation taking
place in the coming weeks after this month’s elections given the falling oil price and the
stumbling Russia rouble
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However, the recent Russian rouble surge complicates decision-making about the timing and
extent of the devaluation
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For example, the Kazakh current account surplus declined to -2.3% of GDP last year and this
year will probably plummet to -4.0% with some commentators suggesting a figure of -9%.
Whatever the final figure, this will be another strain on the currency outlook
Economic outlook (2)
GDP and growth drivers
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But the government and National Bank have propped up the economy which would have
been in a much worse state without these measures
1) The central refinancing interest rate has been kept low at 5.5%
2) Two stimulus packages are already up and running both financed from the
National Fund: in early 2014 a 2-year program was introduced worth $5.4bn
intended to support SMEs and to buttress bank balance sheets; the second
package worth a further $3bn annually during 2015-17 is targeted at
infrastructure spending, roads and terminals (1.4% of 2014 GDP). Combined
spending from both these funds in 2015 could add up to $5.7bn which comes to
almost 2.6% of GDP
3) Investment will also be aided by spending on the 2017 Expo
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The above measures will ensure that investment does not collapse and many related sectors
of the economy and sub-suppliers ought to benefit
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But foreign investment (aside perhaps from China) is likely to be stymied by the on-going
regional uncertainty at least for the coming year
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After recording 5% growth last year, we see investment holding up solidly at 6.0% in 2015
before decelerating marginally in later years as this spending boost filters out
Economic outlook (3)
GDP and growth drivers
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Though export volumes shot up following the devaluation, in US dollars both exports and
imports were down -7% and -15% respectively in 2014
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Monthly exports averaged $6.5bn to $7.5bn in the last two years and were at the lower end
of this range during June to October 2014. With the depreciated oil price, we see further
cutbacks in export revenues and hence why the current account will dip into sizeable
negative territory as a portion of GDP at about -4.0% this year
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But exports then decelerated further in December to $5.2bn and then collapsed to $4.8bn in
January 2015, one of the lowest figures in years
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Imports also slumped in January but they tend do so traditionally and seasonally but the
figure was $2.7bn compared with the monthly average of $3.5bn through 2014
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It looks as though trade will be a net negative contributing factor to GDP
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Thus the current account surplus will turn into deficit on the back of weaker trade and softer
revenues from services and investment
Economic outlook (4)
GDP and growth drivers
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Business confidence was holding up so far and the indicator has averaged about 10-12 in the
last year but fell to 4 in December last year. This indicator starts each year badly so we should
not be too surprised when figures for the first months are eventually published
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The danger is that poor business confidence sets in for the long-term on the back of low oil
prices, higher inflation and the potential tenge devaluation as well as falling exports and retail
sales
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Industry rose by 0.8% last year after figures of 1-2% in earlier years. The 2014 average figure
hides some fluctuations within the year but 2014 did end on a declining trend
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And 2015 has started poorly for industry with an average of -1.1% output in the first two
months of the year
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And it will be 2017 at the earliest before the massive Kashagan oil field comes on stream (which
should double output but has been beset by delays and massive cost overruns) – until then
earnings will mainly fluctuate in-line with oil prices
Economic outlook (5)
government spending
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Government spending will continue to be robust and rose about 2.6% last year and will tick
up by 3.2% this year
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After the devaluation of February 2014, the government went into more stimulus mode to
combat falling growth and this will have to remain the trend as oil prices continue to slump
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As the government spends more and revenues stay flat or more likely decline, then the
budget deficit will widen this year: after touching at least -3% last year, this will rise aging to
minus -3.3% this year and stay at -2.8% in 2016
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The risks are on the downside because, as with other oil producers, the 2014 budget was set
with an oil price well above the current $58 per barrel
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However much of the spending will be off-budget, including investments via loans financed
by the $77bn national oil fund, otherwise our estimates for government spending and
budgeted deficits would have been larger
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In a sign that investors are relaxed about the growing deficit, Kazakhstan successfully
launched a $2.5bn Eurobond in October last year – its first since the 2009 crisis -- which was
wildly oversubscribed
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2015’s budget foresees a real cut to spending of about -8% to -10% but in practice spending,
especially in capital projects, will keep growing and the budget will have to be revised and/or
ignored
Economic outlook (6)
trade and investment outlook
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Large infrastructure investment projects should benefit from the increase in government
spending, with several major transport and logistics projects – including a new airport in
Almaty – currently being pushed forward
Since 2010 the government has spent $10bn from the national oil fund (NFRK) on 27
economic diversification projects and has a pipeline of $81bn worth of projects (100 in total)
across areas such as healthcare, education, high-tech, telecoms, manufacturing,
infrastructure, utilities, etc.
