Kazakhstan Economic Update December 2019 SUSTAINING GROWTH MOMENTUM Kazakhstan Economic Update – December 2019 3 Contents Acknowledgment 6 Abbreviations 1. Overview 8 2. Growth and Inflation: moderate growth sustained by domestic demand and pickup in inflation 10 3. Balance of Payment and Exchange Rate: widened current account deficit and modest real exchange rate depreciation 12 4. Monetary Policy and the Financial Sector: inflation is under control, but credit growth remains weak 16 5. Fiscal Policy: stability amidst a wider deficit 18 6. Outlook and Risks: growth is likely to soften amidst external headwinds and domestic challenges 20 7. Policy Watch 22 a. Asset quality review of major banks 22 b. Bilateral agreements between the Eurasian Economic Union with other countries and new visa-free policies for 12 countries 23 Special Topic 24 Diversification and survival rates of Kazakhstan exports 24 References 29 4 BOX Box 1. Real exchange rate movement and non-oil and gas trade FIGURES Figure 1. Consumption and investment were the main drivers of growth Figure 2. Services and trade Figure 3. Accelerated food prices push up inflation dynamics Figure 4. Import prices increased along with the depreciation of the exchange rate Figure 5. Oil and gas contributed to the decline in growth in nominal exports Figure 6. A surge in domestic demand pushed the deficit in the non-oil and natural gas trade Figure 7. Components of the current account Figure 8. Net outflows of portfolio investment offset net inflows of foreign direct investment Figure 9. The tenge depreciated along with other regional currencies and declining oil prices Figure 10. Depreciation in the real exchange rate has been more modest Figure 11. Real exchange rate and in non-oil and gas trade Figure 12. NBK hiked its policy rate in response to rising inflation pressure Figure 13. Consumer loans have driven credit activity Figure 14. HII on export product concentration Figure 15. HHI on export market concentration Figure 16. Export growth decomposition, 2000–18 (percent) Figure 17. Export quality: median distance to the world quality frontier Figure 18. Kazakhstan’s export quality by sector: median distance to the world quality frontier Figure 19. Export survival, Kazakhstan and comparators, 2000–18 Figure 20. Kazakhstan export survival, by destination, 2000–18 Figure 21. GVC Participation Index in 2005 and 2015 Figure 22. Foreign value-added content of exports in 2005 and 2015 TABLES Table 1. General government fiscal accounts, 2017–19 Table 2. Baseline scenario: selected macro-fiscal indicators, 2016–21 Kazakhstan Economic Update – December 2019 5 Acknowledgments The Kazakhstan Economic Update is a semiannual report analyzing recent economic developments, prospects, and policy issues in Kazakhstan. The report draws on available data reported by the government, the National Bank of Kazakhstan, and additional information collected as part of the World Bank Group’s regular economic monitoring. The team is grateful to the Ministry of the National Economy and the National Bank of Kazakhstan for their support. The report is a product of the World Bank team comprising Sjamsu Rahardja (Senior Economist) and Azamat Agaidarov (Country Economist), and which included the following contributors: Eva Gutierrez (Lead Financial Specialist), Guillermo Carlos Arenas (Economist), Rakhymzhan Assangaziyev (Senior Operations Officer), and William Hutchins (Economist). The team was supervised by Ivailo Izvorski (Lead Economist) and received guidance from Sandeep Mahajan (Practice Manager). The team thanks Gulmira Akshatyrova for excellent administrative support, and Kubat Sydykov, Shynar Jetpissova, and the EXT team for guidance on publication and outreach. The team wishes to thank Lilia Burunciuc (World Bank Country Director for Central Asia) and Jean-François Marteau (World Bank Country Manager for Kazakhstan) for their guidance. Cover photo by Dmitriy Lissin. 6 Abbreviations ASEAN Association of Southeast Asian Nations CIS Commonwealth of Independent States EAEU Eurasian Economic Union EU European Union FDI foreign direct investment GDP gross domestic product GVC global value chains H1 first half NBK National Bank of Kazakhstan Q2 second quarter Q4 fourth quarter SMEs small and medium-sized enterprises Kazakhstan Economic Update – December 2019 7 1 Overview Kazakhstan’s economy in 2019 is expected to grow at a modest rate. Strong domestic de- mand is likely to support annual gross domestic product (GDP) growth of about 4.0 percent this year, similar to last year’s GDP growth. Greater social spending boosted household incomes, and with government support to relieve the debt burden of low-income households, sustained real consumption growth. Meanwhile, investments in residentials supported business investment and offset the decline in net exports. The services sector has performed well, while maintenance work in the major oil fields affected oil production. Rising domestic demand, higher food prices, and weakening of the exchange rate contributed to higher inflation. The year-on-year inflation rate, which hit 5.5 percent in October 2019, slightly higher than 5.2 percent rate, led the central bank to hike the policy rate. But growth is expected to ease in 2020, with greater risks from the external environment and vulnerability to shocks. The economy is projected to grow by 3.7 percent in 2020 as the impact of fiscal stimulus is likely to diminish. Global economic growth is expected to improve slightly in 2020, but worse-than-expected growth in the European Union (EU), China, and Russia can rattle demand and prices of commodities relevant to Kazakhstan’s exports. The recent forecast also suggests that global commodity prices are likely to soften on the back of ample supplies and weak global demand.1 Against the backdrop of weakness in the banking sector and the limited prospect of a surge in economic growth in the medium term, the continued expansion of retail loans can increase the downside risks to the economy. World Bank 2019a. 1 8 Recently, the economy expanded amid the slack- to implement the concept of a “Listening State” and ing external environment. Global economic growth called for raising the living standard, overcoming in- appears to have slowed to a projected 2.6 percent equalities in the provision of services, and strength- in 2019, constrained by subdued international ening civil society. A National Council of Public Trust trade and investments. Average growth of Kazakh- was created and convened for the first time to gath- stan’s major trading partners, which include the EU, er feedback from civil society organizations and China, and Russia, is expected to decline to 1.7 per- involve various stakeholders in the design and im- cent in 2019 from 3 percent in 2018. The weak en- plementation of government programs, including at vironment in global trade and lower oil prices have the local levels. The government has also promised negatively affected Kazakhstan’s exports and edged to increase financial support for low-income house- up the current account deficit to 2.4 percent of GDP. holds, improve the public pension system, and in- The sudden resignation of President Nazarbayev in troduce compulsory health insurance. Kazakhstan March 2019 came as a surprise and paved the way recently improved its standing in the Doing Busi- for an orderly political transition and the election of ness report, where it ranked 25th out of 190 coun- President Tokayev. tries. But against the backdrop of lackluster produc- tivity growth, the plan to address weaknesses in the Policy stimulus has helped domestic demand, but banking sector, improve the efficiency and delivery structural weakness is constraining the econo- model for government services, reign in expansion my from expanding further. An increase in fiscal of state-owned enterprises, and review the use spending is expected to increase the government of the National Oil Fund are key reforms requiring non-oil budget deficit to about 8.6 percent of GDP in strong political commitment. 