Global Insight Perspective | |
Significance | The first-quarter result marks further slowing down of Kazakh GDP growth, despite coming above preliminary official forecasts. |
Implications | Decelerating growth confirms that the economy has taken a hit from the current international credit crunch, for which it is vulnerable due to high foreign liabilities of this banking sector. |
Outlook | The growth result prompted the government to revise its 2008 GDP growth forecast to 5.3% from the previous projection of 5-7%. This fits our current forecast relatively well; our projection at present puts this year annual growth at 5.5%. |
Further Growth Slowdown
According to newest data from the Kazakh State Statistics Agency, the country's real economy grew by 6.0% year-on-year (y/y) over the January-March period. The volume of total GDP was valued at some 3.14 trillion tenge (US$26 billion) in current prices. Goods production comprised 42.3% of the total GDP, while the share of services was reported at 57.5%.
The first-quarter result compares to an annual growth rate of 8.5% seen over the whole of last year, and the growth rate of 10.6% seen in the first quarter of 2007, thus signalling further slowing down of economic expansion (see Kazakhstan: 7 February 2008: Kazakh President Pledges Frugal Spending as GDP Growth Slows in 2007). However, the now reported growth rate comes above preliminary official estimates, which had put the January-March increase in total output at 5.3% y/y (see Kazakhstan: 15 April 2008: Preliminary Estimates Reveal Slowdown of Kazakh Economic Growth in Q1).
As reported previously by the Statistics Agency, Kazakhstan's industrial growth over January-April reached 3.5% y/y (see Kazakhstan: 13 May 2008: Kazakhstan's Industrial Growth Decelerates in April). The mining and quarrying sector on the whole expanded by 6.3% y/y, with growth of coal and gas concentrate in double digits and increase in crude oil output at 6.6%, and production of iron ore contracting in annual terms. Utility supply gained 7.9% y/y over the first four months of the year, while the manufacturing sector suffered a 0.9% y/y contraction.
Further, official data show that gross output in the agricultural sector in January-April rose by 3.9% y/y. Meanwhile, the total volume of freight transportation increased by 2.5% y/y over the same period.
No figures for the construction sector's performance were provided, but activity growth in this field is likely to have eased. This sector has largely financed its recent boom with banks credits, thus proving the hardest hit by the current liquidity squeeze spurred on by the international credit crunch.
Household Demand Relatively Weak
As usual, no detailed demand-side data are available. However, the offered statistics suggest that domestic household demand only provided a relatively weak growth contribution. Indeed, the volume of retail trade turnover only increased by 1.5% y/y in January-April. However, the volume of fixed capital formation rose by a much stronger rate of 14.0%, even if also this robust expansion marks clear deceleration in investment growth.
Trade Balance Strong
Further data from the State Statistics Agency suggest that external demand strongly boosted Kazakh growth in the first quarter. Indeed, customs-based figures put total exports for January-March at some US$15.8 billion, marking a surge of 57% y/y, while imports came in at US$7.1 billion, increasing by a comparatively modest rate of 9.6% y/y. The resulting trade surplus of US$8.7 billion compares with a clearly lower result of US$3.6 in the first quarter last year.
After import growth clearly exceeded the increase in exports last year, the turning of the tables is welcome news for the economy after the oil-boom give rise to overheating fears before the onset of the current credit crunch. A strong goods trade seems to have even resulted in a current-account surplus in the first quarter (see Kazakhstan: 15 May 2008: Preliminary Figures Reveal Q1 Current-Account Surplus in Kazakhstan). Moreover, the resulting boost to foreign exchange revenues gives it more room to manoeuvre in dealing with the current liquidity squeeze.
Outlook and Implications
The publication of first-quarter growth data was followed by the government revising its forecast for Kazakh economic growth this year from the previous estimate of 5-7% to 5.3%. The new official forecast fits our current projections relatively well: we at present foresee Kazakh growth coming in above 5% for 2008 as a whole. While construction growth is sharply decelerating and household demand generally is cooling, the very high international oil prices should keep strongly supporting the mining sector. Moreover, further support is given by the elevated prices of other commodities, notably, metals.
As noted by Kazakhstan's Economy Minister Bakhyt Sultanov, high energy export revenues will allow the government to increase public sector wages and pensions. Indeed, according to Reuters, Sultanov also announced an increase of US$1.3 billion to planned government spending for this year. This will boost the economy and is also designed to allay public unease about persistently very high inflation rates. Also the National Fund will benefit from the high export prices. Sultanov further said that the government has increased its estimate of tax revenues being channelled to the rainy-day fund by 400 billion tenge, with the end-year target for the Fund being put at US$32.8 billion.
We see that risks related to Kazakhstan's economic growth remain firmly on the downside. The heavy external indebtedness of the Kazakh banking sector means that the economy is very vulnerable to the international credit crunch. However, at present we continue to see that the high energy prices will give the economy sufficient boost for it to be able to avoid a recession, while also providing the monetary officials with sufficient means to support the financial sector and the currency should the need arise.