WORLD AND CRISIS: Business state of US, Europe, China and Custom Union countries is greater risk to Kazakhstan’s economy, experts of Kazakh Economy Ministry.
As the experts of the Ministry of Economy and Budget Planning observe Kazakhstan's economy in 2013, as it has been before, is under the influence of external factors that can adversely affect the development of the country.
Expert for Macroeconomic Analysis and Monitoring Directorate Dilruh Sharipov and Head of the Directorate Chenghis Dauletbaev analyzed the major world risks for Kazakhstan and presented their recommendations for rapid response and further economic policy. In Global risks to the economy of Kazakhstan in 2013 review provided are the data on real GDP growth.
The authors emphasize that the greatest risk to the economy of Kazakhstan is the economic condition of the United States, Europe, China and the countries of the Customs Union. Relationship of an economic slowdown in Kazakhstan with the global downturn in the late 2000s has been clearly shown. Decreased production in the world poses a threat to our economy. In particular, the U.S. role in the world economy due to the high proportion of the country's GDP in the world, about 25 percent in 2011. In 2012 the situation in the country has improved, and the GDP growth was 2.2 percent. However, this year the United States will be facing the need to reduce the expenses of the Defense Ministry up to $ 110 billion. In addition, the barrier to growth may be the highest budget deficit in the last four years; it is more than $ 1 trillion annually. Therefore, to maintain investors' confidence in the U.S. financial system, some measures can be applied to reduce budget costs while consumption decrease stimulation may have negative impact on the economic growth. On the other hand, maintaining a high level of deficit in the long-term threatens to undermine the country's credit rating, and that might cause the collapse of the financial markets.
This year what remain are the challenges of an economic slowdown in the European Union. Overcoming the fragmentation of the financial system, the outflow of deposits from the weaker countries and some other issues, Europe has entered a new path of development voicing its stronger orientation of monetary and fiscal union, political integration and setting a Banking Union.
According to the baseline forecast of the European Bank for Reconstruction and Development, the output gap in the euro area bottomed out and will give way to the phase of gradual recovery, through stability of the financial market, liberal monetary policy and the growth of the securities market. But, before the problems in the euro zone have been fully resolved, there is a possibility of crisis' extension over the major countries of the Union, and that will affect the banking sector and provoke further recession. One of those problems could be strengthening of the euro, and that might reduce the competitiveness of European exports and create a barrier to the business growth. In connection with the fiscal contraction the EU are unable to weaken the exchange rate to promote their products.
Traditionally the risk to the economy of Kazakhstan is China. The second largest manufacturing economy in the world is so heavily dependent on exports that a small deviation of growth of the targets is associated with the slowdown in the global economy. The steady increase in the growth rate for 11 years gave way to decline during seven (7) quarters of 2011-2012. In the fourth quarter of 2012 China for the first time showed a positive trend reaching a GDP growth of 7.9 percent in the annual terms that had been caused by the increase of production, investment in fixed assets and sales level. The country is liberalizing the financial sector in order to accelerate growth. According to the number of economic institutions in 2013 China's GDP increase is expected within 8,1-8,3 percent. The major economic risks in the country are high inflation, the problem of surplus savings, strengthening of the yuan, growing "bubble" of real estate and social tensions related to the gap in population's incomes.
The experts also advise to direct attention to the risks from Russia and Belarus in the framework of the Customs Union. Due to the small share of Belarus in Kazakhstan's foreign trade, the situation in this country does not have a significant impact on our economy. On the contrary, due to raw material export orientation of the economy and a significant share of Russia in foreign trade of Kazakhstan, 17 percent of foreign trade in the eleven months of 2012, external and internal shocks have a similar distribution script in two countries. In particular, within the framework of the Customs Union in 2013 there is a risk to Kazakhstan's economy of further slowing down of mutual trade. During eleven months of 2012 the share of the Customs Union in the total turnover of Kazakhstan decreased from 18.7 percent to 17.7 percent, compared with the corresponding period of 2011. That is more due to lower exports to the Customs Union by 7.3 percent. Decline in exports is based on a number of reasons related to the promotion of Kazakh products to the common market of the Customs Union as well as it coincided with the decline in global demand for commodity exports in 2012. As reported by the EBRD, Kazakhstan is highly vulnerable to the events in Russia. So, there is aggravating value of such large risks of the Russian economy for Kazakhstan as large-scale capital flight, reduction of key macroeconomic indicators as well as currency and devaluation risks.
