Results of 2019: support of socially vulnerable citizens from the budget provokes inflation, and enterprises lack investment and loans | FinReview
27 December 2019

Results of 2019: support of socially vulnerable citizens from the budget provokes inflation, and enterprises lack investment and loans

In the near future, the Government and government departments will begin to summarize the activities for 2019. According to preliminary forecasts of Kazakhstan, the national economy continues to develop, stimulating the growth of both industrial and non-oil sectors of the economy. However, the welfare of citizens is not growing in proportion to economic growth. What is the reason for the slowdown in the growth of well-being of the population? How is the national economy developing and what are the prospects for Kazakhstan?

To begin with, we suggest looking back and reviewing the state of the national economy at the time of gaining sovereignty. Indeed, the economy of Kazakhstan experienced a total economic collapse after the collapse of the Soviet Union, the main reason for which were the consequences of the systemic crisis of the USSR.

This difficult period for the country was characterized by a decline in GDP by 61%, hyperinflation of more than 2,000%, an industrial decline of more than 25%, the closure of about 130 large enterprises, a rise in prices of 50% per month, a halt in industrial enterprises, and massive unemployment. As a result, from 1991 to 1995, the number of unemployed in Kazakhstan reached 2 million out of the 15.6 million population.

Kazakhstan managed to overcome the consequences of the crisis period by 1998. It was from this period that the country’s economy began to expand, the last time showing a negative dynamics of GDP of -1.9%.
However, developing the national economy, Kazakhstan failed to achieve high GDP growth. The reason for this was three crisis events: the Asian crisis of 1998, the global economic crisis of 2008 and the financial crisis of 2015. As a result, the country suffered four phases of cyclical growth and decline in GDP.

To stimulate the growth of the country’s economy, Kazakhstan began to develop the established capacities of the mining industry and manufacturing. As a result, the consequences of the crises of 2008 and 2015 were covered by revenues from the sale of oil and raw material mining. Nevertheless, the raw material commitment of Kazakhstan showed a high dependence of the country’s economy on price volatility in the world market, which poses serious risks to the continuing decline in GDP.

In 2016, Kazakhstan’s GDP amounted to 137.3 billion US dollars and continued to strengthen in the next two years. At the same time, there is a risk of a slowdown in GDP growth in the absence of the introduction of systemic reforms aimed at developing non-resource sectors of the economy.


Kazakhstan’s economy develops amid worsening foreign economic environment

According to the World Bank, in 2019, the world economy will once again slow down to 2.6% due to a reduction in global trade and investment.

Nevertheless, in the current year, GDP growth for the first ten months amounted to 4.4%, in gross value the indicator reached 44.1 trillion tenge. That is, Kazakhstan is ahead of the average global GDP growth rate.

The impulse to accelerate the economic growth of Kazakhstan was government measures to increase social spending and reduce the debt burden of low-income households. As a result, demand in the domestic consumer market increased – for the nine months of 2019, household incomes used for consumption per capita on average increased by 9% and reached 57.2 thousand tenge.

In the structure of GDP, the main source remains the exploitation of the country’s raw material potential. Thus, mining and manufacturing formed 15.7% and 11.6% of GDP, respectively.
It is noteworthy that the wholesale and retail trade, car and motorcycle repair this year also had a significant impact on the formation of GDP, providing 15.6% of the funds.

The highest growth rates were achieved in the construction sector (growth by 12.7%), trade (by 7.5%), transport logistics (by 5.6%), communication services (by 4.5%) and industry (by 3.5 %).

Industrial production maintains a steady growth trend. The increase in production was achieved in the areas of light industry (an increase of 18.9%), engineering (by 18.8%), pharmaceutical products (by 15.2%) and beverages (13.9%). In the mining industry, production growth was achieved due to the restoration of oil production with an increase of 0.3% and an increase in the production of non-ferrous metal ores at the level of 18%.

The volume of construction work also increased by 12.7% due to the construction of industrial facilities, a gas main, a wind farm, a steel plant, and also due to reconstruction of roads. The commissioning of residential buildings was at the level of the same period last year, amounting to 9.8 million square meters.


Problems of GDP growth: internal and external economic factors

Despite the stable development of the economy of Kazakhstan in 2017, 2018 and following the results of ten months of 2019, the risk of a slowdown in GDP dynamics remains. Factors holding back economic growth are both events on the world market that reduce the volume of trade and investment, as well as the socio-economic situation within Kazakhstan.