2019, higher than 7.6 percent last year. The policies included the government taking over the debt ser- The special topic of this report is Kazakhstan’s vice of 443,000 citizens and raising social spend- export diversification. Trade plays an important ing to 5 percent of GDP in 2019 from 4.4 percent in role in Kazakhstan’s development, and the country 2018. The subsidized loans for housing continued, is positioned to benefit from the growing markets of although at a lower volume than in previous years. China, Europe, and Central Asia. Trade offers oppor- As increase in domestic demand widened the cur- tunities for Kazakhstan’s economic growth and for rent account deficit and pushed up inflation; howev- diversifying away from oil. But to benefit from the er, the National Bank of Kazakhstan’s (NBK’s) move opportunities, Kazakhstan needs further cross-cut- to control inflation helped improve macroeconomic ting reforms such as improvement in transport lo- stability. Nevertheless, growth in the real sector is gistics, trade facilitation, and the functioning of fac- largely limited to non-tradeable services including tor markets (finance, land, and labor). Therefore, un- construction, trade, and transport services, while derstanding current developments and challenges lower prices and output weakened the performance in exports is important to inform policy to improve of the oil sector. Corporate lending by the banking export competitiveness of non-resource products. sector continues to sag, reflecting a conflation of The special topic section of this report highlights the low demand from corporations and risk aversion by fact that, although Kazakhstan has made progress banks. Although Kazakhstan’s current GDP growth in diversifying its export destinations, product quali- is higher than half the countries at similar levels of ty outside commodities is still relatively low and has development, addressing structural weaknesses is less than a 50 percent survival rate beyond the first imperative for the economy to join the ranks of the year if a product was exported beyond the Eurasian world’s 30 most developed economies by 2050.2 Economic Union (EAEU) or Commonwealth of Inde- pendent States (CIS) markets. OECD data on trade Continuing with structural reforms is critical in value added indicate that Kazakhstan’s exporters to sustain higher and more inclusive economic used fewer imported inputs compared to a decade growth. In his September 2019 Annual Address to earlier, which suggests a declining participation in the Nation, President Tokayev underscored the need global value chains. 2 Defined as upper middle-income countries with a 2018 current gross national income per capita between US$3,996 and US$12,375 . Kazakhstan Economic Update – December 2019 9 2 Growth and Inflation: moderate growth sustained by domestic demand and a pickup in inflation Kazakhstan’s GDP has continued to grow at a moderate pace of 4 percent, much lower than the breakneck expansion before the 2008 global financial crisis. The slowdown in growth over the last decade has reflected a lack of productivity in- creases, and a weak external environment is projected to be little changed in 2020. While increases in social spending supported domestic demand and sus- tained growth this year, with rising inflationary pressure, improvement in produc- tivity is needed to accelerate growth. The economy continued to grow at a solid addition to GDP during the last two years, the pace supported by strengthening domestic contribution of net exports has faded because demand and activities in the services sector. of a surge in imports. Real exports grew by 4.2 Preliminary data show that real GDP rose by percent, down from the previous year’s rate of 4.3 percent during January–September 2019, 8.9 percent owing to moderating oil produc- largely reflecting a sizable expansion in house- tion – mainly export products – whereas im- hold and business activity (Figure 1). Reported ports, boosted by fiscal stimulus actions taken data for the first half of 2019 suggest that real so far this year, grew by 10.5 percent, notably consumer spending grew at an annual growth faster than the 2.7 percent registered over the rate of 5.9 percent, stronger than the 4.5 per- review period. On the supply side, growth has cent recorded for the same period of 2018. been supported largely by trade and transport Rising wages, social benefits, and an increas- services (Figure 2). The contribution of mining ing demand for consumer loans have sup- and manufacturing has remained moderate ported household spending. Business invest- compared to the previous year, considering ment expanded further at 5.7 percent during weakening global trade. Oil production con- the period under review, and gains appears tracted by 0.5 percent during January–Sep- to be driven in large part by capital spending tember because of maintenance in major oil in the mining industry and activity in residen- fields, while activity in manufacturing expand- tial construction. After providing a substantial ed at a moderate pace of 3.5 percent. 10 Figure 1. Consumption and investment Figure 2. Services and trade were the main drivers of growth (contribution to GDP growth, percent) (contribution to GDP growth, percent) Consumption Net exports Investment GDP Others Mining Manufacturing Trade 4,0 5,0 3,0 4,0 3,0 2,0 2,0 1,0 1,0 0,0 0,0 -1,0 2016 2017 2018 2018H1 2019H1 -1,0 2016 2017 2018 2018H1 2019H1 Sources: World Bank staff calculations based on Committee Sources: World Bank staff calculations based on Committee on on Statistics data. Statistics data. Consumer price inflation moved up to 5.3 percent cluding food and energy, however, showed a more (year-on-year) in September from its lowest re- convincing upward trend, jumping over the central cord of 4.8 percent a year earlier, in part owing to bank’s target of 4 to 6 percent for this year. The a pickup in food prices. This inflation rate is almost tenge depreciated about 6 percent in nominal terms at the upper bound of the 4 to 6 percent inflation against the U.S. dollar in October relative to the rate target of the NBK. Food, accounting for around 40 12 months earlier. Import price inflation already ac- percent of the consumption basket, continues to celerated in response to 8.1 percent year-on-year in be main factor pushing up underlying inflation dy- August 2019 from 7.8 percent in August 2018 (Fig- namics this year (Figure 3). Food prices grew by 9.1 ure 4). This appears to reflect rising inflation expec- percent in September, considerably above the pre- tations and will likely influence wage and price-set- vious year’s record of 5.7 percent, while non-food ting decisions going forward. So far this year, the products inflation moved lower in recent months, effect of those factors has been felt on food prices falling to 5.4 percent from 7.7 percent in Septem- and, to a lesser extent, on prices of durable goods. ber 2018. This year’s lower grain harvest owing to But overall, looking beyond the volatility in recent colder weather conditions and lower yield will likely months, inflation has been following a downward have an impact on the supply of grains to process- trend over the past three years and declined from ing and affect prices. Underlying core inflation, ex- the high levels recorded in 2016 Figure 3. Accelerated food prices push up Figure 4. Import prices increased along with the inflation dynamics depreciation of the exchange rate (contribution to inflation, percent) (changes in import prices and exchange rate) 20,0 Food (38%) Non-food (30%) Import prices (y-o-y) Exchange rate (RHS) Tariffs (14%) Other services (18%) 14,0 390,0 380,0 15,0 12,0 370,0 10,0 360,0 10,0 350,0 8,0 340,0 6,0 330,0 5,0 320,0 4,0 310,0 0,0 2,0 300,0 . 