The Weak Current Account Is Offset By Large Net FDI Inflows
Despite the significant current account deficit (-1.1% of GDP in the third quarter and -3.9% of GDP in the first 9M), the net inflow in financial account, due to significant foreign direct investment, has a positive impact on the overall balance of payments.
The deficit of the current account, according to preliminary estimate of the National Bank of Kazakhstan amounted to $5.2 billion. The deficit in 9M of 2016 deepened compared to estimate for 9M in 2015 by 22%.
The negative balance of the current account worsened due to reduction in trade surplus, which amounted to $7.02 billion (-31% yoy). At the same time, exports of goods decreased to $26.8 billion (-26% yoy) and imports to $19.8 billion (-24% yoy). Given that energy products take the significant weight in the export structure of the country (67.2%), the change in the price of oil during the period from $55.4 to $42.1 (-24%) is the main cause of the current account deficit worsening.
The deficit of the balance of services showed a modest improvement (7% yoy) to $3.4 billion due to the reduction in the imports of international services due to its high costs. Balance of primary income traditionally showed a negative $8.4 billion, which is an improvement of 11% compared to the same period in 2015. This is, mainly, caused by the improvement in net income on direct investments by 5% to negative $6.7 billion (resident income is down due to reduction of assets abroad, non-residents’ income is reduced by lower dividends in Kazakhstan enterprises). Deficit of secondary income balance narrowed significantly to $353.6 million from $1.4 billion in 2015, due to lower transfer operations (public sector transfers and individuals’ transfers).
Also, it should be noted that compared to 2Q of 2016, the deficit shrank in absolute terms to $938.2 million, mainly due to the increase in exports whilst oil prices rose in 3Q 2016 to $45.8/bbl.
The net inflow in financial account for the current year, according to preliminary estimate, amounted to $7.5 billion, which is a slight increase compared to the same period in 2015 (+2% yoy). At the same time, there is a record high inflow of direct investment, which increased almost threefold and reached $14.6 billion (in the same period last year, the inflow amounted to $5 billion). According to data in 1H of 2016, gross inflow of FDI was concentrated in conduction of exploration activities, as well as, crude oil and gas mining. It amounted to 56% of the total FDI inflows in the country.
The net outflow of portfolio investment of $2.7 billion is reported for the first 9M of 2016, versus the net inflow of $7.3 billion in 2015 for the same period. In the medium and long-term investments net borrowing increased from $ 1.6 billion to $ 2.7 billion (+64% yoy).
Reserve assets of the NBK increased by $0.2 billion, there was observed a decrease of $0.8 billion in the same period of 2015.
Thus, despite significant current account deficit (-1.1% of GDP in the third quarter and -3.9% of GDP in the first 9M), the net inflow in financial account, due to significant foreign direct investment, has a positive impact on the overall balance of payments. During the year, we expect the current account deficit to be at the level of -4.1% of GDP, reflecting the worse estimate then previous year’s deficit of -3% of GDP. According to our expectations, the process of improvement of the current account balance will be slow, primarily, due to the slow recovery in oil prices (70% of exports), while the potential for further reduction in imports seems to be limited by the necessity to use the import of investment goods, consumer sphere reduction still continues due to falling income of the population, for example, real wages fell by 5.1% yoy in January-September 2016.
Elmira Arnabekova, Assan Kurmanbekov