That is, a number of serious barriers to GDP growth can be identified:

Firstly, the growth in consumer demand, caused by measures of state support for vulnerable segments of the population, not only stimulated the growth of GDP, but also provoked an acceleration of inflation. Its indicator in October 2019 compared to December 2018 amounted to 3.9%, and in annual terms the inflation rate reached 5.5%. As a result, food prices rose by 9.7%, non-food products – by 5.2%, paid services – by 0.8%.

Secondly, the investment potential of Kazakhstan is not fully disclosed – despite the growth of investments, their impact on the economy remains minimal. So, for the first half of 2019, the economy of Kazakhstan attracted $ 12.1 million of foreign direct investment. In general, over the past three years there has been a positive trend in revealing the investment potential of Kazakhstan with an average annual investment growth of 20%. However, their involvement in the national economy is about 14%.

Thirdly, the development of domestic enterprises is limited by sources of raising capital. So, for ten months of 2019, the volume of investment in fixed assets grew by 8.2% due to the construction of a gas pipeline, a solar power station, industrial facilities, the acquisition of production equipment, modernization of mining facilities, social facilities, housing, and infrastructure. However, according to the financing structure, about 70% of the funds are generated from the own assets of enterprises.

The main reason for the growth of financing projects at the expense of equity is the reduction in the share of borrowed funds, which over the past 5 years have decreased by 30%.

Fourth, the tenge exchange rate for ten months of 2019 varied between 377 – 390 tenge per US dollar. The weakening from the beginning of the year was 2.5%. Demand and supply in the domestic foreign exchange market were influenced by the observed increase in imports and price volatility in global commodity markets.

Fifth, corporate lending in the banking sector remains weak, due to low demand among entrepreneurs. The volume of loans issued to legal entities for the ten months of 2019 decreased by 8.6% to 7.1 trillion tenge. Moreover, the share of lending to the banking sector in the total investment of domestic enterprises at the end of 2018 amounted to only 6.8% (in 2017 – 7.4%). For comparison: in developed countries, this indicator varies from 20% to 30%.

Sixth, a slowdown in global economic growth poses a significant risk for Kazakhstan, as it may cause a decrease in the volume of domestic exports and a reduction in investment flows. A particularly acute effect will affect Kazakhstan if the level of GDP slows down in the countries of Kazakhstan’s key partners, such as the EU, Russia, China.

The development of the national economy requires a systematic approach, the stimulation of which is already underway.

For Kazakhstan, trade plays an important role in the development of the country, and the national economy can increase the profitability of export growth to the markets of Europe, China, and Central Asia. However, this requires the implementation of additional systemic reforms, such as improving transport logistics, developing manufacturing, stimulating small and medium enterprises, expanding the sales market, and simplifying business procedures.

Work in this direction has already been successfully carried out in Kazakhstan. So, after the implementation of the state program of support and development of the business “Business Road Map 2020”, an increase in the share of SMEs in GDP was achieved from 24.9% in 2015 to 28.4% in 2018. As a result, the volume of output increased by 10 trillion tenge to 23.4 trillion tenge, more than 342 thousand jobs were saved and more than 94 thousand new ones were created.

The state program of industrial and innovative development of Kazakhstan is also being effectively implemented. The effect of the program is already noticeable – more than 24 new types of manufacturing industry have been created, 1360 industrial projects have been introduced, competitiveness in exporting more than 50 new goods has been achieved, about 137.1 thousand new jobs have been created, and the production of highly profitable goods has attracted the attention of foreign investors, the volume of investments which reached $ 34.2 billion.

Analyzing the results of even only these two state programs, it can be noted that the degree of their influence on the economy is significantly underestimated. This is due to the fact that the main revenue part is spent on supporting process issues and eliminating the consequences of the crisis.
To increase the efficiency of state programs and stimulate economic growth, additional funds must be raised. And Kazakhstan already has an effective institution capable of attracting capital flow – the Astana International Financial Center. Already, more than 350 companies from 34 countries are registered in the AIFC.

The vast geography of registered companies indicates the increased interest of the international community in the financial center, which provides a wide range of opportunities and preferences for its participants. As the international experience of leading financial centers from New York and London to Dubai, Hong Kong and Singapore shows, the centralization of financial markets on one platform regulated by a special legal regime gives a good impetus not only to representatives of the financial sector, but to the economy as a whole.

The economy of Kazakhstan can receive additional cash flows through the privatization of state assets, stimulating the growth of SMEs, developing business models, expanding the geography of cooperation for both entrepreneurs and the country as a whole.