5,0 2016 2017 2018 2019 2017 2018 2019 Sources: World Bank staff calculations based on Committee Sources: World Bank staff calculations based on Committee on on Statistics data. Statistics data. Kazakhstan Economic Update – December 2019 11 3 Balance of Payments and Exchange Rate: widened current account deficit and modest real exchange rate depreciation Weak global demand, lower international crude oil prices, and slightly lower oil production have curbed Kazakhstan’s export growth and widened the current ac- count deficit. A large outflow of portfolio investments contributed to currency de- preciation and a decline in foreign reserves held by the NBK. Real exchange rate depreciation allowed import demand to adjust to higher import prices but rising domestic inflation can offset the effect. Growth in export value has softened amidst than in the same period last year. In addition, lower global oil prices, a weak external envi- maintenance in the three giant oil fields (Kara- ronment, and supply problems. The soften- chaganak, Kashagan, and Tengiz) in H1 2019 ing of exports continued through the first half have slightly lowered oil production during the (H1) of 2019, and total export value increased observed period.3 However, value of non-oil by only 0.8 percent compared to 26 percent exports demonstrated better growth perfor- in the same period the previous year. For the mance than oil and gas, with an annualized first time since 2016, the value of oil and gas growth rate of 28 percent in H1. Commodities exports posted a negative growth rate (Fig- that contributed to the increase in non-oil ex- ure 5). This performance is likely due to the ports were cotton and minerals. Meanwhile, lower average price of Brent oil per barrel in lower yield per hectare of the 2019 grain har- H1 2019, which was about 7 percent lower vest reduced the volume available of grain 3 As part of an agreement with OPEC and non-OPEC countries, Kazakhstan is also expected to cut oil production from 2.098 million barrels per day to 1.988 million barrels per day in 2019. 12 for export. Export growth to the Eurasian Econom- non-oil and gas products (Figure 6). During H1, for ic Union (EAEU) countries also declined, reflecting example, the import quantity of transport equip- weaker demand from the Russian market. ment (cars and trucks) increased by 26 percent for cars and 120 percent for trucks. However, the de- The increase in imports is associated with an preciation of the tenge against the U.S. dollar by 15 uptick in the growth of domestic demand, but percent year-on-year in H1 2019 helped ease the depreciation of the tenge helped rein in imports growth of imports. Allowing the tenge to depreciate growth. Against strong growth in domestic de- in nominal and real terms has increased the prices mand, nominal import in H1 grew by 7.2 percent of imported goods and helped dampen growth in year-on-year, and 95 percent was contributed by import demand (see Box 1). Figure 5. Oil and gas contributed to the Figure 6. A surge in domestic demand pushed decline in growth in nominal exports the deficit in the non-oil and natural gas trade (contribution to y/y export growth, percentage) (y/y change, percent; balance of non-oil trade as percentage of GDP) Oil & gas Non oil & gas Export 55 Household consumption 0 Government consumption 40 Gross- xed capital formation -2 35 Balance of non-oil & gas trade (RHS) 30 35 -4 25 20 -6 15 15 10 -8 5 0 -10 -5 -5 Q4-2018 Q3-2018 Q2-2018 Q2-2019 Q4-2017 Q1-2018 Q1-2019 -12 Q4-2018 Q3-2018 Q2-2018 Q2-2019 Q4-2017 Q1-2018 Q1-2019 Sources: World Bank staff calculations based on NBK data. Sources: World Bank staff calculations based on NBK data. The weak performance of exports and the contin- in portfolio investments intensified in Q1 this year ued outflow of investment income widened the driven mainly by soaring net purchases of foreign current account deficit. A smaller deficit in services assets, mostly corporate and sovereign debt secu- trade narrowed the surplus in the trade balance. rities. The timing of the large portfolio outflow also However, the outflow of investment income contin- aligned with the sharp depreciation of the tenge ued and turned the current account into a deficit of and coincided with the surprise political transition in 4.5 percent of GDP in the 2nd quarter, or 2.4 percent March 2019. The repayment of Eurobonds by state- of GDP in H1 (Figure 7). The current account deficit owned enterprises led to an increase in the portfolio is expected to continue throughout 2019 as exports investments outflow in the amount of $1.1 billion in continue to face a weak and uncertain environment. H1, lower than $2.6 billion in the same period last year. The easing of the monetary policy stance in Inflows of foreign direct investment (FDI) were developed economies might have contributed to offset by a surge in the outflow of portfolio in- the flow of short-term funds to emerging and fron- vestment. Kazakhstan recorded a net inflow of for- tier markets. But domestic inflation pressure and eign direct investment of US$3.7 billion in H1 2019, the perception of risk might have dampened inves- 13 percent lower than the US$4.27 billion inflow tor confidence despite the upgrade of the outlook in during the same period last year. Compared with sovereign risk by international rating agencies. The the 20 percent decline in the global foreign direct current account deficit and net outflow in the finan- investment flow in H1 2019, however, Kazakhstan cial account have caused foreign reserves to fluctu- fared relatively better. However, in the same peri- ate from US$30 billion in January 2019 to US$27 od, the net outflow of portfolio investment stood billion in June, before it edged up to US$29 billion in at US$4.2 billion compared to US$2.0 billion in October this year. the same period in 2018. The amount of outflow Kazakhstan Economic Update – December 2019 13 Figure 7. Components of the current account Figure 8. Net outflows of portfolio investment (percentage of GDP) offset net inflows of foreign direct investment (percentage of GDP) Primary & secondary income Net direct investment Services Net portfolio investment 30 Goods 4,0 Financial account Current Account (RHS) 20 2,0 8,0 10 0,0 3,0 0 -2,0 -2,0 -10 -4,0 -7,0 -20 Q4-2018 Q4-2018 Q3-2018 Q3-2018 Q2-2018 Q2-2018 Q2-2019 Q2-2019 Q4-2017 Q4-2017 Q1-2018 Q1-2018 Q1-2019 Q1-2019 -12,0 Sources: World Bank staff calculations based on Haver Sources: World Bank staff calculations Analytics and the NBK. For presentation purpose, signs are based on Haver Analytics and the NBK. in reverse from the orignial format. The Kazakhstan tenge continued to depreciate However, the depreciation of Kazakhstan’s real against the U.S. dollar throughout the third quar- exchange rate has been more modest. Domes- ter of 2019. The tenge depreciated against the U.S. tic inflation turned relatively higher than infla- dollar since January 2019, and by September it had tion in Kazakhstan’s major trading partners, and depreciated by 5.3 percent (year-on-year), reaching it appeared to have reduced the pace of real ex- 390 tenge per U.S. dollar in October 2019 before it change rate depreciation. Depreciation of the real