Targets to increase the total of the National Oil Fund will now fall by the wayside due to low
oil prices
Chinese investment will also keep pouring in – Chinese representatives signed $30bn worth
of investments last September
China is now estimated to own half of Kazakhstan’s oil assets
The government is also trying to increase the competitiveness of its state-owned enterprises
(SOEs) and Samruk Kazyna, the state holding company which manages $100bn of SOEs, is
planning to spin off certain assets and using the funds to invest in new sectors
Economic outlook (7)
consumer spending
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Consumer spending has remained robust aided by wage hikes and growing lending (in turn
supported by low interest rates)
Public sector wages were hiked 10.7% last year in nominal terms and we expect a rise of about
6-7% this year and next with risk on the upside
Slower nominal wages will mean a reduction in real wage growth: from +3% last year to just
1% in 2015 and 1.5% in 2016 as inflation remains sticky at 6% to 8.5% range
But low unemployment (about 5.2%) in recent years and in 2015-17, credit emission and
consumers eating into savings have all combined in keeping retail spending at a very healthy
12% average in 2014 matching similar numbers in 2013 and 2012
Even though retail sales grew 13% in the second half of last year, they started 2015 badly: just
4.7% expansion in January and 3.1% in February which are the lowest levels recorded in the
last 5-6 years
With stubborn inflation about 7%+ and confidence general weakening against the backdrop of
a low oil price and a recessionary Russia, we expect retail sales to decelerate to 3.8% this year
and then to average 5-7% in subsequent years
Household spending generally should slow down to 1.3% in 2015 and then rise by 3.5% in 2016
and average 6.5% in subsequent years
Consumer confidence held steady to December but we expect some deterioration in the first
months of 2015 when the figures are published as wages fall and inflation stays sticky
Inflation and interest rate outlook
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The February 2014 devaluation stoked inflation from a low of 4.4% in January 2014 to an
average of 6.8% to 7.6% through the rest of the year and inflation in November was 7.4%
With the slow start to inflation last year, the annual average came out about 6.8%
There are also signs that the inflationary trend at the end of last year was decelerating and when
we add falling oil prices to the equation (Kazakhstan still imports about one third of fuel needs,
mainly from Russia), then we expected to see inflation on a downward curve over the next 18
months and this started to occur in January with inflation at 4.5% and 5.4% in February
But with some sort of devaluation presumed in the coming 1-2 months, we expect inflation to
start to rise through the summer and rest of the year
The extent of the inflation surge will of course depend on the scope of the devaluation
But given that the year has already started slowly fro prices, we think average inflation in 2015
could actually stabilise at 8.5% with some possible upside risk
Some of the monthly figures this summer could spike temporarily to 8-10%
Despite negative real interest rates, the National Bank has kept the refinancing rate at 5.5% for
over a year now in order to boost and support flagging growth
The Bank will aim to keep rates at this level as long as inflation stays below its upper limit of 8%
However, as currency pressures remain, then it may be forced to increase the repo rate in the
coming weeks/months though rates will remain low in real terms
Currency outlook
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The strong consensus was that the tenge would devalue by 12-18% in the coming weeks after
the upcoming elections
The consensus is that the tenge will reach 210-215 to the US dollar with the devaluation from its
current level of 185.7(mid-April)
Since February last year the tenge has fluctuated versus the dollar in a defined range of 180 to
185 usually averaging 182 and creeping down to 185.7 in mid-April
Meanwhile versus the weakening Euro the tenge has climbed to 197 by mid-April (matching of
course the 1.05 FX rate between dollar and Euro)
Some commentators talked until recently of an even deeper devaluation of 20-25% which would
take the tenge quickly to 230 or weaker to the US dollar but this extreme view now looks much
less likely given the rise in the Russian rouble
The intended aim of any devaluation is to keep the tenge competitive against a number of
currencies with special focus on the rouble. With a collapsed Russian rouble and slumped oil
prices a devaluation of 12-18% looked fairly certain despite government and Bank denials
We still presume that a devaluation will be announced but the timing and scope of such
measures now much more complicated than 1-2 months ago
Our central estimates in this report are for such a step. If it does not occur this spring/summer
then inflation will be lower and growth slightly higher for the short-term but questions about
Kazakh competitiveness would remain and the discussion postponed until the end of the year
and dependent on shifts in the Russian rouble
Kazakhstan - economic outlook: statistics
(based on central scenario/presumption that a devaluation of the tenge will
occur spring/summer 2015)
GDP
Fixed investment
Industrial output
Household spending
Government spending
Real wages
Retail sales (year-end)
Consumer prices (average)
Budget balance (% GDP)
Current account (% GDP)
Tenge/euro (average)
Tenge/dollar (average)
Unemployment (%)
Note: Real annual % change unless stated
2012
5.0
3.7
0.5
11.0
13.2
6.9
14.1
5.1
-3.0
4.6
192
149
5.4
2013
6.0
7.0
1.3
9.0
2.0
1.2
14.2
5.8
-2.5
0.0
197
152
5.2
2014
4.3
5.0
0.8
4.6
2.6
3.0
12.0
6.8
-3.0
1.8
230
182
5.0
2015
1.8
6.0
-1.2
1.2
3.2
1.0
3.8
8.5
-3.3
-4.0
225
215
5.2
2016
3.2
4.5
1.9
3.5
2.9
1.5
4.8
6.9
-2.4
-3.7
230
220
4.8
2017
5.0
6.0
3.5
4.6
2.7
3.0
6.3
5.7
-2.5
-3.3
230
220
4.7
2018
6.4
6.2
4.6
5.0
2.5
3.3
6.6
5.3
-2.3
-2.0
224
220
4.7
© 2015 CEEMEA Business Group*
*a joint venture between
DT-Global Business Consulting GmbH, Address: Keinergasse 8/33, 1030 Vienna, Austria,
Company registration: FN 331137t
and GSA Global Success Advisors GmbH, Hoffeldstraße 5, 2522 Oberwaltersdorf, Austria
Company registration: FN 331082k
Source: DT-Global Business Consulting GmbH and CEEMEA Business Group research
Basic data sources come from central banks, own intelligence network, CEEMEA Business Group
corporate survey, governments and other public sources. Interpretation, views, forecasts, business
quotes and business outlooks by DT-Global Business Consulting GmbH and CEEMEA Business Group.
This material is provided for information purposes only. It is not a recommendation or advice of any
investment or commercial activity whatsoever. The CEEMEA Business Group accepts no liability for any
commercial losses incurred by any party acting on information in these materials.
Contact: Dr Daniel Thorniley, President, DT-Global Business Consulting GmbH
M: +43 676 534 6852 / E: [email protected] / W: www.ceemeabusinessgroup.com