Kazakhstan’s economy experiences high pressure from external and internal factors. External factors include uncertainties caused by geopolitical issues and the global energy markets, while internal risks are associated with the country’s economic policy.
Low economic diversification is one of Kazakhstan’s most important issues and challenges. According to the World Bank (2024) data, in 2023, Kazakhstan’s fuel exports (as % of merchandise exports) amounted to 59%, while ores and metals exports reached 14.6%. Kazakhstan’s high dependence on mineral fuel exports makes it vulnerable to price and demand volatility in the global energy markets. The start of the conflict in Ukraine in 2022 led to a surge in oil prices. According to Statista (2024) data, in 2021, the average annual Brent crude oil price was equal to 71 USD per barrel, while in 2022 it increased to 101 USD, showing 42% growth. In 2023, the indicator decreased to 82 USD, and the tendency of the reduction is continuing in 2024. Data from Oilprice.com (2024) shows that as of December 18, 2024, Brent crude oil price amounted to 73 USD. Global oil supply and demand are characterized by high uncertainty. Recently, OPEC+ postponed the start of oil output rises and extended the full unwinding of cuts due to weak demand and booming production outside the group [Reuters, 2024]. To maintain stability in global oil markets, Russia, Kazakhstan, and Saudi Arabia have announced their readiness to compensate for their overproduction within the framework of OPEC+ quotas (Forbes, 2024). The plans of the elected US President Donald Trump to increase oil production will further put pressure on the global market and can have a declining effect on prices. At the same time, China demonstrates weak demand for energy products which will negatively result in global prices (Downs and Rajendran, 2024). It is worth mentioning that China is one of the alternative markets for Kazakhstan’s mineral fuels. Hence, in 2025, Kazakhstan may experience lower production, decreasing demand and prices for its mineral fuels, which will negatively affect the country’s main macroeconomic indicators.
The second important factor that affects Kazakhstan’s economy is the state of Russia’s economy. Russia is a key import partner of Kazakhstan and economic ties between the two states are strong. The recent sanctions on Russia’s economy, in particular, its financial sector including Gazprombank, were significant. Under new sanctions, Gazprombank cannot handle any new energy-related transactions (Reuters, 2024). The Russian currency ruble started weakening, which also impacted on the volatility of Kazakhstan’s currency tenge. According to the National Bank (2024) data, as of November 21, 2024, the official (market) exchange rate of USD was 495 tenge, while on December 21 it amounted to 524 tenge, weakening by almost 6%. The National Bank explained the weakening of the tenge by external issues such as the strengthening of the US dollar, the weakening of the Russian ruble and geopolitical crisis, and domestic issues including an increase in demand for foreign currency from economic agents and limited supply (National Bank, 2024). Monetary authorities of Kazakhstan responded with currency interventions worth more than 1 billion USD and increased the interest rate from 14.25% to 15.25%. According to the Head of National Bank Timur Suleimenov, the last intervention was in May 2022 due to the war in Ukraine, which caused higher inflation and exchange rate fluctuations. Suleimenov didn’t consider the situation a speculative pressure and noted that the market is in search of a new level of equilibrium (Forbes, 2024). However, it is worth mentioning that tenge’s weakening was due to expectations of negative market conditions. For instance, global oil prices, despite the reduction in 2024, demonstrate stability, and sanctions against Gazprombank took effect on December 20. Moreover, recently, Türkiye and Hungary have received an exemption and can continue paying for Russian natural gas via Gazprombank (Euractiv, 2024). Thus, despite such positive news for the economy of Kazakhstan, risks associated with uncertainties on the global energy market and the future of the conflict in Ukraine remain.
One of the most unfavorable effects of a weak tenge is its impact on inflation. Taking into consideration the high dependence of the economy of Kazakhstan on imports, currency devaluation will accelerate inflation, which stands above the National Bank target. The response measures such as increasing interest rates may restrain inflation, but represent higher borrowing costs for Kazakhstan’s business. Hence, the implementation of investment projects will be limited, which will negatively affect economic growth and further undermine the country’s competitiveness. However, it is important to mention that the costs of inflation can be even higher, and finding a tradeoff will not be an easy task for Kazakhstan’s authorities.
Kazakhstan’s increasing budget deficit is another important issue. The rising deficit can be addressed by higher revenues or lower expenditures. A budget deficit leads to government borrowings and debt. However, as Kursiv (2024) reports, the Ministry of Economy of Kazakhstan proposes to consider the national debt, which reached 22.6% of GDP, as an investment in the country’s development. The country’s authorities mention that they borrow to invest in strategic and infrastructural projects. Moreover, the government mentions that Kazakhstan’s debt remains low, while representatives of international financial institutions note that borrowed funds can be used to finance education, infrastructure, and ensure long-term growth (Kursiv, 2024). However, public investments may have a crowding-out effect. According to Sholanova (2024), in 2024, the state budget and borrowed funds became a key source of capital investments in Kazakhstan, while last year the private sector was a key driver of capital investments. Thus, during January-November 2024, the share of the state budget investments increased to 20.2% from 14.8% in the same period last year.