In general, the risks pointed out could lead to a slowdown in demand in the world's major powers that can cause a drop in the prices of the main export commodities of Kazakhstan. Decline in export revenue will reduce the rate of growth of production in the country. Thus, in 2012, as a result of weak global demand there was a decrease in the prices of basic metals exported, a slight increase in oil prices as well as more expensive wheat, due to the global drought. These and other reasons have led to slower growth of Kazakhstan's GDP to 5 percent in 2012 from 7.5 percent in 2011.
In the review of the Economy and Budget Planning Ministry of Kazakhstan under consideration are the ways of global risks' influence on the economy of Kazakhstan. First, the global slowdown will affect the economy of Kazakhstan via the trade channel. The greatest danger is protracted nature of recovery in Europe and a slowdown in China. China has worsened its position moving from 8th to 12th place in the ranking of a composite index of risk in 2012, which increased the probability of weakening economic activity. Consequences for Kazakhstan could be reduction of exports which will trigger decline in capital inflows in Kazakhstan and worsening balance of payments, and this, in turn, will put pressure on the exchange rate of KZT (tenge). Aimed at supporting KZT (tenge) the National Bank will use the available international reserves and, in the case of protracted recession, tenge devaluation risks are being created.
Second, the impact of the world economy risks is going through the financial channel. In particular, the reduction of the U.S. credit rating and the decline of stock markets will contribute to the loss of value of Kazakh investments abroad. The deteriorating situation in the European Union and China will have an impact through the reduction of foreign direct investment in Kazakhstan. Creation of a single bank union in the EU will assume a single investment promotion policy among the largest banks in Europe, and the European Union might redirect investment in its own economy.
Thus, uncertain world situation in 2013 creates the background for the development of a sound economic policy of Kazakhstan. Despite the high growth rate in 2012 one can observe decrease of dynamics. External factor of growth have become relatively high world oil prices that provided a stable income from exports. Expansion of aggregate domestic demand also contributed to economic growth by increasing the lending activity of the banking sector by 13.6 percent, and the growth of per capita income of the population by 7.5 percent in 2012. Deterrents have been reduced external demand for exports amid the global slowdown and unfavorable natural conditions having a negative impact on agriculture. Stable growth has been provided in the financial market together with a moderate level of inflation at 6 percent. According to the forecasts, in 2013 the GDP growth is to be 6 percent.
At present there is a policy for conservation of oil revenues in the National Fund. These measures improve the prospects for the future, and may also be used to maintain the stability of the national economy. Annual fixed transfer from the National Fund is allocated to reduce the dependence on the cost of world oil prices and investment in strategic projects. Measures are being taken to move away from oil dependence by diversifying the economy within the State Program of forced industrial-innovative development. In fiscal policy we use methods of budget breakdown into the oil and non-oil ones.
Experts D.Sharipov and Ch.Dauletbaev note that most of the world risks affecting the situation in Kazakhstan are associated with the raw material orientation of the economy. Therefore, diversification should be one of the major goals of the economic policy. The experts emphasize that the objectives set out in the new Kazakhstan-2050 Strategy in the long run will allow Kazakhstan to move away from dependence on natural resources, to build a strong self-sufficient state playing important role in the world, to improve the standard of living as well as to prepare the country for the 3rd industrial revolution. The survey also points to the need for constant monitoring and prediction of global processes and the use of economic instruments for rapid response to prevent negative consequences.
