In their February macroeconomic review of Kazakhstan as of 2021, the AERC experts rely on the following preconditions in the document: the price of Brent will develop at $48.5 per barrel on average over the year; economies of the trading partner countries will grow by 4.5%; oil and gas condensate production in Kazakhstan will be 86 million tons. The real GDP of Kazakhstan will grow by 4.8% under these conditions. Consumer inflation will slow down in comparison with 2020 and amount to 6.5% in 2021. According to the AERC forecast, following a gradual recovery of exports and imports, the current account of the balance of payments of Kazakhstan will be formed with a deficit of $9.4 billion amounting to -5% of GDP this year.
“In 2021, given the growing uncertainty in the global economy and the Brent price of $48.5, the dollar against tenge will average 432.8 units in 2021, demonstrating a weakening of the tenge by 4.8% compared to 2020. The nominal cash income in Kazakhstan will grow by 9.5% against the background of growth in nominal wages by 9.2%. According to this year results, the average annual consumer inflation will be at the level of 6.5% against the background of the forecast of weakening of the tenge against dollar and the assumption that the National Bank will keep the base rate at 9%,” the document noted.
The review noted that the financial repression policy introduced by the government is associated with inflationary risks.
“Firstly, through a wide range of state programs of concessional lending to the economy, it actually creates alternative interest rates in the economy, and therefore the real sector does not react to changes in the base interest rate. Given that the measures of concessional lending to the economy are accompanied by an increase in the money supply, while the efficiency of the interest rate channel is constrained by the availability of alternative rates in the economy, the risks of long-term inflation in the country increase. Secondly, such state programs create risks for the financial stability of the banking sector. To overcome this risk, the Kazakhstan Sustainability Fund has been created; it provides liquidity at rates below the base level. However, this practice deprives banks of the ability to provide their own products on market conditions creating risks of instability and lack of independence. Third, the practice of stimulating the economy by making the market value of money cheaper is accompanied by the risk of inflating local bubbles in the economy. In particular, the measure to support SMEs through the provision of concessional lending forces banks to lower the scoring requirements for loan recipients, which creates the likelihood of an increase in bad loans. This process can be called a “bubble of SMEs”: the number of loans to small businesses grew by 19.3% in 2020. There are fears that the state budget will become the lender of last resort,” the AERC experts believe.
According to them, the risk of inflating a bubble is present in the mortgage market of Kazakhstan: the demand for housing in 2020 has been growing despite the decline in household income. As a result, the prices on new homes have increased by 5.2%, secondary housing - by 13.1% over the past year. This trend continued in the current year.
Photos are from open sources.