stabilized. The depreciation of the tenge this year was exchange rate intensified during the first half of broadly in line with lower oil prices, which affected 2019 and slightly appreciated in July and August nominal export of oil. The depreciation is also consis- (Figure 10). Keeping domestic inflation under con- tent with trends in movement of regional currencies trol is vital to maintain the relative competitive- such as the Russian ruble and Uzbek som (Figure 9). ness of Kazakhstan’s products. Figure 9. The tenge depreciated along with oth- Figure 10. Depreciation in the real exchange er regional currencies and declining oil prices rate has been more modest (y/y change, percent) (real exchange rate index December 2013=100) Tenge/US$ Ruble/US$ Brent $/barrel (RHS) Tenge/US$ Real effective exch rate index (RHS) 20 60 Sep-2017 Nov-2017 Jan-2018 Mar-2018 May-2018 Jul-2018 Sep-2018 Nov-2018 Jan-2019 Mar-2019 May-2019 Jul-2019 50 15 40 10 30 300 82 20 310 5 80 10 320 0 0 330 78 -10 340 -5 76 -20 350 -10 -30 360 74 May-2018 May-2019 Nov-2018 Mar-2018 Sep-2018 Mar-2019 Sep-2019 Jan-2018 Jan-2019 Jul-2018 Jul-2019 370 72 380 70 390 Sources: World Bank staff calculations based on Haver Analytics Sources: World Bank staff calculations based on Haver and NBK. Analytics and the NBK. Note: A decline in real effective exchange rate is a depreciation. 14 Box 1. Real exchange rate movement and non-oil and gas trade Figure 11. Real exchange rate and non-oil and gas trade In August 2015, the NBK allowed the tenge (seasonally adjusted, 3Q/3Q growth) to move more flexibly against the U.S. dollar.a Since then, Kazakhstan’s exports and imports have been exposed to more fluctuations in Non‐oil import Real exchange rate (RHS) Non‐oil export GDP (RHS) the exchange rate. Kazakhstan’s trade has a 10 2 large share of oil and gas the production lev- 8 1 el of which typically follows period-specific contracts. Therefore, movement in the real ex- 6 0 change rate is likely to be relevant for trade in 4 -1 non-oil and gas products (non-oil, in short). 2 -2 0 -3 About 90 percent of Kazakhstan’s imports are Q4-2018 Q3-2018 Q2-2018 Q2-2019 Q4-2017 Q1-2018 Q1-2019 non-oil products. One estimate suggests that import demand elasticity for Kazakhstan is elastic and above average, which implies im- port volume tends to change more than chang- es in import prices.b Sources: World Bank staff calculations based on Haver Analyt- ics and NBK. Figure 11 presents three quarters to three Note: A decline in real effective exchange rate is a depreciation quarters growth of seasonally adjusted data of nominal non-oil exports, nominal non-oil im- ports, and the real exchange rate.c From Q2 to Q4 2018, the appreciation in the real exchange rate, which eroded the price competitiveness of domestic products, was accompanied by a rap- id increase in imports. However, from Q4 2018 to Q2 2019, growth of imports decreased, to- gether with depreciation in the real exchange rate. The decrease in non-oil import growth also occurred despite a sustained increase in real GDP. This implies that depreciation in the real exchange rate is associated with a decline in growth in demand of non-oil imports. In contrast, during Q4 2018 to Q2 2019, growth of non-oil exports declined with the real exchange rate depreciation. One possible ex- planation for this is weaker global demand, and lower commodity prices dampened growth in non-oil export value. Another possibility is the time lag for depreciation in the real exchange rate to effectively influence the demand for Ka- zakhstan’s non-oil exports. Note: a. Official statistics suggest that, since September 2016, the NBK has done little to directly intervene in the foreign cur- rency market. b. Mahdi Ghodsi, Julia Grubler, and Robert Steh- rer, “Import Demand Elasticity Revisited,” Vienna Institute for International Economic Studies Working Paper #132, Vienna, 2016. c. Export and import data were seasonally adjusted us- ing the Census X-13 method. Kazakhstan Economic Update – December 2019 15 4 Monetary Policy and the Financial Sector: inflation is under control, but credit growth remains weak Sustained inflation pressure led the NBK to hike the policy rate. Meanwhile con- cerns over nonperforming loans continues to affect credit growth, which prompt- ed the NBK to review the quality of assets of major banks. At the same time, the rapid buildup of retail lending raises concerns over higher risk from nonperform- ing loans. Although inflation has been within the target been driving overall lending activity over the range, the NBK raised the policy rate in Sep- last three years. NBK data also suggest that tember 2019 to anticipate further increases it has stepped up absorbing excess liquidity in inflation. Before the recent increase in in- from the market through auctions of depos- flation, the headline inflation in Kazakhstan its and notes since October this year.4 With had continued its downward trend through rising import prices and a government plan March this year. Higher food prices and im- to increase social spending and the salary of port prices propped up inflation and caused public servants in 2020, it is likely that the the NBK to increase its policy rate by 25 per- NBK will continue to maintain the current centage points, back to 9.25 percent in Sep- stance of monetary policy to contain infla- tember 2019. The rate increase was taken tion expectations. after the NBK maintained a 9.0 percent rate Existing credit growth is driven by retail for five months since April 2019 (Figure 12). lending to consumers, but credit to legal en- The rate hike was enacted to rein in inflation tities, particularly small and medium-sized expectations and retail lending, which has enterprises (SMEs), continues to contract. 4 For a list of NBK instruments for monetary policy, please see https://nationalbank.kz/?docid=3334&switch=english. 16 Domestic credit has barely grown and remained pared with a 1.9 percent contraction of corporate depressed in real terms in the last 10 months (Fig- loans). Despite the slight improvement in credit ure 13). Existing credit growth is driven by lend- growth, total lending and deposits of the Kazakh- ing to individuals, both mortgage and consumer stan banking sector in H1 2019 accounted for lending. Meanwhile lending to corporations (legal 20.5 and 24.6 percent of GDP, respectively, down entities) remains in negative territory and contin- from 23.1 percent and 28.6 percent, respective- ues to decrease its share in total lending (from ly, at the beginning of the year. These lending ra- 63 percent at end-2017 to 53 percent in Septem- tios are well below the levels at the beginning of ber 2019) due to the write-off of nonperforming the decade (around 60 percent and 35 percent) loans. Lending to SMEs is experiencing the larg- and the levels observed for upper middle-income est contraction (12.9 percent during 2019 com- countries. Figure 12. NBK hiked its policy rate in re- Figure 13. Retail lending (consumer loans) have sponse to rising inflation pressure driven credit activity (percent year-on-year) (percent year-on-year) 20,0 CPI in ation Consumer loans Business Base rate NBK target in ation corridor 15,0 Nominal Real 15,0 10,0 10,0 5,0 0,0 5,0 -5,0 0,0 -10,0 sep.19 2015 2016 2017 2018 2019 2018 2014 2016 2013 2015 2012 2017 Sources: World Bank staff calculations based on NBK data. Sources: World Bank staff calculations based on NBK data. Although reported financial indicators show The rapid growth in retail lending raises concerns. banks have high capitalization levels, nonper- It also suggests the connection between credit forming loans in the banking sector are likely growth and the NBK policy