During the forecasting round “August – September 2022” the National Bank of Kazakhstan updated estimates of the key macroeconomic indicators of the country. It’s expected that the current account of the Balance of Payments will shift into a positive zone and end up with a surplus. Akylzhan Baimagambetov, Deputy Governor of the National Bank, spoke about the key drivers of export growth this year, as well as medium-term forecasts of the Balance of Payments and their prerequisites.

  

– Mr. Baimagambetov, another forecasting round of the National Bank has recently ended. What are your expectations for the balance of payments in the medium term?

 – In the current forecasting round, under the baseline scenario, we assume a gradual decline in oil prices from current levels to an average of USD 90 per barrel in 2023. With such a forecast price trajectory, the current account of the Balance of Payments this year will move into the positive zone, that is, it will end up with a surplus. This will be the first surplus in the last eight years. It will be provided by high commodity prices, which are the core of Kazakhstan’s exports. Even taking into account high levels of imports and income payments to foreign direct investors in the commodity sector, under the baseline scenario the surplus would be USD 7.0 billion.

In 2023, also due to high level of exports, the surplus will expand to USD 7.5 billion.

 

– By means of what goods, and how much will exports grow?

 – We expect that exports by the Balance of Payments methodology will grow significantly in 2022 – by 35.2% to USD 81.6 billion. The growth will be observed in sales of both oil and non-oil products – ferrous, non-ferrous metals, uranium, as well as grain crops. Along with that, key contribution to the increase in exports, of course, will be made by oil. Historically, oil accounts for nearly 60% of all Kazakhstan’s exports.

The gradual recovery of the global economic activity after the pandemic and subsequent geopolitical crisis are supporting high commodity prices. This affects the expected increase in the cost of sales this year.

 

 – Do you expect this positive trend to continue next year?

 – Yes, in 2023 the value of exports in the baseline scenario will also be high, it is projected to grow up to USD 83.3 billion. Due to a high base of the current year, the growth itself will not be very large, plus 2.2%. Such a level will be achieved due to an increase in production volumes forecasted by the Ministry of Energy, up to 92.6 million tons from 85.7 million tons in 2022, which will be offset by a scenario adjustment of high commodity prices of previous years towards some reduction.

 

 – Since the beginning of the year, we have repeatedly observed CPC shutdowns. Moreover, Kazakhstan’s oil is sold at a discount to Brent oil. However, in your forecasts you put growth in exports. How realistic is such a scenario in this context?

 – The main export channels for Kazakhstan’s oil are the CPC and Atyrau-Samara pipelines. CPC accounts for an impressive share of oil exports. Historically, it is about 80%. Therefore, the risks of CPC shutdowns are very significant for the state of Kazakhstan’s Balance of Payments.

When forming estimates for oil exports in the baseline scenario, we rely on the forecasts of Ministry of Energy for production volumes. According to expectations, production volumes for this year will remain at the level of the previous year and will amount to 85.7 million tons.

Indeed, during the first half of the year we witnessed both partial and complete shutdowns in the work of CPC. However, as the Ministry of Energy says, in the first half of 2022, physical volumes of exported oil were almost at the level of the previous year, slightly falling by 2.2%, to 33 million tons.

Given this factor, according to the State Revenue Committee, the growth of oil exports by 84.7% to USD 24.8 billion in the first half of this year was primarily due to the price factor despite the discount to Brent oil.

 

– Does it turn out that, even taking into account this discount, current oil prices allow to predict the growth of exports and, consequently, a surplus?

 – This is quite right. About 20% of the exported oil was sold at a large discount. This oil is transported mainly through Atyrau-Samara pipeline together with Russian Urals oil. According to Reuters, the average discount of the Urals to Brent since the beginning of the year was about USD 18 per barrel. Meanwhile, the overwhelming share of Kazakhstan’s oil, as mentioned earlier, is exported under the CPC Blend brand through the CPC pipeline. Average discount for it was USD 3 per barrel this year. It turns out that Kazakhstan sells major oil volumes abroad with a minimum discount.

Given this and the projected production volumes, under the baseline scenario we estimate the expected growth of oil exports by 60.7%, to USD 50 billion in 2022 as realistic.

 

– It is fairly clear with the oil. And what about the export of goods with higher value-added? Are improvements expected in export diversification?

 – In the first half of 2022, total official exports doubled, increasing by 56.2% to USD 42.2 billion compared to the same period last year. When decomposing this growth into the components, the picture is as follows: 52.3% is provided by commodities and their primary processing, while only the remaining 3.9% by manufactured goods.

On the other hand, share of manufactured goods in exports continues to grow from 5.1% in 2014 to 8.5% in 2021. In nominal terms, from USD 4.1 billion to USD 5.1 billion. This is, among other things, facilitated by the growth of price competitiveness due to the free floating of tenge. However, the existing potential for growth of non-commodity exports has not been fully realized, and the indicator still remains at a low level.

Export diversification is not a one-day job. It is ongoing. The government has set targets for growth of non-commodity exports of goods and services to USD 41 billion by 2025, including goods for USD 29.5 billion. Work in this direction must be continued and enhanced.

