Partnership Program Snapshot April 2015 - World …

1 World Bank Group Kazakhstan Partnership Program Snapshot April 2015 . RECENT ECONOMIC AND exchange rate, in the second half of 2014 the NBK. SECTORAL DEVELOPMENTS spent a record amount of its foreign exchange reserves (about US$14 billion, two-thirds of the total). Growth and External Performance and tightened monetary policy by curbing tenge liquidity and allowing money market interest rates to Kazakhstan experienced slower growth and soar by end-2014 (they averaged 33 percent in higher inflation in 2014. Kazakhstan's real GDP December 2014). growth slowed from 6 percent in 2013 to percent Total Official International Reserves in 2014, due to weaker domestic demand. This came 120. as a consequence of the devaluation of the local 100. currency in February 2014 and an oil price shock 80. US$ billion during the second half of the year, as well as weaker 60. external demand from China and Russia for 40. Kazakhstan's crude oil, iron ore, and metal products.

2 20. Private consumption, in particular, was hit hard by 0. the negative wealth effect after the devaluation, a Sep Dec Sep Dec Sep Dec Sep Dec Dec Mar Sep Jan Mar Mar Mar Mar Jun Jun Jun Jun Jun tightening of lending conditions for consumer loans, 2010 2011 2012 2013 2014 15. and the delayed impact of the slower growth in real FX monetary and gold reserves FX fiscal reserves wages in 2013. Because of the devaluation, domestic inflation, as measured by the consumer price index Looking forward, as external uncertainties (CPI), increased gradually from percent year-on- heighten and domestic policies create demand year in January 2014 to percent in December, imbalances, Kazakhstan's economy will grow at due to higher imported input prices. During the a slower pace. In the medium term, the growth second half of 2014, oil prices fell considerably and outlook is dampened by weaker domestic demand, affected export and fiscal revenues as well as and consumer and investor sentiment have already business confidence to invest in the Kazakh started to deteriorate.

3 Expectations of weaker economy. external demand were maintained due to the anticipated slowdown in China and the recession in Real GDP Growth Composition by Expenditure Russia. Based on an oil price assumption of US$53. 10. per barrel, Kazakhstan's GDP growth is projected 8. to slow considerably from percent in 2014 to Percent/pecentage points Discrepancy 6 Investment percent in 2015 . Lower oil export revenues are 4. Consumption expected to lead to deficits in both the current 2. Net exports account and the overall fiscal balance. 0. GDP growth -2. In the longer run, Kazakhstan's development -4. objective of joining the rank of the top 30 most -6. 2010 2011 2012 2013 2014 developed countries by 2050 will depend on its ability to sustain balanced and inclusive growth. The fall in oil prices affected the external trade Enhancing medium- to long-term development balance and put pressure on the exchange rate. prospects depends on Kazakhstan's success in As oil prices have softened considerably since June diversifying its endowments, namely, creating highly 2014, the trade balance surplus narrowed and led to skilled human capital, improving the quality of a deficit in the current account in the second half of physical capital, and more importantly, the year.

4 Weaker demand from China and Russia has strengthening institutional capital all of the also contributed to the decrease in export revenues. necessary ingredients for the development and Despite the fall in oil prices, the National Bank of expansion of the private sector in the country. Kazakhstan (NBK) kept tight control on the exchange rate, holding the tenge-dollar rate fairly Fiscal Policy and Public Financial stable. This pushed up devaluation expectations, as Management was reflected in the high demand for foreign currency and a rise of dollarized deposits in the The authorities are applying a countercyclical banking system by year's end. To defend the pegged expansionary fiscal policy to support the 1. economy. Immediately after the tenge devaluation planning and results-based budgeting, and enhance and amid early indications of an economic the public audit function. There are also plans to slowdown, the Government launched an economic improve the equity and neutrality of the tax system support Program for 2014 15 of 1 trillion tenge, and increase the efficiency of the use of transfers equivalent to US$ billion, used mainly to relieve from the Oil Fund.

5 The subsequent phase will focus credit problems in the banking sector by addressing on expanded PPP implementation, the improved a long-standing issue with nonperforming loans efficiency of local governments, and the enhanced (NPLs) and providing subsidized loans to small- and functioning of the public audit system to improve medium-sized enterprises (SMEs). With oil prices fiscal sustainability. sliding and external uncertainties heightening, the Government announced a supplemental five-year The Bank assists the public sector and PFM. economic support Program for 2015 19 centered reforms in Kazakhstan through a range of on a major stimulus package of about US$14 billion activities, including: the ongoing Customs to be used for developing transport and utility Modernization Project, the Tax Administration Reform infrastructure and building social housing and Project, the Statistical Capacity Building Project, and the schools.

