Kazakhstan is generally benefiting from Russia’s geopolitical tensions through an inflow of high-skilled labour and businesses and opportunities for increased trade with the EU.
That said, high dependence on the Russian pipeline infrastructure and the need to balance its relationship with the EU are the risk factors. In 2023, growth momentum may strengthen, but domestic constraints include a deteriorating inflationary outlook and high dependency on the oil sector, prone to sudden maintenance issues.
Financially, Kazakhstan’s fiscal and external balances remain comfortable. Nevertheless, the scope for further strengthening of the Kazakhstani Tenge (KZT) appears limited given the expected return of the current account to deficit and likely normalisation of net private capital inflows in the face of risks of secondary sanctions related to ties with Russia.
Following a 1ppt slowdown to 3.3% GDP growth in 2022, Kazakhstan is on track to post GDP acceleration in 2023-24 thanks to continued growth in consumption and a recovery in industrial (including oil production after a somewhat erratic 2022). 1Q23 GDP growth was 4.9% YoY. Support factors include the presence of c.100,000 Russian immigrants (1% of the permanent population) and relocated companies, growing consumer lending and wages, expansion of oil production and exports to the EU.
Meanwhile, sticky elevated inflation remains a concern, preventing any easing of monetary policy, while fiscal support is also limited. Kazakhstani oil exports’ dependence on Russia is a growing concern, with 80% of oil exports going through the Caspian Pipeline Consortium (CPC) pipeline and extra supplies to the EU via the Druzhba pipeline. Also, Kazakhstan is on the US/EU watch in terms of compliance with Russian sanctions.
Last year was lucrative for the budget, as thanks to a US$20/bbl increase in the Brent oil price and recovery in production after a sluggish 2020-21, along with some restraint on the expenditure side, the consolidated budget deficit shrank by 3ppt to 1.3% of GDP, and breakeven Brent fell from US$140/bbl to US$116/bbl.
The new budget rules introduced in 2023 suggest that the government is targeting a cautious approach to spending to limit the breakeven, which is still elevated. A tighter limit on the sovereign fund (NFRK) outlays suggests a higher role of borrowing, mostly domestic, in financing the Republican budget deficit (which should remain at 2- 3% of GDP pa as most of the oil revenues go to the sovereign fund directly).
The public debt should remain limited at around 25-30% of GDP unless the policy is eased.
After showing a US$8.5bn surplus in 2022, the current account returned to a US$1.5bn deficit in 1Q23 and is likely to remain negative on moderation of oil prices and growth in imports. In fact, the current account surplus has been shrinking since 2Q22, the breakeven Brent increased from US$77/bbl to US$81/bbl in 2022, and the KZT appreciation since 3Q22 was based on the substantial atypical net private capital inflow of c.US$3bn per quarter, which could prove volatile.
USD/KZT has now almost recovered to levels seen before February 2022, and the new fiscal rule assumes lower state sales of FX out of NFRK. In addition, risk of Russia-related secondary sanctions may push Kazakhstan to be more cautious about its financial and trade flows.