 

– The effect of reducing pressure on the balance of payments can be achieved not only by the export diversification but also by reducing dependence on imports. What are your expectations for imports this year?

–  Pressure on the current account from imports persists. It should be indicated that according to results of the first half of this year, compared to the same period of the last year, import of goods by the balance of payments methodology rose by 15.9% to USD 20.7 billion. And this happened despite the disruption of global supply chains. According to the forecasts, by the end of 2022 the growth will be 11.3% to USD 44.2 billion, and in 2023 will be 3.4%, to USD 45.7 billion.

Growing needs of the population and business in the absence of Kazakhstan’s production continue and will further continue to contribute to expanding volumes of imports. Moreover, large volumes of budget expenditures allocated for implementation of government programs and measures to support the economy have an impact.

 

– At the expense of what goods will imports grow? What, according to your expectations, will be the key driving force of purchases from abroad this year?

– The largest growth in imports on the forecasting horizon is expected for intermediate and investment goods. Imports of these goods are projected to grow by 11.4% to USD 32.0 billion in 2022 and by 0.9% to USD 32.3 billion in 2023. This is due to the growing cost of raw materials, as well as implementation of investment projects and programs in both public and private sectors.

Such projects and programs, for example, are implemented in the car market. Preferential car loans, expansion of domestic production capacity and other initiatives will support import of large-scale components for car assembly. We already see in statistics how their imports doubled to USD 1.0 billion in the first half of this year.

Intermediate and investment goods in the first half of this year surged by 17.8% to USD 15.0 billion compared to the same period of the previous year. They were supplied mainly from Russia and China. If we compare a month to a corresponding month of the previous year, growth was reported in each individual month. And this is despite the geopolitical crisis. In case of imports from Russia, a slight decrease was recorded only in April. However, if further purchases from the Russian Federation nevertheless shrink, the upward trend in imports of intermediate and investment goods will persist due to a partial reorientation of demand to new markets.

 

– Does it turn out that consumer goods will not be the driver of the import growth in 2022?

– Indeed, consumer imports, according to our expectations, are also growing, but at a slightly slower pace than imports of intermediate and investment goods. If we look retrospectively, consumer imports reached USD 12.4 billion in 2021, which is the highest level since 2014. According to the forecast for the current year, it will exceed that level and reach USD 13.5 billion. Expectations for 2022 are based on multidirectional factors.

 

– What exactly are the factors?

– On the one hand, a drop in supply due to disruption of logistics supply chains and Russia’s restrictions on exports of some goods, such as sugar and cars, will lead to a reduction in consumer imports. Re-orientation to new transit routes will, of course, take time and affect prices. And it will restrain demand to a certain extent. For example, the ban imposed by Russia in March on sugar exports already led to a decrease in the volume of its imports from this country by 57.6 thousand tons in the second quarter as compared to the first. The resulting deficit in the domestic market of Kazakhstan was partially covered by a completely new supplier which is India. In the second quarter, India sold 17.7 thousand tons of sugar to Kazakhstan.

On the other hand, domestic needs growing from year to year in the absence of Kazakhstan’s production will contribute to the growth of import of consumer goods. Effective demand will be supported both by personal funds of the population and borrowed funds in the form of consumer loans.

These factors together will drive a projected 8.6% growth in consumer imports in 2022.

Since we are talking about consumer imports, I would like to indicate that this month we are going to include in the final balance of payments indicators our estimate of “gray” car imports. Over the past few years, official car imports have tripled, from USD 417 million in 2016 to USD 1.3 billion in 2021. At the same time, our car market has been actively expanding due to unofficial import of cars by individuals from the EAEU countries, mainly from Russia. This category of car imports was not included in official statistics due to the absence of customs duties within the EAEU and the possibility for the Bureau of National Statistics to bind individuals to reporting. The National Bank conducted its own assessment of this “gray” import of cars. It is planned to release more detailed information on performed calculations in October.

 

– To sum up, the current account in 2022, as you said, will move into a surplus zone despite high imports and income payments to foreign investors. What does this mean and how good is it?

– The current account of the balance of payments demonstrates how much a country has to pay in case of a deficit or earn in case of a surplus for a certain period of time on current operations with the rest of the world. These are export and import of goods and services, wages, investment income, as well as international transfers.

When there is a current account deficit, the macroeconomic indicators of a country are under pressure. Especially if this is accompanied by shrinking foreign investments.

As we have mentioned earlier, the current account in Kazakhstan has been in a deficit zone for the last seven years. But by the end of 2022, a transition to a surplus zone is expected. In the short term, it will somewhat reduce the pressure on macroeconomic indicators of the country, but it does not bring structural changes. This is because the surplus will be provided only by the growth of oil and metals prices, thereby emphasizing the high exposure of the country to global shocks.

Reducing the dependence on changes in the external environment is possible only by solving structural problems of the balance of payments: low diversification of exports, high dependence on imports, concentration of foreign investment in the commodity sector of the economy.

Source: Forbes.kz