6 At the same time, the 2015 government recently launched Justice Sector Institutional budget was optimized and rebalanced by cutting Strengthening Project. An additional Program is the nonproductive expenditures and scaling up those Joint Economic Research Program (JERP), which expenditures that stimulate growth, while protecting involves technical assistance for improving the basic previous social commitments from cuts. Assuming principles of results-based budgeting, reforming relatively stable external conditions, the fiscal selected tax areas and the integration of fiscal stimulus is expected to have a positive impact on agencies, strengthening the public debt management employment in the near term and on growth from system, improving the insolvency system, and 2016 onward. facilitating the Extractive Industries Transparency Initiative (EITI). The Government has developed a new budget policy aiming to further strengthen the public Financial Sector Performance financial management (PFM) system.

7 Following President Nursultan Nazarbayev's address to the Kazakhstani banks benefit from the economic nation in December 2012, the Government support Program . In 2014, economic support went developed a concept on a new budget policy for mainly to the banking sector to relieve credit Kazakhstan aiming to enhance budget efficiency problems by addressing a long-standing issue with during 2014 17 (phase I) and improve fiscal NPLs and providing subsidized loans to SMEs. The sustainability during 2018 20 (phase II). The budget support Program recapitalized the Problem Loans efficiency phase envisages reforms across a large Fund by US$ billion in 2014 and US$ billion number of functions and objectives. The in 2015 in order to reduce NPLs, which constituted Government aims to streamline current about percent of total bank loans in December expenditures by addressing the financial 2014. The authorities also extended tax exemptions sustainability of the pension system; introducing per for NPL write-offs.

8 Nevertheless, the NPL ceiling capita financing in education and health care; (set at 10 percent by end- 2015 ) remains too reforming the public service pay system; and ambitious for several banks. This Program of credit improving the targeting of social assistance stimulus has been rolled over to 2015 . programs. Banks' Non-performing Loans and Provisions The Government also hopes to achieve better 40. capital expenditure efficiency by improving the 35. public investment system; developing new public- Percent of total loans 30. private Partnership (PPP) mechanisms for 25. NPLs overdue 90. infrastructure development; introducing public 20. days and more 15. monitoring and oversight over the debt of the state- 10. Provisions for all owned enterprise (SOE) sector; and reforming the 5. types of NPLs intergovernmental targeted capital transfer system. 0. Aug-14. Nov-14. Jun-14. Mar-14. Apr-14. May-14. Oct-14. Dec-14. Jan-14.

9 Jul-14. Sep-14. Feb-14. In addition, the Government intends to further strengthen the inter-linkages between strategic 2. Tighter monetary policy and targeted policy the insolvency system in the country. It is expected interventions impacted the rate of credit growth that the new insolvency legislation, if soundly and its composition. By year-end 2014, credit implemented, would produce significant results, growth had slowed from double digits in the first such as: (i) the expansion of access to credit at half of the year to percent year-on-year by the affordable rates, particularly for SMEs; (ii) the end. Credit to the corporate sector stagnated after efficient use of judicial resources; (iii) the monetary policy tightened. Growth of consumer encouragement of foreign and local investment; (iv). credit fell from nearly 50 percent year-on-year in the the preservation of jobs; and (v) improved overall beginning of 2014 to 17 percent in December, due financial stability and enhanced economic growth to the NBK-imposed cap of 30 percent for each through the release of locked-up productive assets.

10 Bank. Meanwhile, subsidized loans to SMEs grew from -9 percent year-on-year in January 2014 to Private Sector Performance nearly 33 percent in December, supporting a growth in credit overall. The Government's strategy for the diversification and competitiveness of the Contribution to Nominal Credit Growth economy is anchored in the recognition of the 20 private sector's paramount role. Though 15. diversification toward non-extractive tradables has Percentage points 10. been part and parcel of Kazakhstan's development Mortgage strategy, actual success has so far been limited. The 5. Consumer loans economy was and remains highly resource 0 Loans to SMEs dependent, with manufacturing accounting for 11. -5 Corporate loans percent and agriculture for 5 percent of GDP. The -10. diversification agenda proved difficult in the face of Feb-14. Sep-14. Oct-14. Dec-14. Jan-14. Apr-14. May-14. Jun-14. Mar-14. Aug-14. Nov-14. Jul-14.