Kazakhstan: Inflation Report - First Quarter 2017

Transcription

1. Inflation Report The First Quarter of 2017 Almaty , Kazakhstan
2. 2 The Inflation Report is a quarterly publication of the National Bank which contains the analysis of key macroeconomic indicators affecting inflation as well as the forecast of macroeconomic parameters in the short- and medium-term horizon . The Report is published in an electronic form on the official Internet-resouce of the National Bank in the Kazakh, Russian and English languages. The forecast of macroeconomic indicators was prepared on the basis of statistical information as at 18.05.2017. Inflation Report | The First Quarter of 2017
3. CONTENTS CONTENTS Summary ....................................................................................................................................................... I. Macroeconomic Environment and the Financial Sector Development ................................................ 1. External Macroeconomic Environment .................................................................................................. 1.1 Situation in the Global Commodity Markets.......................................................................................... 1.1.1 Oil Market ........................................................................................................................................... 1.1.2 Non-Ferrous Metals Market................................................................................................................ 1.1.3 Food Market ....................................................................................................................................... 1.2 Economic Situation in the USA and Fed’s Rate ...................................................................................... 1.3 Economic Situation in Countries-Kazakhstan’s trading partners………................................................... 1.3.1 China .................................................................................................................................................. 1.3.2 European Union ................................................................................................................................. 1.3.3 Russia ................................................................................................................................................. 1.3.4 Aggergate External GDP and Inflation ................................................................................................ 2. Domestic Economy ................................................................................................................................. 2.1 Monetary Policy and the Financial Sector Development…………….......................................................... 2.1.1 Money Market and the NBRK’s Operations......................................................................................... 2.1.2 Foreign Exchange Market and the NBRK’s Foreign Currency Operations .......................................... 2.1.3 Deposit Market ................................................................................................................................... 2.1.4 Credit Market ..................................................................................................................................... 2.1.5 Monetary Aggregates.......................................................................................................................... 2.2 Prices and Inflationary Processes .......................................................................................................... 2.2.1 Consumer Price Index …….…………………………………………………………………………….………………………………. 2.2.2 Prices in the Consumer Sector……….……….…………………………………………………………………………….……….. 2.2.3 Prices in the Real and External Sectors….……………………………………………………………………………………….. 2.2.4 Inflationary Expectations……………………………………………………………..……………………………………..….……… 2.3 Real Sector Development ...................................................................................................................... 2.3.1 Domestic Demand ............................................................................................................................. 2.3.2 Domestic Production …....................................................................................................................... 2.3.3 Labor Market and Unemployment..................................................................................................... 2.4 Fiscal Policy ………................................................................................................................................... 2.5 Balance of Payments.............................................................................................................................. II. Forecast of Key Macroeconomic Indicators and Further Monetary Policy Guidelines …………………… 1. Key Assumptions for External Forecast Parameters ………………............................................................... 2. Forecast under the Baseline Scenario….………………………………………………………………………………….………….. 3. Risks in the Medium Term ……………......................................................................................................... 4 6 6 6 6 7 8 9 10 10 12 13 14 16 16 16 17 17 18 19 20 20 20 20 22 22 22 25 27 28 29 34 34 35 37 Basic Terms and Definitions ......................................................................................................................... 39 List of Key Abbreviations ………………………………………………………………………………………………………….………....... 42 Inflation Report | The First Quarter of 2017 3
4. SUMMARY SUMMARY During the first quarter of 2017 , the annual inflation was maintained within the National Bank’s target band of 6-8%, having decelerated to 7.7% in March. Within the structure of inflation, the contribution of non-food inflation and the paid services inflation decreased while the contribution of food inflation remained at the level of the previous quarter. A further recovery of oil prices supported by the meeting of commitments to limit the oil production taken by exporting countries as well as the increased metal quotations assured appreciation of the tenge. This contributed to the behavior of prices favoring their deceleration, despite some increase in prices of imported products. Prices in foreign food market demonstrated a feeble decline in the first quarter of 2017. However, the decline in wheat prices amidst high competition in the global markets as well as sufficient reserves in the domestic market had a downward pressure on processed grain products in terms of their price growth within the structure