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National Bank: current account surplus of the balance of payments will shrink in the medium term

The National Bank of Kazakhstan forecasts a current account surplus of USD 6.4 billion in 2022. Along with that, over a medium-term horizon, in 2023–2025, the regulator expects a significant contraction of the surplus. NBK Deputy Governor Akylzhan Baimagambetov spoke about the key factors that affected revision of the forecasts as well as expected dynamics of the income balance, imports and exports of goods in an interview with Forbes.kz.

– Mr. Baimagambetov, based on the results of the forecast round held in November, the National Bank has updated balance of payments forecasts. What are the current account expectations in the medium term?

According to our forecasts, we expect that the current account of the balance of payments will reach USD 6.4 billion in 2022.

Key components are as follows. Export of goods are expected to grow by almost 40% (tentatively 39.9%) to USD 84.4 billion. Over half of it (tentatively 55.3% of the total exports) are exports of oil and gas condensate, which, according to our estimates, will increase by USD 15.6 billion to USD 46.7 billion. Rising commodity prices, due to the high concentration of foreign direct investors in the mining industry, will lead to the growth of their income. It will broaden the income deficit by 11.7% to USD 27.7 billion. Steady demand will continue to drive further the growth of import of goods, which is expected at 7.6% or USD 48.9 billion as the result of 2022.

In the medium term, we expect the current account surplus to narrow to USD 1.9 billion in 2023, USD 1.2 billion in 2024 and USD 0.6 billion in 2025.

 

– How significantly have expectations been revised compared to the previous forecast round?

In August-September, the National Bank projected a current account surplus of USD 7.0 billion in 2022, with a subsequent increase to USD 7.5 billion in 2023. Surplus forecasts have been revised downward to USD 6.4 billion in 2022, and USD 1.9 billion in 2023.

Two main factors in revision of the forecasts can be highlighted among others. First, it is the adjustments to the calculation of imports of goods according to the balance of payments methodology. Second, it is the growing dynamics of imports in the 3rd quarter of 2022.

As for our adjustments on imports. Our research team has done a lot of work to develop a methodology and carry out adjustments since 2015 in two very important areas of imports, which are not reflected in the official trade statistics. These are grey imports of cars and an estimation of consumer goods imports comprised of household online purchases from foreign platforms. In the near future we will release articles covering the methodology of these adjustments. In the meantime, I would like to point out that for the first 9 months of 2022, total adjustment for imports of goods in the balance of payments amounted to USD 1.1 billion, where USD 0.7 billion are from ‘grey’ imports of cars and USD 0.4 billion are from online-imports. Let me remind you that this import is taken into account in the balance of payments as an adjustment and is not included in the official statistics.

As for the overall dynamics of import of goods, according to official statistics, for the first 9 months of 2022, it rose by 16% to USD 34.6 billion. This turned out to be USD 1.2 billion above our expectations.

In this regard, the expected import of goods according to the balance of payments was revised upward to USD 48.9 billion in 2022 and to USD 51.3 billion in 2023. The latter also affected the drastic decline in the expected surplus of the current account next year.

 

– Could you give more details on what factors influenced such a significant expected growth in imports in 2023? What are forecasts for 2024–2025?

The expected imports in 2023 will indeed be significant and will reach their record high, doubling from the level of 2016. Along with that, in 2024 and 2025, a further increase in imported goods is expected to reach USD 54.1 billion and USD 54.6 billion, respectively.

This growth is largely due to the following factors. First, demand of households and businesses remains stable, despite the reported rise in the price of foreign goods. Thus, according to results of the 9 months of 2022, physical deliveries of imported goods grew by 3.5% year-on-year. This growth was reported mainly in consumer and intermediate goods. In terms of consumer non-food products, extra pressure on imports is also coming from the reported growth in re-exports. Second, the aforementioned increase in physical supplies, with their reduction from Russia by 11% in 9 months of 2022 compared to 9 months of 2021, indicates a gradual reorientation to other markets, for example, China. Third, the targeted fiscal spending over the medium term will stimulate further growth in imports of intermediate goods.

 

– It turns out that the pressure on the current account in the medium term will be mainly from imports. What will happen to export of goods?

According to the base oil price scenario, export of goods in 2023 will remain at the level of 2022 amounting to USD 84.9 billion. By baseline scenario we mean that the average Brent oil price declines from around USD 102/bbl this year to USD 90/bbl in 2023. Meanwhile, oil exports will go up by USD 0.4 billion to USD 47.1 billion in 2023 due to the expected increase in output. Thus, the share of oil in total exports continues to prevail to the extent of over 50%. Non-oil exports in our forecasts will also remain roughly at the level of the 2022 forecast, increasing by USD 0.3 billion to USD 37.9 billion in 2023. The share of manufactured goods in the structure of non-oil exports remains small, although it rose from 17% in 9 months of 2021 to 22% in 9 months of 2022.