rate is not that strong. higher than the official figure. On average, banks By September 2019, retail lending grew by 22.4 reported having 23 percent capital ratio and 17.9 percent year-on-year, while lending to the cor- percent common equity ratio. The reported non- porate sector still contracted by 5.5 percent. The performing loans are about 1.3 trillion tenge, an rapid increase of retail lending throughout 2018 increase to 9.5 percent from 7.4 percent of loans and 2019 also suggests the previous rate hike at end-2018. Recently, Standard & Poor’s (S&P) es- by the NBK from 9.0 percent to 9.25 percent be- timated that the additional reserves to cover true tween October 2018 to March 2019 has little ef- nonperforming loan levels could amount to 1 tril- fect on curbing the growth of this type of lending. lion tenge (about US$2.6 billion). Although lend- The rapid buildup of retail lending can increase ing in dollars continues to decline, reaching 17.5 the risk of household indebtedness and increase percent at end-September 2019 compared to 23 nonperforming loans because consumer loans percent one year ago, deposit dollarization of 44 typically rely only on individual creditworthiness, percent remains a concern. Banks may not be able with little or no collateral. To prevent the buildup to pass foreign currency deposits into foreign cur- of household indebtedness and limit the growth rency lending to local borrowers with no foreign of consumer lending, the NBK plans to increase currency receivables. To assess the extent of prob- the capital charges of uncollateralized consumer lematic assets, the NBK is completing an indepen- loans and refine the household-debt burden cal- dent review of the quality of assets of 14 banks. culations. Kazakhstan Economic Update – December 2019 17 5 Fiscal Policy: stability amidst a wider deficit Kazakhstan’s fiscal position in 2019 remains stable as non-oil revenue improved on the back of better administration and sustained economic growth. Despite the goal of reducing the budget deficit over the medium term, the deficit in 2019 is likely to increase substantially because of the increase in social expenditure and continued infrastructure investments. Kazakhstan’s fiscal policy is judged to be tration and sustained increase in economic more expansionary in 2019, with budget activity helped strengthen budget revenue. spending rising notably faster than in 2018. Corporate income tax and value-added tax, During January–June 2019, the general which account for half of fiscal tax revenue, government budget, which is the aggregate increased by 16.9 percent and 27.4 percent, of state and local budgets, posted higher respectively, during the period under review spending across the range of expenditure compared to the first half of 2018. Oil rev- items both in absolute terms and relative enue increased by almost 27 percent in the to GDP (Table 1). Higher wages for low-paid first half of 2019, owing to a discretional public sector workers; broader social enti- withdrawal from the National Oil Fund of T tlement programs, including education and 370 billion, on top of a T 1.4 trillion guaran- health care; and housing and debt relief for teed transfer to the budget from the total T low-income earners among others, boost- 2.7 trillion guaranteed transfer allocated this ed social transfers by an estimated 24 per- year. There was little change in the overall cent, while spending support to industry and deficit to 0.4 percent of GDP in the first half, transport facilitation moved up 9.1 percent which contrasts with a larger non-oil deficit and 13.3 percent, respectively. On the rev- associated with a calendar factor and expen- enue side, improvements in tax adminis- diture execution processes. Although the 18 non-oil deficit is likely to decline from the deficit policy actions in 2019 are expected to boost GDP in the first half-year, the non-oil deficit in 2019 is this year largely driven by higher expenditures expected to be 8 percent of GDP, above the level both in nominal terms and adjusted for inflation. observed in 2018. Overall, the government fiscal Table 1. General government fiscal accounts, 2017–19 (in percent of GDP)   2017 2018 1H2018 1H2019 2019 est. Revenues 21.8 18.1 21.1 22.2 18.5 Oil revenue 10.0 6.2 7.7 8.6 6.6 Non-oil revenue 11.8 11.9 13.5 13.6 11.8 Expenditures 23.5 19.0 20.6 21.4 20.2 Goods and services 7.4 5.4 5.5 6.0 5.8 Social transfers and wages 7.1 7.3 8.6 9.3 8.0 Capital spending and subsidies 4.1 3.6 3.3 2.9 3.8 Interest payments and other transfers 5.0 2.8 3.1 3.2 2.6 Net lending and financial transactions 1.0 0.5 0.9 1.2 0.3 Overall balance -2.7 -1.4 -0.3 -0.4 -1.8 Non-oil balance -12.7 -7.6 -8.0 -9.0 -8.6 Memorandum items: Stock of FX assets in the National Oil Fund 35.8 33.5 32.8 35.0 34.3 Stock of total government debt 20.1 20.7 19.0 19.8 19.1 External debt and state guarantees 9.4 10.5 8.9 9.4 9.2 Domestic debt and state guarantees 10.7 10.2 10.1 10.3 9.9 Source: World Bank staff calculations based on data published by authorities. Note: The general government budget comprises the state and local budgets. The stock values of foreign exchange assets and government debt relative to GDP for semiannual periods are calculated by using annualized GDP data. FX = foreign exchange. The stock of government debt to GDP was about Keeping a lid on budget expenditures, improv- 19.8 percent of GDP in the first half of 2019, with ing its efficiency, and raising non-oil revenue the nominal value of US$31.8 billion in the first collection are needed to retain fiscal sustain- half of the year. A lower level of public debt helps ability. The Draft State Budget 2020, while de- the government to smoothly proceed with consol- signed assuming a steadily growing economy at idation efforts and continuing economic growth a pace higher than the World Bank baseline and together with stable oil prices are expected to put conservative oil price forecast, presents a deficit the debt-to-GDP ratio on a further declining trend. reduction path consistent with the midterm fiscal In September 2019, the government tapped the consolidation strategy. The non-oil deficit of the Eurobond market and successfully placed slight- state budget – a numerical fiscal target – is ex- ly over 1.1 million euros in bonds at a lower bor- pected to decline further in 2020 on the back of rowing cost. The 15-year bond circulation term improved non-oil tax collection and implies no fur- has been the longest issue denominated in eu- ther additional withdrawals from the National Oil ros ever offered by a country from the Common- Fund apart from a T 2.7 trillion guaranteed trans- wealth of Independent States region. Despite the fer. Although achieving a lower budget deficit is economy’s long-standing structural weaknesses, feasible, the planned increase in social spending decent macro performance, a strong government can increase the pressure for a budget deficit. Re- balance sheet with low public debt, and sizable cently, the government has committed to lift sala- foreign exchange reserves allow the government ries and compensation to teachers, medical work- to raise funding at lower borrowing costs. Euro- ers, and other social sectors workers in the com- bond issuance to a certain extent intends to firm ing years. This planned increase in payroll and the up investor confidence and at the same time pro- larger proportion of spending on the social sector mote the newly launched Astana Financial center in the past few years could increasingly constrain as a regional financial hub. capital spending. Kazakhstan Economic Update – December 2019 19 6 Outlook and Risks: growth is likely to soften amidst external