The National Bank’s Policy for 2019, Part V

Since, in the recent years, the National Bank of the Republic of Kazakhstan has been in the center of attention of the Kazakh civil society, the experts and the business, the regulator and its management are now being hold responsible for not only their own actions but also for those of the government and Akorda. In other words, they are de-facto playing the part of the scapegoat for the benefit of the authoritarian system and the super-presidential vertical as a whole.

In light of this, it is important to note that the National Bank has learned how to communicate with the Kazakh press and the expert community at quite a professional level which should be attributed to Daniyar Akishev personally. It is particularly evident if we compare him to his predecessors – Grigory Marchenko who openly scorned the people trying to question him and disregarded the public opinion as well as Kayrat Kelimbetov who professed to be a highly-qualified professional standing above the crowd and, for this reason, never got around to solving the problems of his co-citizens.

Thus, the document called “The Monetary Policy Guidelines for the Republic of Kazakhstan for 2019” is not only and not so much a presentation of the regulators’ intentions and a description of its policy for the current year as an instrument for exerting the propaganda influence on the population and the business.

In this context, we would like to comment on certain statements (stipulations) contained in the document. Not that they fool the Kazakhs but, in our opinion, can have a different interpretation, explanation or consequences than it seems at first glance (text in bold by; English translation from official NBK website).

Maintaining monetary conditions at the level close to a neutral one as well as a limited import of inflation driven by a low inflation background in countries-main trading partners contributed to a gradual deceleration of inflation pressure. Besides, there was a sufficient supply in food markets and growth rates of prices of regulated services were slowing down. Expansion of aggregate demand, as a result of the recovering rise in real income of the population and positive growth rates of the consumer lending, served as a constraining factor for a faster deceleration of inflation”.

This statement allows us to conclude that, since, in 2019, the inflation rate is expected to rise in Russia while Akorda is to continue the policy of vote-buying as part of carrying out the stipulations of Nazarbayev’s October 5, 2018 “socially-oriented” address to the nation, the negative influence of these two factors must increase significantly against last year’s results.

“In 2018, the correlation between the non-shock changes in the exchange rate of the tenge and domestic prices was weakening. The deceleration of inflation was occurring against depreciation of the tenge when over 11 months of 2018 the market exchange rate of the tenge had depreciated by 11.8% (throughout 2017 – by 0.3%). According to the National Bank, the public is getting accustomed to the exchange rate fluctuations in a sense that retail prices of consumer goods are becoming less elastic versus the exchange rate”.

In our opinion, at the very least, it is incorrect to speak about the public getting accustomed to the exchange rate fluctuations. To see that, it is enough to read the posts written by Kazakhs on social media. As for the National Bank’s statement that retail prices of consumer goods are becoming less elastic against the exchange rate, it is nothing but at attempt to fool themselves as well as the citizens. It is simply that the limited consumer demand on the part of the Kazakhs does not allow the market and suppliers to adequately rise prices and tariffs.

However, this is an “achievement” not of the regulator but of Akorda that has not been able to solve the task of increasing the level and quality of life for the majority of the country’s population even though it has given numerous promises to do just that in its strategies and development programs. Also, it is an “achievement” of the citizens and the business that, to this day, remain not very efficient and able to meet competition in the modern world.

“A perception of inflation and inflation expectations of households continued to follow their long-term downward trend. However, in the near term inflation expectations remain unstable and are prone to the detrimental effect of factors, especially on the supply side in certain commodity markets and on the part of the exchange rate. Given that the sample of responders selected for the poll characterizes an average citizen of the country but not professional economists or financiers, assessments are subjective and often overestimated. So, in November 2018 perceived households’ inflation which was calculated on the base of quantitative question (respondents were asked to provide their own inflation measure for the last 12 months) made up 16.8%, which is more than three times larger than the actual inflation”.

In our opinion, the real inflation level in Kazakhstan is significantly higher than what the Statistics Committee of the Ministry of National Economy suggests. The quote above confirms this and explains why most citizens trust the regulator – their real expenditures on purchasing goods and services are growing faster than it is registered by statistics.

There are a great many reasons for that starting with the fact that the list of the consumer goods purchased by low-income buyers is much shorter than the statistics suggests and finishing with the fact that the unorganized market is massively hiding the rise of the prices from the local authorities in order to escape the pressure from the officials.

