What saved Kazakhstan’s economy from recession in 2016?

Arman Akhunbayev

Deputy Head of the Department for Strategic and Sector Research at EDB

Kazakh economists believe that the country has managed to avoid recession thanks to the measures it had devised. This is the opinion of Arman Akhunbayev, Deputy Head of the Department for Strategic and Sector Research at Eurasian Development Bank (EDB).

He believes that GDP growth slowed down to 1% because of difficulties in the oil (a reduction of 1.8% in 2016) and coal (4.9%) sectors, certain services (communications, transportation) and some processing sectors (15% in mechanical engineering, 12.7% in the leather sector, 5.5% in beverage production, 2.2% in the chemical sector, and 0.9% in the light industry). According to Akhunbayev, these industries depend on interim imports that have high elasticity with respect to revenues or are dependent on exports.

“An important result of the year is that positive growth has been maintained in some sectors, helping Kazakhstan to avoid economic recession. The growth drivers were construction (7.9%), agriculture (5.5%) and some manufacturing industries, accounting in aggregate for slightly less than 50% of industrial output,” Akhunbayev noted.

EDB estimates that in 2006 non-ferrous metal output grew significantly (by 7.8%), primarily due to the completion of the final stages of operation of large copper deposits (Bozshakol, Aktogai). This increase and enhanced gold production helped to ensure growth in the production of main noble and non-ferrous metals (8.5%, the highest rate among all sectors).

With a 3.3% growth in ferrous metallurgy ensured by the commissioning of new cast iron, steel and ferroalloy assets, these figures helped to achieve an overall growth of 6.6% in metallurgy. The strategically important food sector has also demonstrated a growth of 3.9%. The power sector, oil processing, paper, wooden and cork items, furniture, pharmaceuticals, textiles, tobacco and other industries have also shown positive rates. Despite negative figures in the end of the year, retailing has also made a positive contribution (0.9%).

“Government stimulation of the economy and institutional reforms (the law on public-private partnerships and a large-scale reform of pricing in the regulated sectors, among other initiatives) aimed at improving the business environment, attracting foreign investment, strengthening market economy, and import substitution played a key part in maintaining positive GDP growth rates. Heavy yield contributed to the growth in agriculture. Many sectors were given an additional impetus by import substitution enhanced as a result of improvements in the country’s external competitiveness in terms of prices after the tenge devaluation, as well as by investments made in previous periods. The latter were mainly in metallurgy,” Akhunbayev said.

He added that development institutions’ active support to the real sector also had a positive effect on the economic activity. In 2016, for example, EDB financed a number of large-sized enterprises in its top-priority sectors such as metallurgy and infrastructure, which were among the key drivers of growth as at the end of the year.

In addition, the expert told about import substitution in the food sector. According to him, the sector meets the domestic market’s demand for the majority of essential food products. Imports include primarily raw materials and goods that are not produced in the country because of climate, as well as high-priced products intended for consumers with high incomes.

Akhunbayev says that imports may account for some 30% of the sector’s output. More than a half of these volumes are supplied from the CIS countries and are exempt from duties, which restrains the effect of customs duties on pricing in the domestic food market.

“The influence of foreign exchange fluctuations on pricing in the domestic food market is indirect and caused by changes in the prices of agricultural produce and fuel in the global market,” he added.

At the same time, mechanical engineering depends on foreign manufacturers by 85%.

“In 2016, imports to Kazakhstan of mechanical engineering products exceeded US $9.5 billion, which is more than four times higher than the domestic output. Consequently, imports account for over 85% of the domestic consumption of mechanical engineering products. Out of this amount, the EAEU countries account for 26% only. The sector and, in particular, its pricing mechanism remain therefore strongly dependent on customs duties and foreign exchange fluctuations,” the expert stated.

According to him, in 2016 Kazakhstan imported 23,200 cars, including 21,200 new vehicles (91%). Out of this, 12,900 cars (60%) were imported from the EAEU countries, primarily Russia. Japan, Germany, South Korea and other countries account for the remainder. In the same period, domestic manufacturers produced 8,400 cars (26.5% of domestic consumption).

“Imports from the EAEU are exempt from duties, which means that duties do not affect the prices of 60% of imported cars. The remaining 40% are subject to customs clearance. According to the customs, the average price of a car imported from Russia is around US $14,000 and from non-EAEU countries $24,000,” Akhunbayev explained.

In addition, various estimates indicate that the degree of localisation in the manufacture of domestic cars is below 30%. This means that if prices of imported components change, the cost of 70% of a car made in Kazakhstan will change accordingly.