headwinds and domestic challenges Despite the prospect for a modest recovery in global growth in 2020, the external eco- nomic environment remains fragile, with uncertainties over global trade weighing down global growth and commodity prices. Meanwhile, Kazakhstan’s economy remains vul- nerable to external shocks, and domestic challenges are limiting growth potential. The economy is expected to grow amidst if Kazakhstan continues implementing commit- sluggish demand by Kazakhstan’s main ments to the World Trade Organization and bi- trading partners and the diminishing effect lateral agreements of the EAEU (see section on of the previous fiscal stimulus on domes- Policy Watch). tic demand. The World Bank is projecting the economy to grow by 4.0 percent in 2019 and to As monetary policy remains focused on pre- soften to 3.7 percent in 2020 (Table 2). House- serving price stability, inflation is projected hold spending and investment are expected to to stabilize within the NBK’s target. How- continue to drive demand, although to a lesser ever, fiscal measures, including larger social extent than in previous years. Services are also spending, rising domestic cost pressure, and expected to support growth on the supply side. exchange rate volatility can still strengthen in- Weak performance of manufacturing, however, flation expectations. To help keep a lid on in- flation and effectively steer inflation expecta- owing to lackluster FDI beyond the oil and gas tions, the central bank can further enhance its sector, is weighing down economic expansion. communication strategy and strengthen the Lower international oil prices and higher do- interest rate transmission channel. mestic demand for imports will likely keep the current account in a modest deficit over the me- Although the fiscal position of the govern- dium term. Meanwhile, international reserves ment is expected to remain strong, it is held by the NBK remain adequate as they can important to continue with fiscal consoli- cover at least nine months of imports.5 The con- dation. The 2019 adjustment to the midterm tinued expansion of Tengiz oil field until 2022 is budget includes additional spending on social expected to lead the FDI inflow in the coming assistance, infrastructure, and subsidies to years. FDI in other sectors can potentially rise SMEs, which will bring the non-oil deficit to 8.6 20 percent of GDP (Table 2). For 2020, the government fiscal sustainability, the government should proceed is likely to increase expenditure on social allowanc- on the announcement of cutting the non-oil deficit. es for low-income households, salaries of education Increased spending in this regard will need to be ac- workers, contributions to pensions, and spending on companied by higher non-oil revenues. Fiscal con- the national health care system. However, because solidation is also important as the government the government has not announced a new program already announced a reduction in the amount of on capital expenditure, the non-oil deficit for 2020 is scheduled transfers from the National Oil Fund6 expected to be about 7.6 percent of GDP. To ensure to the budget. Table 2. Baseline scenario: selected macro-fiscal indicators, 2016–21 (In percent, unless otherwise indicated))   2016 2017 2018 2019 2020 2021   Projections Real GDP growth 1.1 4.1 4.1 4.0 3.7 3.9 Oil sector 2.3 7.4 4.7 2.0 1.8 2.0 Non-oil economy 0.9 3.2 3.9 4.5 4.2 4.5 Consumer price inflation, end of period 8.3 7.2 5.4 5.6 5.5 5.5 percent of GDP, unless otherwise indicated Current account balance -5.9 -3.1 0.0 -2.8 -2.5 -1.7 Foreign direct investment 10.0 2.3 2.8 2.1 2.5 2.2 Overall fiscal balance -5.5 -4.5 2.7 -1.3 -0.6 -1.1 Non-oil fiscal balance -10.0 -12.8 -7.6 -8.6 -7.6 -7.4 Net financial assets 25.0 15.7 12.7 13.8 12.1 10.1 Poverty rate (US$5.5 per day at PPP terms) 12.2 8.6 7.4 6.6 5.8 5.2 Source: World Bank staff calculations based on data published by authorities. Note: PPP = purchasing power parity. The economy’s vulnerability to external shocks re- The limited progress in advancing reforms to mains the primary source of risk to medium-term expand the economy’s productive potential is growth and poverty reduction. Market expecta- limiting the scope for growth. Kazakhstan made tions of GDP growth have deteriorated, with av- progress in the 2020 Doing Business ranking and erage forecasts for global and emerging market is in the top 25 countries of the 190 countries sur- and developing economy growth continuing to veyed. Nevertheless, the lack of dynamism in the edge downward. In September 2019, global trade private sector, persistent market capture by large contracted by 1 percent year-on-year. Therefore, state-owned enterprises, and banks that are not this year, growth in the global economy is expect- lending to small and medium-sized corporates ed to slide to 2.6 percent, the lowest since 2009, present high downside risks to the economy. before picking up modestly in 2020.7 The ongoing Therefore, a renewed vigor in advancing structural trade war between China and the United States reforms becomes imperative for the government has weakened the global business confidence for to boost productivity and attract much needed FDI flows. A worse-than-anticipated growth of the foreign investment in the non-oil economy. The Chinese economy can further depress global eco- policy actions taken so far by the government to nomic growth. For Kazakhstan, such a scenario support socially vulnerable people, along with ro- can further soften global commodity prices and bust job creation, are expected to help bring the negatively affect the demand for Kazakhstan’s poverty rate down to almost 8 percent by 2021. exports. The outlook for commodity prices rele- A significant portion of the population will likely vant for Kazakhstan, such as energy and metal, is remain close to the poverty line, and any poten- expected to soften in 2020 and remains vulnera- tial shocks to economic activity might reverse the ble to a larger-than-expected slowdown in global prior gains. growth.8 5 Assuming monthly imports of US$3 billion. 6 Kazakhstan’s sovereign wealth fund. 7 World Bank 2019a. 8 World Bank 2019b. Kazakhstan Economic Update – December 2019 21 7 Policy Watch a. Asset quality review of major banks The National Bank of Kazakhstan (NBK) is the banking sector. Despite these measures completing an independent review of the and generous credit support programs fund- quality of assets possessed by 14 banks, ed with quasi-fiscal resources, bank credit to which make up about 87 percent of the as- legal entities, especially to SMEs, continued sets of the banking sector. In 2014–15, the to retrench to 7 trillion tenge by end-Sep- fall in oil prices and the depreciation of the tember 2019, from 8.6 trillion tenge by end- tenge adversely affected the quality of Ka- 2016. The ratio of deposits to GDP has also zakhstan’s asset portfolio and the solvency been declining. The asset quality ratio pro- of the country’s banking sector. The author- cess of second-tier banks would help reveal ities provided liquidity and subordinated the true extent of banks’ problem assets loans to banks, purchased bad assets, and and their solvency position so that author- provided regulatory forbearance on loan ities could take the necessary measures to classification and provisioning to stabilize restore the health of the financial sector. 