Kazakhstan Macro: Inflation to Decelerate Slowly As Economy Remains Overheated
Despite various challenges, the Kazakh economy has been performing well in recent years, and 2025 is expected to be another good year as economic growth is reportedly accelerating. Growth remains uneven, but strengthening of the services sector is an important trait of the Kazakh economy. The country’s importance as a transit hub on the trade routes from East to West and from North to South becomes more evident. The accelerating development of the services sector creates new jobs and pushes incomes higher. The Kazakh economic growth in recent years was not driven by growing leverage either on the government or corporate side. Rapidly growing household debt was the only exemption, but still it remains low as a percentage of GDP.
Compared to many other countries, the nation’s economy is not too leveraged and despite high inflation and interest rates, debt servicing is not yet a problem for the Kazakh economy. The total foreign debt currently stands at slightly over 58% of GDP. The domestic debt-to-GDP is much lower. Household debt, for instance, stands at slightly over 18% of GDP. However costs of servicing this debt are rising, as a combination of a relatively low debt-to-GDP ratio and interest rates of about 20% would look equivalent to over 70% debt-to-GDP ratio with interest rates, say, at about 5%.
Hence the pressure on household incomes and the need to bring down inflation and interest rates. However, disinflation may be slow due to an abnormally strong ruble and the passthrough effect as about one-third of Kazakh imports comes from Russia. One of the reasons for the ruble’s abnormal appreciation against the tenge and major currencies was the fundamental shift in Russia’s foreign trade settlements as the bulk of these transactions is now settled in local currencies, including rubles. As Russia enjoys current account and trade surpluses, the demand for rubles from the buyers of Russian products is greater than the demand for other currencies from the Russian importers. As this development creates some problems for the Russian economy, the issue will be somehow addressed sooner or later. Until a solution is found, the RUB will remain too strong against the KZT, and inflationary pressure from Russia’s imports will persist - chances for rapid disinflation and aggressive rate cuts in Kazakhstan have decreased.
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