Kazakhstan reports sharply decelerated GDP growth for 2015 as outlook remains gloomy

According to the latest, preliminary national accounts results for the full year of 2015 published by Kazakhstan's State Statistics Agency, the economy expanded by 1.2% over last year, after growing by 4.3% in 2014. This result implies some strengthening in the final quarter, following deceleration so far during the year; January-September growth had earlier been reported at 1.0% year on year (y/y), following 1.7% y/y in the first half and 2.3% y/y in the first quarter. Nominal GDP for the year was valued at KZT40.761 trillion (USD116 billion), while the GDP deflator showed a fall of 1.1%.

Further details revealed that, unsurprisingly, the deceleration in overall growth to a great degree drew from the weakness of industrial activity; production in this sector retreated by 1.5%. Highlighting the current predicament of the Kazakh economy, this weakness followed a very unsupportive base, given that in 2014, industrial output had already nearly stagnated. The share of industrial production of the total GDP last year slid to under 26%, from near 28% in 2014. The less important fields of construction and agricultural activity both achieved fairly respectable growth rates. The relative strength of the former was significantly connected to state investment projects, while the expansion of the latter followed very muted growth over the previous year, thus benefiting from a base effect. Meanwhile, supply of services as a whole sharply decelerated over the past year. Nevertheless, in reflection of the decisive industrial weakness, this did not prevent from the GDP share of the service sector somewhat increasing. Product taxes accounted for close to 7% of the factor-price GDP.

Outlook and implications

The relatively strong end to 2015 comes somewhat above our earlier expectations, and seems to be drawing from slightly better performance in the construction sector, in particular, than we foresaw. More detailed data may also show somewhat stronger activity in the transformation field than we expected. Meanwhile, the significant industrial weakness well fits our projections. Given the most recent further drastic fall in oil prices, and our downgraded forecast for the average Brent oil price for 2015 at USD38.5 per barrel (pb), the outlook for the Kazakh economy remains very weak. Moreover, the weak oil prices are also keeping the Russian economy in recession, and this will harm Kazakhstan's export demand and competitiveness, via the weakness of the Russian rouble. In addition, the shut-off of oil production in the offshore Kashagan oil-field, which has been an ill-fated, delayed project since its inception, presents a major setback for the Kazakh economy. Production there is not likely to start this year. Together with the weak oil price outlook, another year of industrial stagnation or modest contraction is likely in our baseline forecast. However, the rapid tenge depreciation should give some temporary support for the manufacturing sector, to some extent counteracting the significant negative impact from the collapsed oil prices. Similarly, the government's major stimulus programme will boost construction activity in the framework of the Nurly Zhol plan, in particular, and the budget will continue receiving support from the National Fund (see Kazakhstan: 26 January 2016: Kazakh officials prepare for budget adjustment and bank support, as economic outlook suffers from low oil prices and 11 December 2015: Kazakhstan outlines anti-crisis plan to tackle economic and financial challenges).

The expansion rate of service supply last year also largely matches our expectations. With the monetary authorities' initial reluctance to let the tenge weaken in line with the slide in oil prices and foreign currency revenues, consumers' purchasing power only weakened more clearly later in the year. However, given the recent rapid tenge depreciation, households' real incomes have now suffered in the dollarised economy. With the tenge exchange rate still fragile, the outlook for households' real incomes still remains discouraging. However, the overall GDP deflator will continue to be pushed down due to low producer prices, with the muted oil price outlook.

The plan government's recently presented anti-crisis plan, which outlines both structural reforms and policy plans, includes several commendable ingredients, necessary for Kazakhstan to make its economy more dynamic and competitive, but implementation risks remain notable. However, the task of tackling both a severe cyclical downturn and drastic structural deficiencies at the same time is no enviable duty. Then again, the oil price crash clearer than anything highlights the vulnerability of a commodity-dependent economy. The road to sustained diversified growth can only be found via structural change. One crucial part of this would be further development of the banking sector, so that it would act as an efficient intermediary of savings to investment. In the current environment, its heavy exposure to foreign currency risks adds to threats of financial instability, and weak credit conditions, as confidence in the tenge remains weak, suppresses the already muted economic activity.

The latest presented budget version outlined growth this year at 2.1% (see Kazakhstan: 20 November 2015: Kazakh government downgrades 2015 growth forecast, approves medium-term budget), but this will likely be cut. A revised budget, based on a lowered oil price projection and a weaker tenge assumption, should be presented this week. We are I our February interim forecast lowering our Kazakh economic growth projection to 1.0%, and risks to this forecast still remain firmly on the downside. The government certainly has its work cut out for it, as it tries to secure budget sustainability in the face of dwindling revenue inflows, at the same time as seeking to stimulate the struggling economy. If the government cuts its infrastructure projects, overall growth will suffer, and the risk of economic contraction this year increases. Then again, if the government fails to find budget cuts, it needs to borrow more, or reach even deeper into its oil revenue chests.