22 b. Bilateral agreements between the Eurasian Economic Union with other countries and new visa-free policies for 12 countries New trade agreements of the Eurasian Econom- ic Union (EAEU) could expand Kazakhstan’s export opportunities. On October 1, 2019, the EAEU-Singapore free trade agreement was signed. It incorporates trade in goods as well as regulation of trade in services and terms of in- vestment. An economic cooperation agreement with China also entered into force at the end of October, which focuses on simplified trade pro- cedures. On October 25, 2019, the EAEU-Serbia free trade agreement was signed, which was largely based on already existing bilateral trade agreements Serbia had with Belarus, Kazakhstan, and Russia. Why is this important for Kazakhstan? As a member of an EAEU customs union, Kazakh- stan is bound to implement a common import tar- iff structure of the EAEU. These new agreements add trading partners to the EAEU and provide opportunities for Kazakhstan to diversify export markets, attract FDI, reduce trade diversion, and increase trade in services. The government added 12 countries whose cit- izens can visit Kazakhstan for 30 days without a visa. Bahrain, Colombia, Indonesia, Kuwait, Lichtenstein, Oman, the Philippines, Qatar, Saudi Arabia, Thailand, the Vatican, and Vietnam add- ed to the list of countries whose citizens can trav- el to Kazakhstan without a visa.9 Some of these countries, particularly Southeast Asian countries, have a growing appetite for outbound tourism travel. The policy can substantially increase for- eign business and tourism travel to Kazakhstan and strengthen economic links between Kazakh- stan and the Middle East and Southeast Asia. In November 2019, the government also comple- mented this policy by announcing the adoption of an Open Sky policy to allow foreign air carriers to fly to 11 airports in Kazakhstan and continue con- nection to cities in other countries over the next three years. This initiative is expected to attract traffic, increase competition in the aviation indus- try, and significantly improve the accessibility of Kazakhstan to international travelers. These new countries add to the existing list of 9 members of European Union and other 45 countries. Kazakhstan Economic Update – December 2019 23 Special Topics Diversification and survival rates of Kazakhstan exports* Trade can play an important role in Kazakhstan’s development prospects through enlarging access to markets, increasing access to FDI and technology, and increas- ing competition. Recently, Kazakhstan achieved modest progress in diversifying exports, but export quality is still relatively low, and Kazakhstan participation in the global value chain is still limited. In addition, beyond markets in the Eurasian Eco- nomic Union, Kazakhstan exports are facing low survival rates. Kazakhstan has a relatively small domestic substantial real wage increases, and a sharp market and the economy has significant ex- decline in poverty. Since the decline in glob- posure to hydrocarbon. To sustain growth al commodity prices, however, economic and achieve high-income status, it cannot growth has slowed, from 10.2 percent on av- rely only on domestic demand. Instead, erage during 2000–07 to 4.1 percent during it needs to integrate with growth in other 2008–17, and productivity increases have economies through cross-border invest- been nearly nil. ment and trade. In addition, the high expo- sure to hydrocarbon has caused growth to Growing opportunities in regional trade can remain vulnerable to shocks in international support growth and productivity increases. commodity prices. In the past, rising oil pric- Against the deceleration in growth of global es have led to a rapid increase in growth, trade during 2014–17, two-way trade within * This section draws heavily from a background note developed by Guillermo Carlos Arenas. 24 Russia and the Central Asia region in- creased by an average of 6.5 percent, Figure 14. HHI on export product concentration and two-way trade in non-oil prod- ucts between Russia and Central and 0.39 AZE 0.66 East Asia increased by an average of 0.09 2.6 percent. Those expansions pro- CHL 0.11 vide Kazakhstan the opportunity to IDN 0.02 0.02 tap into growing middle-class con- 0.81 sumption and demand for interme- KAZ 0.39 diate goods from industries in those 0.02 MEX countries. Access to imported goods 0.02 can also improve access to better RUS 0.12 0.15 technology and competition in the market, which are important for pro- 0 .2 .4 .6 .8 ductivity growth. 2000 2018 The concentration of Kazakhstan’s Sources: World Bank staff calculations based on UN-COMTRADE data. export basket has decreased along Note: HHI = Herfindahl–Hirschman Index. AZE = Azerbaijan; CHL = Chile; both the product and market di- IDN = Indonesia; KAZ = Kazakhstan; MEX = Mexico; RUS: Russia. mension. Figure 14 shows that al- though the concentration index has decreased over the years, especial- Figure 15. HHI on export market concentration ly after the decline in international prices in 2013, Kazakhstan’s exports 0.21 AZE 0.11 are still highly concentrated in terms 0.07 of products that are mostly raw and CHL 0.14 unprocessed commodities. The de- 0.09 IDN crease in concentration appears to 0.06 be a trend unique among all bench- KAZ 0.14 0.07 mark countries, as most (except for MEX 0.78 Indonesia) increased their product 0.59 concentration over this period. The RUS 0.05 0.05 World Trade Organization’s most-fa- vored nation treatment of Kazakh- 0 .2 .4 .6 .8 stan’s exports allows access to more 2000 2018 markets. This has allowed Kazakh- Sources: World Bank staff calculations based on UN-COMTRADE data. stan exports to make progress in Note: HHI: Herfindahl–Hirschman Index. AZE = Azerbaijan; CHL = Chile; IDN diversifying across markets (Figure = Indonesia; KAZ = Kazakhstan; MEX = Mexico; RUS: Russia. 15). Diversification along commodity exports has played an important Figure 16. Export growth decomposition, 2000–18 (percent) role in Kazakhstan’s export growth 70 65,5 performance over the last two de- cades. Figure 16 shows that during 60 2000–18, 66 percent of total export 50 growth of Kazakhstan was explained by ability to sustain market presence 40 33,6 (selling the same commodities to the 30 same destinations), and 34 percent was explained by product expansion 20 in the existing markets (sales of new 10 products to old markets) (Figure 16). 0,7 0,1 0 More significantly, less than 1 per- Old markets, Old markets, New markets, New markets, cent of growth resulted from selling old products new products old products new products (either old or new products) to new Sources: World Bank staff calculations based on UN-COMTRADE data markets. Kazakhstan Economic Update – December 2019 25 But despite the modest improvement in diversifi- and are of low quality compared to peers (Figure cation, most of Kazakhstan’s non-oil exports did 17). Nevertheless, the quality of Kazakhstan’s ex- not show a marked quality upgrade, except some ports of dairy products is showing significant im- agricultural and food products. During 1990– provement (Figure 18), which suggests the possi- 2000, Kazakhstan’s unit value of exports was bility of improving product quality and the poten- close to that of other commodity exporters such tial for these types of exports to play a larger role as Chile and Indonesia. A decade later, however, in export diversification. unit values of Kazakhstan have steadily declined Figure 17. Export quality: median distance Figure 18. Kazakhstan’s export quality by sector: to the world quality frontier median distance to the world quality frontier 0,9 1990‐2000 2001‐2014 1,0 1990‐2000 2001‐2014 0,8 0,9 0,7 0,8 0,7 0,6 0,6 0,5 0,5 0,4 0,4 0,3 0,3 0,2 0,2 0,1 0,1 0,0 0,0 Meat Dairy Cereals Fruits Beverages Kazakhstan and Azerbaijan Indonesia vegetables Mexico Russia Chile Sources: IMF Quality Index; World Bank staff calculations Sources: IMF Quality Index; World Bank staff