“However, from August onwards, the situation in foreign markets has been characterized by an escalation of international trade conflicts between the USA and a number of countries, as well as by the US sanctions, that potentially have a constraining effect on the global economic growth. In addition, a persisting policy of increasing the US Fed’s interest rates and, consequently, the growing attractiveness of assets denominated in the US currency give rise to the capital outflow from developing countries and depreciation of their domestic currencies”.

Since the tenge exchange rate is susceptible to the influence of at least three currencies (the US dollar, the euro and the Russian ruble), each of which, due to various reasons, will endure the external pressure in 2019, it is going to find itself in a difficult situation. As a result, the volatility of the tenge exchange rate akin to that of the end of 2018 is to become the norm especially considering the small size of the local currency market and the National Bank’s limited possibilities in terms of stabilizing the national currency exchange rate.

To confirm this, let us quote the following statement of the regulator.

“Consequently, the uncertainty about the further dynamics of inflation factors intensified. Assessments made by the National Bank based on the outcomes of May-June and August-September forecast rounds demonstrate that pro-inflationary risks are increasing on the 1-2 year horizon. Hence, in October the National Bank raised the base rate to 9.25%”.

We would like to conclude this article with the National Bank’s and Daniyar Akishev’s involuntary admission of their impotence and inability to withstand the external threats, influences and factors. How else can one interpret the following passages of the “Monetary Policy Guidelines - 2019”?

“In the environment of the Kazakh economy’s reliance on raw materials, the existence of the National (Oil) Fund with a considerable part of the state budget spending being financed with transfers from this Fund, the monetary policy is influenced by the implemented fiscal policy and the status of the balance of payments.

There are two important channels that determine the influence of the fiscal policy. The first implies a gradual change in accents and prevalence of the social focus in the budget spending (regular indexation of retirement benefits and social security benefits, one-off revisions of approaches to the setting of the base retirement benefit (the 1.5 time increase in minimum wage, raising wages of employees working for the state-owned companies by 35% on average, introduction of additional social security benefits that are coming from January 1, 2019).

The second channel of influence is predicated by a significant state budget deficit. An active fiscal policy encouraging the economic growth is one of the key factors maintaining high liquidity of the banking sector. Along with that, the fiscal rule with a fixed amount of a guaranteed transfer obtains a potentially pro-cyclical nature, especially in the environment of favorable oil prices, thus limiting the capacities of the monetary and fiscal policies to manage macroeconomic risks during a phase of falling oil prices. As a consequence, an expansion of aggregate demand intensifies the risks of acceleration (or less-than-prompt deceleration) of inflation and non-achievement of inflation target.

External shocks and changes in capital flows continue to establish an unsteady nature of the balance of payments and, as a consequence, have an impact on the formation of the exchange rate of the domestic currency in nominal and real terms. From 2016, the trend of a steady reduction in the current account deficit had been observed; however, its dynamics are determined by the recovering prices of key export commodities, the growing volumes of oil and gas condensate production, and by stable demand on the part of trading partner countries. Improvement of the current account is constrained by the increased imports of goods required to implement infrastructure projects in the oil and gas sector as well as by the growing payouts of returns to foreign direct investors. The outstripping expansion in the payouts, as compared to the growth in exports, even in a favorable external environment, may potentially put pressure on the current account towards its deficit and, other things being equal, determines a more contractionary monetary policy stance”.

A weak impact of the bank lending channel is related to the fact that the central bank has a limited influence on the factors that determine the demand for credits in the economy. The demand side is characterized by a low quality of borrowers, insufficient awareness of a business community about lending as an option of the project financing. In the retail segment, the income of the population is in a sluggish growth zone; this, coupled with the scarcity of a collateral, reduces creditworthiness of the population. Own funds still represent the main source of enterprise financing and investments. In this view, the increase of lending has a weak influence on economic activity.

On the loan supply side, constraining factors include unsteady funding, reliance on resources of quasi-government entities, low capitalization of banks, lack of proper credit risk assessments, related-party lending. These factors do not enable banks to respond adequately to the changing monetary conditions. At present, the functioning of the credit channel is also distorted as a result of lending of government resources to the real sector of the economy at non-market rates”.

What else is there to say?

 More on the subject in the coming articles 


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