The government uses the National Fund to solve the budget deficit problem. In 2023, the government withdrew a record 5.4 trillion tenge, while more than 6 trillion tenge were transferred this year. It is expected that in 2025, the government will take around 5.2 trillion tenge (Exclusive, 2024). Increasing transfers from the National Fund and higher levels of borrowing show a lack of fiscal discipline. Moreover, there is a lack of policy coordination between fiscal and monetary authorities. While fiscal authorities increase spending using funds from the National Fund and borrowing, the National Bank tries to control inflation by high interest rates. Higher costs of borrowing undermine the private sector’s ability to finance investment projects and the crowding-out effect puts additional pressure on public finance. It is important to mention that the government cannot achieve economic growth without participation of the private sector. Hence, there is a high need for the development of a coordinated policy between the government and the National Bank. Other important measures that the government should implement are creating conditions for higher revenues and reassessment of the budget expenditures. It is important to ensure that these processes will be open and transparent.
Thus, addressing issues of policy coordination and budget deficit will help Kazakhstan attract investments from the private sector and finance priority and transformative projects from the state budget. These measures will help to diversify the economy and improve its competitiveness and resilience to external shocks. Predictable and consistent rules-based policy will also contribute to the attraction of foreign investments, which will have a positive effect on currency exchange and economic stability.
References:
Downs, Erica and Abhiram, Rajendran (2024). China’s slowing oil demand growth is likely to persist and could impact markets. Retrieved from https://www.energypolicy.columbia.edu/chinas-slowing-oil-demand-growth-is-likely-to-persist-and-could-impact-markets/. Accessed on 24.12.2024.
Euractiv (2024). Türkiye, Hungary receive US sanction waiver for gas payments to Russia. Retrieved from https://www.euractiv.com/section/eet/news/turkey-hungary-receive-us-sanction-waiver-for-gas-payments-to-russia/. Accessed on 24.12.2024.
Exclusive (2024). National Fund: How soon will we leave children without a future? Retrieved from https://exclusive.kz/naczfond-kak-skoro-my-ostavim-detej-bez-budushhego/. Accessed on 20.12.2024.
Forbes (2024). Russia, Kazakhstan and Saudi Arabia decide to compensate for excess oil production in OPEC+. Retrieved from https://www.forbes.ru/biznes/526017-rossia-kazahstan-i-saudovskaa-aravia-resili-kompensirovat-sverhdobycu-nefti-v-opek. Accessed on 22.12.2024.
Forbes (2024). Head of the National Bank of Kazakhstan: Interventions are over. Retrieved from https://forbes.kz/articles/glava-natsbanka-kazahstana-interventsii-zakonchilis. Accessed on 20.12.2024.
Kursiv (2024). Baibazarov suggested considering the growing government debt as an investment in Kazakhstan. Retrieved from https://kz.kursiv.media/2024-11-22/lgtn-gosdolg/. Accessed on 20.12.2024.
National Bank (2024). Daily official (market) exchange rates. Retrieved from https://nationalbank.kz/ru/exchangerates/ezhednevnye-oficialnye-rynochnye-kursy-valyut/graph?beginDate=21.11.2024&endDate=21.12.2024&rates%5B%5D=5. Accessed on 24.12.2024.
National Bank (2024). Information message on the currency market. Retrieved from https://www.nationalbank.kz/ru/news/informacionnye-soobshcheniya/17170. Accessed on 20.12.2024.
Oilprice.com (2024). Oil price charts. Retrieved from https://oilprice.com/oil-price-charts/#Brent-Crude. Accessed on 20.12.2024.
Reuters (2024). OPEC+ delays oil output hike until April, extends cuts into 2026. Retrieved from https://www.reuters.com/business/energy/opec-will-delay-oil-output-hike-meeting-source-says-2024-12-05/. Accessed on 22.12.2024.
Reuters (2024). US Treasury targets Russia’s Gazprombank with new sanctions. Retrieved from https://www.reuters.com/business/finance/us-targets-russias-gazprombank-with-new-sanctions-treasury-website-shows-2024-11-21/. Accessed on 24.12.2024.
Sholanova Dinara (2024). Fixed capital investment for 11M2024: acceleration due to state budget, but its growth lags behind GDP growth. Retrieved from https://halykfinance.kz/download/files/analytics/invest_112024.pdf. Accessed on 24.12.2024.
Statista (2024). Average annual Brent crude oil price from 1976 to 2024 (in U.S. dollars per barrel). Retrieved from https://www.statista.com/statistics/262860/uk-brent-crude-oil-price-changes-since-1976/. Accessed on 20.12.2024.
Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.