Kazakhstan macro: looking for opportunities in 2022
According to Kazakhstan’s Bureau of National Statistics, the nation’s economy grew by 4.0% in 2021. The 2021 figure looked reasonably good after the 2.5% contraction in 2020, especially due to the fact that the pandemic started to influence the Kazakh economy several months later than in Russia and many other countries. The start of 2022 looked encouraging as well, as the so-called "short-term indicator", which covers nearly 70% of the country’s economic activity, grew by 5.5% y-o-y in 2M22. Industrial output was up by 4.7% y-o-y over the same period, and construction, transportation and storage, agriculture, trade (including auto repairs), IT and communications were up by 7.6%, 10.4%, 1.6%, 6.1% and 5.1% y-o-y, respectively. Inflation, however, accelerated to 12.0% in March.
The Kazakh economy is generally a twin-deficit one, implying a rather strong dependence on capital inflows. The country’s current account was positive only when the oil price was above $100/bbl or close to this level. Repatriation of profits by foreign investors and the high transportation costs of Kazakhstan’s exports are the main reasons for that. The EU is the most important destination of the country’s exports, while Russia accounts for nearly 42.0% of its total imports. Meanwhile, as oil prices are likely to remain high in 2022, Kazakhstan’s current account may again turn positive this year.
As Russia’s share in the country’s foreign trade turnover is the highest, some dependence between the ruble and the tenge appears natural. However, since there are lots of differences between the two countries, the ruble-tenge exchange rate is far from remaining stable. If more severe shocks are ahead for the Russian economy, such as a complete disconnection of the country’s banks from SWIFT or whatever measures may be invented, the KZT may strongly appreciate against the ruble, but if Russia absorbs such shocks, then the RUB/KZT will approach some kind of equilibrium level over time.
The sovereign debt market of the Republic of Kazakhstan may be divided into two parts: external and domestic. Traditionally, local authorities preferred to borrow money abroad in the most traditional method for the EM space – via issuance of Eurobonds under British law, denominated in US dollars and euros. There are four tranches of Kazakh paper in each currency. Liquidity is mostly concentrated in USD-denominated bonds ($6.5 bln outstanding), and paper in EUR is less liquid (the amount in circulation is only EUR2.2 bln). The risk premium measured by the CDS increased moderately in early 2022 (by about 20 bps) on the back of internal political tensions and has skyrocketed since the start of the Russian “special military operation” in Ukraine. Currently it trades close to 200 bps vs about 65 bps at the end of the last year. In our view, the underlying credit risk is much more moderate.
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