calculations Kazakhstan’s exports have less than a 50 percent ufacturing exports, such as machinery and trans- chance of surviving after the first year. The prob- port equipment, have the lowest survival rates ability of maintaining that relationship for more among main export products (Figure 19). Beyond than three years is less than 25 percent. Further- markets in the Eurasian Economic Union (EEAU) more, 90 percent of Kazakhstan’s export flows or Commonwealth of Independent States (CIS), disappear by their 10th year. In comparison, the Kazakhstan’s exports to other “nontraditional” export survival rate of most comparators is higher markets have lower survival rates. The probabil- throughout the period of observation. The proba- ity that an export relationship will survive if it is bility of an export relationship with Chile, Indone- established with members of the EEAU or CIS is sia, Mexico, or Russia surviving after the first year significantly higher (Figure 20), but the probability is 54 percent, after which it drops to 32 percent that exporting ties with other EEAU or CIS coun- past the third year (which is 7 and 8 percentage tries last beyond a year is significantly lower. After points higher than in Kazakhstan, respectively). the first year, the survival rate for exports to China The survival rate beyond the 10th year is 16 per- is 50 percent, the EU 46 percent, and Association cent for Chile, Indonesia, and Russia, and 19 per- of Southeast Asian Nation (ASEAN) countries 43 cent for Mexico. Kazakhstan’s nontraditional man- percent. 26 Figure 19. Export survival, Kazakhstan and Figure 20. Kazakhstan export survival, by comparators, 2000–18 destination, 2000–18 1.00 1.00 0.25 0.50 0.75 0.25 0.50 0.75 Survival rates Survival rates 0.00 0.00 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Years Years AZE CHL IDN ASEAN CHN CIS* KAZ MEX RUS EAEU EU ROW Sources: World Bank staff calculations based on UN- Sources: World Bank staff calculations based on UN-COM- COMTRADE data. TRADE data. Note: ASEAN = Association of Southeast Asian Nations; CHN = Note: AZE = Azerbaijan; CHL = Chile; IDN = Indonesia; KAZ = China; CIS = Commonwealth of Independent States; EAEU = Eurasian Kazakhstan; MEX = Mexico; RUS: Russia. Economic Union; EU = European Union; ROW = rest of the world. Increasing integration in global value chains and Russia, and less than a fifth of the levels in (GVCs) is crucial for Kazakhstan’s effort to di- countries highly integrated into GVCs, like Mexico, versify exports. For a commodity exporter, par- Thailand, or Vietnam. ticipation in GVCs presents an opportunity for growth in non-commodity exports. Kazakhstan Kazakhstan’s exporters are using fewer import- could start diversifying its export basket and find ed inputs than a decade ago even though their nontraditional sources of export growth by partic- use is necessary for participation in GVCs. The ipating in a new GVCs, or “deepening” the existing share of exports that is accounted for by import- participation in GVCs. By integrating into GVCs, ed value added, a key measure of GVC integra- Kazakhstan firms will gain exposure and access tion, dropped from 20.3 percent to 6.5 percent in to international technologies and knowledge and Kazakhstan between 2005 and 2015 (Figure 22). will be forced to meet international standards, all Although the decline in GVC integration has also of which can be sources of productivity growth. been seen at the global level in recent years, the decrease in use of foreign inputs is spread among Kazakhstan’s overall participation in GVCs is rel- almost all industries in Kazakhstan and may re- atively low compared to peer countries. Kazakh- flect a higher relative trade cost (transport, logis- stan is substantially forward integrated in GVCs tics, tariff structure, and non-tariff measures) of because its raw materials are used as inputs in Kazakhstan. other countries’ exports. Such integration is not a measure of sophistication, but rather of Kazakh- Domestic production also became less reliant on stan’s ability to integrate into the global economy foreign demand (from 40.6 percent to 25.3 per- based on its dominant asset, which is natural re- cent) and more reliant on domestic demand over sources (Figure 21). By contrast, Kazakhstan has the last decade. While this significant increase in weak backward integration into GVCs because the importance of the domestic market reflects of the low use of foreign value added in its ex- the growing size of the internal market, it is also ports. Moreover, the share of foreign value add- consistent with a general loss of export compet- ed in Kazakhstan’s exports has dropped almost itiveness that might have that pushed domestic three times since 2000 and is well below that of firms to forego export markets as a growth diver- resource-rich comparators such as Indonesia sification strategy. Kazakhstan Economic Update – December 2019 27 Figure 21. GVC Participation Index in 2005 and Figure 22. Foreign value-added content of 2015 exports in 2005 and 2015 60 Backward Forward 35 2015 2005 30 50 25 40 20 15 30 10 20 5 0 10 Total Manufacturing Agriculture Mining Food & beverages Chemicals Metals Machinery &eq. Transport eq. 0 IDN05 IDN15 RUS05 RUS15 KAZ05 KAZ15 CHL05 CHL15 MEX05 MEX15 THA05 THA15 VNM05 VNM15 Sources: World Bank staff calculations based on OECD TiVa data. Sources: World Bank staff calculations based on OECD TiVa Note: CHL = Chile; IDN = Indonesia; KAZ = Kazakhstan; MEX = data. Mexico; RUS: Russia; THA = Thailand; VNM = Vietnam. The recent announcement of a Roadmap to Pro- Further reforms are needed for Kazakhstan to mote Non-Resources Exports is also timely. The continue diversifying exports. Kazakhstan can Ministry of Trade and Integration suggests that focus on unilaterally streamlining procedures in the Roadmap contains 81 measures, which in- trade facilitation within the EAEU and improving clude policies to reduce costs to comply with doc- connectivity in transport and logistics. For in- umentary requirements, improve brand aware- stance, streamlining the business processes of ness, and realign various government supports to key agencies such as Customs and Quarantine promote Kazakhstan exports. The Roadmap also can be a first step in developing a single window contains a plan to develop financial instruments for processing trade clearances. Policies to attract to support exporters. One of the measures is to and retain FDI beyond in natural resources, such create QazTrade, or “one-stop shop” services for as in agriculture and livestock, can also help Ka- exporters. QazTrade will be set up in selected Ka- zakhstan diversify exports by increasing partici- zakhstan trade missions abroad to promote Ka- pation in GVCs. In addition, Kazakhstan needs to zakhstan products and mediate issues between continue developing the absorptive capacity of exporters and relevant government agencies. local firms to link with foreign manufacturers and Experience also suggests that export promotion comply with standards in the foreign markets. agencies can reduce information and research costs for traders and help them comply with mar- ket regulations.10 Nevertheless, effective delivery and monitoring are needed for the Roadmap to have an impact on exports. 10 Lederman, Olarreaga, and Payton 2010. 28 References Lederman, Daniel, Marcelo Olarreaga, and Lucy Payton. 2010. “Export Promotion Agencies Revisited.” Journal of Development Economics 91 (2): 257–265. World Bank. 2019a. Global Economic Prospects. Washington, DC: World Bank, June. World Bank. 2019b. Commodity Markets Outlook. Washington, DC: World Bank, October. Kazakhstan Economic Update – December 2019 29 FOR NOTES 30