With this in mind, the nominal volumes of exports and, as a result, foreign exchange earnings entering the country are highly correlated with the stock price for commodities, which are volatile. A clear example of this dependence is the pessimistic scenario of our forecast, in which the oil price in 2023 falls down to USD 50 per barrel, on the average making about USD 53-54 per barrel for the year. In this scenario, export of goods decline by 20.6% to USD 66.6 billion and the current account plunges from a projected surplus in 2022 to a deficit of USD 3.9 billion in 2023.

 

– You have mentioned that the share of finished goods in non-oil exports increased over the first 9 months of 2022. Does this indicate certain successes in the efforts to diversify supplies to foreign countries?

In terms of growth for 9 months of 2022, exports of finished goods indeed surged by nearly 70% year-over-year to USD 6.0 billion. However, it is important to consider the structure of these exports. According to the results of the 9 months of 2022, main goods in terms of export volumes were mobile phones, computing equipment, computers, household and digital appliances. Generally, these are goods produced outside of Kazakhstan, meaning in this case, that these exports are in fact a re-export to the neighboring countries.

If we consider only those goods that are produced in Kazakhstan, the top exported product will be flour. For the 9 months of 2022, compared to the same period of the previous year, it almost doubled by 89% to USD 0.5 billion. This growth was achieved due to both the price factor and growth of physical deliveries: for the 9 months of 2022, compared to the 9 months of 2021, the average export contract price for Kazakhstan’s flour increased by 43% to USD 395 per ton, while physical volumes rose by 32% to 1.3 million tons.

 

– As you have said earlier, growth of raw materials exports has direct influence on the increase of the income balance deficit. Will there be any changes in the income balance dynamics in the medium term?

The income balance has historically been in a deficit zone. In simple terms, the income we pay to non-residents exceeds the income we earn abroad. This is due to a high concentration of foreign direct investment in the natural resources sector of the country, especially in the oil and gas sector. For the past 5 years, the share of income of foreign direct investors in income payable accounted, on average, for almost 67%, varying based on the export volume. In the medium term, export earnings will continue to determine dynamics of this income balance item.

However, the income balance gap is estimated to widen by 8.9% in 2023 compared to 2022 to USD 30.2 billion. The main reason for this growth is the growing interest payments to foreign investors due to tightening of the monetary policy by major central banks.

We expect income balance deficit of USD 30.2 billion in 2024 with a slight reduction to USD 29.5 billion in 2025.

 

– Finally, what are the main conclusions that you would like to emphasize based on the recent forecast of the balance of payments?

Summing up, the current account surplus is expected to shrink from USD 6.4 billion in 2022 to USD 0.6 billion in 2025 following the base scenario of the average oil price USD 90 per barrel next year. Based on this scenario, it is observed that export of goods that we produce domestically retain its predominantly ‘raw material’ trait and remains quite stable, whereas those goods which we import tend to grow. It turns out that even with high oil prices, the current account surplus converges to zero in the longer run.

In this context, it is extremely important to understand that the balance of payments deficit, itself, is not the problem. Deficit is a reflection of the state of the economy in terms of its interaction with the whole world. The main two challenges are as follows:

First, our economy remains heavily dependent on exports of commodities such as oil and metals. At the same time, level of processing or complexity of production is relatively low. That is, we export raw materials and then import a finished product made from our own raw materials. In this context, the entire value added of production remains abroad, and our economy pays for it.

Second, almost all manufactured goods are imported, with the exception of the most food products. That is, Kazakhstan, unfortunately, almost does not produce the essential goods. Along with that, demand for imports is supported, among other things, by fiscal spending, which entails import of equipment, building materials and, in general, other intermediate and investment goods.

These two challenges can and must be solved. At the same time, the solution is the same in both cases. It is diversification of production of goods and services, with focus on high value-added goods and complication of the extent of processing of goods. Meanwhile, this problem has been clear for a long time, and Kazakhstan is taking various measures to support manufacturers of such goods.

However, unfortunately, statistics reveal that dependence on raw materials in exports and dependence on the imports of finished goods is not going anywhere. The answer to the question ‘What to do?’ and ‘How to solve the problem?’ is complex and is a topic for a separate discussion.

Source: Forbes.kz

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