Ana Lucia Coronel, Chief of the Central Asia Division & Mission Chief in Kazakhstan for the IMF, on managing the country’s economy in a risky external environment.
Kazakhstan’s fast upturn after the 2007–2009 crisis is encouraging. The country has seen a swift pace of economic recovery, which is now more broad based, as high oil prices and the rebound in agricultural output have helped spur domestic demand. Although construction and real estate activity remain weak, strong real GDP growth of 6% is foreseen for 2012, and inflation is projected to pick up only modestly, to 6%-7%, from the current record-low levels. The country also enjoys a solid external position, aided by increasing oil exports. At close to 8% of GDP, the current account surplus is the highest that the country has registered in many years. And combined international reserves and oil fund resources, amounting to more than $86 billion (about 42% of GDP), provide a comfortable buffer for the economy.
The recovery, however, is taking place amid an uncertain external environment. Prospects for global activity are improving only slowly, and growth is expected to stay weak, especially in eurozone countries. While action by policymakers has helped reduce global vulnerabilities, risks to the outlook remain high, particularly from the possibility of renewed financial turbulence in Europe and geopolitical uncertainties affecting the oil market. For Kazakhstan, immediate spillovers from an adverse external scenario are likely to take the form of lower exports, volatility in commodity prices, and fluctuations in capital inflows. The country’s close links with international markets and dependence on commodity exports expose its economy to developments in the rest of the world, particularly in its two key trading and financial partners, China and Russia.
Part of Kazakhstan’s substantial oil proceeds contribute to financing development needs, while another significant share is prudently saved for the benefit of future generations and to help insulate the economy from swings in inflows generated by global oil price fluctuations. Kazakhstan’s stabilization fund—the National Oil Fund of the Republic of Kazakhstan—is the cornerstone to managing and preserving the country’s oil revenues. The central bank manages the fund, and the government budget is allocated a fixed annual transfer. Thanks to the authorities’ discipline in managing oil proceeds and to high oil prices, the fund has increased from about $20 billion in mid-2009 to $51 billion in April 2012.
Kazakhstan’s oil wealth is a great catalyst for growth in the non-extractive sectors of the economy and the development of the country. The link between the oil and non-oil sectors seems to have become stronger in recent years. However, the direct benefits of increased oil activity are only shared by a few related sectors, such as transportation and communications. It is therefore important that the country’s plans for economic diversification continue to be implemented to ensure positive spillovers of Kazakhstan’s mineral resource wealth to the other key domestic drivers of growth, including manufacturing, construction, real estate, and various other services. Structural reforms, such as improving the business environment, removing barriers to trade, building institutions, and enhancing governance in the banking and corporate sectors will be key in attracting private investment to non-oil activities. Similarly, better integration of the stabilization fund into the budget, with well-defined, medium-term fiscal targets, would allow for a more efficient use of oil revenues to finance investments in health, education, and infrastructure. This strategy should be complemented by continued private-sector investment in the oil industry, sustained by market-friendly conditions.
Restoring the Health of the Banking Sector
It is also vital that Kazakhstan overcome its banking sector difficulties, which restrain the full recovery of non-oil sector activity. Despite strong economic growth, the banking sector has not fully recovered from the severe shock in 2007. Foreign liabilities have fallen drastically, aggregate liquidity is ample, and the provisioning of overdue loans is still relatively high. Nevertheless, domestic banks’ burden of non-performing loans has further increased, and BTA bank has embarked on a second debt restructuring with external creditors after a default earlier this year.
The authorities have appropriately removed tax impediments to writing off bad loans and adopted policies to discourage foreign currency lending, increase minimum capital requirements, and require better governance and transparency practices. The central bank has also announced the establishment of a centralized problem loan fund, and enabled banks to set up asset management companies to handle bad debts. Nevertheless, additional efforts are needed to fully restore the health of the banking system and to boost its resilience to potential shocks and improve its ability to channel savings toward productive activities.
A first priority is to enforce existing regulations, such as ensuring realistic loan valuation and proper provisioning in all banks. In addition, actions should be taken to replenish bank capital—with shareholder or public funds—where needed. Contingency plans for such eventualities need to be prepared. These measures would allow Kazakhstan’s economy and banking system to be better prepared for a possible further deterioration of the global environment and, in particular, potential spillovers from large neighboring countries. Transmission channels would include lower access to funding and higher borrowing costs (for banks, corporations, and quasi-sovereign entities), and weaker confidence, which would in turn result in additional bank difficulties. Despite the economy’s ample financial resources, such a situation would create multiple challenges for policymakers, and could inhibit efforts to encourage private-sector-led growth and economic diversification.
After two years of very strong expansion, the projected return of Kazakhstan’s economy to its growth potential calls for continued fiscal adjustment and close control of inflation. The authorities’ plans to deal with ongoing uncertainty in the global environment through expansionary policies should therefore be treated as contingent: monetary and fiscal authorities should stand ready to adjust conditions if external shocks affect the domestic economy, while avoiding premature or excessive reaction that could unnecessarily invigorate demand and result in overheating. In addition, social spending should be anchored on improved safety nets to avoid the use of administrative measures to control inflation. Greater exchange rate flexibility would help the economy adjust to external shocks.
In the medium term, there is considerable scope for a smaller role for the public sector and more dynamism in private sector activity. This would make growth more inclusive, bringing benefits to the population as a whole, and help ensure social cohesion. In this regard, recent improvements in international indicators of the ease of doing business are encouraging, and further gains in governance, transparency, and institution building—in parallel with restoring the soundness of the financial sector—would create new investment, growth, and employment opportunities in Kazakhstan.
© The Business Year