of the food component of inflation. The situation in countries – main trading partners demonstrates a weak recovery of the external demand, and the inflationary background remains neutral because of a dramatic deceleration of inflation in Russia as well as its acceleration in the EU countries. The behavior of macroeconomic parameters indicates the outlining signs of the economy’s revival. The GDP growth in 2016 accounted for 1%, being promoted by a favorable external environment, gradual recovery of the business activity and improved performance in the consumer demand. In the first quarter of 2017, the recovery trend continued. So, the growth rates of the shortterm economic indicator were increasing. The industry as well as construction, agriculture, trade, and transport sectors became the main drivers for the growth. The household consumer spending was supported by recovering positive rates of growth in the real income of the population because of decelerating inflation rates and increasing rates of growth in the social benefit payments. So, the share of non-food products in the structure of retail sales increased; this is an evidence of a gradual recovery of the consumer demand and realization of the effect of deferred demand. Preparation for the EXPO-2017 international exhibition has a positive effect on the employment and consumer demand while representing a short-term effect. In general, due to the absence of positive pattern in the production sector, a negative output gap is gradually decreasing, thus decreasing deflationary impact of the real sector of the economy. At the same time, prices in the real sector of the economy are influenced by the increased cost of interim goods and industrial services constraining the price growth rates for certain categories of consumer goods. In the first quarter of 2017, the money market was still characterized by the structural liquidity surplus. As a consequence, the TONIA rate had been between the base rate and the lower boundary of the interest rate band. Excess liquidity was withdrawn by the National Bank primarily via its short-term notes. The deposit market still shows the trend of the shift in foreign currency preferences of the population towards the domestic currency. In the environment of persisting excess liquidity, interest rates were decreasing. The credit market showed a minor growth rate of lending in the domestic currency and the decreasing interest rates. In February 2017, the National Bank made the decision to lower the base rate from 12% to 11% while preserving the interest rate band width of +/-1%, and in April 2017 the base rate was maintained at that level. On June 5, 2017 the National Bank lowered the base rate to 10.5%. Due to consolidation of stable oil prices in global markets, parameters in the baseline scenario were maintained at USD 50 per barrel. Inflation Report | The First Quarter of 2017 4
5. SUMMARY The real GDP forecast in 2017 is expected to be at 2 .8%, and in 2018 – 3.6%. The reason for the increase in forecasts for the economic growth was a more rapid recovery of the economic activity than it was expected. A further recovery of the domestic consumption, growth in fixed capital investments, and increased volumes of extraction of mineral resources will become the main drivers for the economic growth. In the long term, the potential GDP is still anticipated to be at 3-4%. According to the National Bank’s estimates, migration of the GDP gap to a weakly positive zone is expected in the first quarter of 2018. Under the baseline scenario, in 2017 the inflation will be within its target band of 6-8% followed by its deceleration in the medium-term. However, in the short-term, the inflation may increase slightly because of the low base of the second half of 2016. A favorable external inflationary background, recovery of the real effective exchange rate to its equilibrium, and stable situation in the global food markets will be conductive to deceleration of inflation. Inflation Report | The First Quarter of 2017 5
6. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT I. MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT 1. EXTERNAL MACROECONOMIC ENVIRONMENT 1.1 Situation in the Global Commodity Markets 1.1.1 Oil Market In the first quarter of 2017, the average Figure 1. Price of Oil (Brent), USD per Barrel, price of oil (Brent) had been at USD 53.7 per Monthly Average barrel, thus demonstrating the growth of 9.1% 70 as compared to the previous quarter and of 59.3% as compared to the corresponding 60 quarter of 2016 (Figure 1). 50 Intra-quarterly fluctuations of market quotations of oil were in line with the price 40 level which outlined in December 2016. A continuing significant growth in prices of energy 30 resources was secured by a sizable reduction of 20 surplus in the global oil market. According to 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 the U.S. Energy Information Administration1, a 2015 2016 2017 surplus between the oil production and Source: U.S. Energy Information Administration (EIA) consumption in the world amounted to 0.32 million barrels a day, which is by 58% less than Figure 2. Demand and Supply in the Global Oil in the previous quarter and by 87% less than Market, Million Barrels a Day the surplus in the first quarter of 2016. Thus, in Surplus/deficit (right axis) the first quarter of 2017 the global oil market Supply in the oil market Demand in the oil market 99 approached a balance between the demand 6 98 5 and supply (Figure 2). Both the global 97 production and consumption of energy 4 96 3 resources decreased. 95 Annual rates of growth in oil consumption 2 94 globally showed the weakest numbers since the 1 93 end of 2015, being the consequence of the 0 92 reduced oil consumption in Japan and in the US -1 91 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q as well as of the reduction in demand in annual 2015 2016 2017 terms in the European countries. At the same time, the reduction in oil consumption volumes Source: U.S. Energy Information Administration (EIA) in annual terms in India as the largest world net importer of energy resources had the strongest impact on the slowdown in the growth rates of the demand for oil (Figure 3). Reduction in the oil production globally resulted both from the continuing drop in the supply on the part of countries outside of OPEC and a significant decline in the extraction volumes in OPEC countries (Figure 4). The main factor for reduction in the oil production in the countries outside of OPEC in 1 Published on April 11, 2017 in the monthly “Short-Term Energy Outlook” Inflation Report | The First Quarter of 2017 6
7. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT the first quarter of 2017 had been a considerable slowdown in the annual extraction volume in Russia in line with commitments made in November as part of the Algerian Agreement on Reduction of Total Oil Production from January 1, 2017. A continuing drop of oil production in China in annual terms served as an additional factor. In the first quarter of 2017, the growth rates of oil production volumes in OPEC countries slowed to 0.7% as compared to the corresponding quarter of the previous year (in the fourth quarter of 2016 – 3.7%). Reduction in the volumes of energy production in OPEC countries also occurred due to the Algerian Agreement. Alongside with that, a positive contribution to the oil production was still being made by Libya which was excluded from the Agreement together with Iraq due to a difficult military and political situation. A future demand and supply pattern in the global oil market that determines market quotations of energy resources will be connected with actions taken by countries within the framework of the Algerian Agreement as well as with the situation in the US shale oil market where the production volumes are recovering amidst the growth in the world oil prices. 1.1.2 Non-Ferrous Metals Market In the first quarter of 2017, the metals market demonstrated the growth in market quotations which was outpacing the expectations of market participants. The mean arithmetic index of prices of copper, aluminum, zinc and lead in March 2017 versus December 2016 increased by 19% (Figure 5), which was caused by the increase in prices of all metals under review. The growth in prices of copper was associated with the decreased supply on the part of Chile and was also supported by signs of stability in the Chinese economy. Lead prices increased given the growth in raw material imports on the part of China as well as reduction in the stock reserves of this Figure 3. Global Oil Consumption and Contribution by Countries, YoY India China Europe Other countries Japan Russia US Consumption growth rate % 2,8 2,3 1,8 1,3 0,8 0,3 -0,2 -0,7 2Q 3Q 4Q 1Q 2Q 2015 3Q 4Q 1Q 2016 2017 Source: U.S. Energy Information Administration (EIA) Figure 4. Global Oil Production, YoY 4 Contribution by OPEC countries Contribution by countries outside of OPEC Growth rate of global oil production % 3 2 1 0 -1 -2 2Q 3Q 4Q 1Q 2015 2Q 3Q 4Q 2016 1Q 2017 Source: U.S. Energy Information Administration (EIA) Figure 5. Price Index of Copper, Aluminum, Zinc and Lead (January 2015=100 %) % 140 Weighted average Copper Lead Aluminum Zinc 130 120 110 100 90 80 70 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 2015 2016 2017 Source: NBRK’s calculations based on data from Bloomberg Inflation Report | The First Quarter of 2017 7
8. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT metal. Zinc quotations demonstrated growth given the reduced production in the South Africa and reduced capacities in Peru. Alongside with that, the growth in zinc prices was associated with the increased investments and increased profitability in the sector. From December 2016 to March 2017, the price of aluminum increased because of the reduced production of this metal in China. 1.1.3 Food Market In March 2017 as compared to December Figure 6. FAO Index (2002-2014 =100 pp) 2016, the FAO Index decreased insignificantly FAO Meat Cereals by 0.4%. Prices of sugar, dairy products, and Dairy products Vegetable oils Sugar vegetable oils were declining. Prices of meat pp 315 and cereals demonstrated a feeble growth 300 285 (Figure 6). 270 255 Sugar prices are declining under the impact 240 225 of a persistently low import demand as well as 210 195 of the market expectations about a future 180 165 increase in supplies from Brazil. 150 135 Prices of vegetable oils were declining 120 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 throughout the first quarter of 2017 because of 2015 2016 2017 the declining prices of palm oil and soya oil. The reason for declining vegetable oil prices is Source: UN FAO mainly the reduced import demand, the increased acreage and a record-high crop of oilseeds as well as an anticipated seasonal growth in supply. Given an anticipated peak seasonal growth in the production volume of dairy products in the North America and Europe, prices of these foodstuffs show a slight decline. Along with that, due to the excessive demand over supply among dairy products, prices of butter are growing. Prices of meat products are increasing being influenced by the growth in prices of lamb and pork. If lamb increased in terms of price because of the seasonal demand, the price of pork increased because of the growth in the domestic demand in European countries and the increase in supplies to the Republic of Korea and China. In the first quarter of 2017 as compared to the previous quarter, prices of cereals slightly Inflation Report | The First Quarter of 2017 8
9. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT increased. Among prices of cereals, the major price growth occurred in the price of rice the demand for which increased in the Middle Eastern countries. At the same time, wheat prices showed a minor decline under the pressure of sharpened competition among exporters and because of supply which is maintained at a sufficient level. 1.2 Economic Situation in the USA and the Fed’s Rate According to the data of initial assessment by the US Bureau of Economic Analysis, the GDP Figure 7. US Economic Performance growth in the US based on performance in the GDP growth, YoY Inflation, YoY Unemployment first quarter of 2017 slowed to 1.9% (Figure 7), % 6,0 thus appearing to be below the market expectations. So, experts interviewed by the 5,0 Bloomberg anticipated the growth of 2.1% (the 4,0 growth of 1.2% versus the previous quarter in 3,0 annual terms). Earlier, the Bureau of Economic 2,0 Analysis revised the US economy’s growth in 1,0 the fourth quarter of 2016 from 1.9% to 2%. The decreasing rates of real GDP growth in 0,0 1Q 2Q 3Q 4Q 1Q the first quarter of 2017 caused the slowdown 2016 2017 in the growth of personal spending on final Sources: U.S. Bureau of Economic Analysis (BEA), U.S. consumption (the energy consumption Bureau of Labor Statistics (BLS) decreased due to the warm weather) as well as the decrease in the government spending on defense. The growth in private investments into residential construction and extraction of mineral resources had a positive impact on the economic growth. In the first quarter of 2017, the annual inflation was generally around the 2% target and was determined by the behavior of energy prices (Figure 7). So, in February 2017 the annual inflation accelerated to 2.1% as compared to 1.6% in December 2016 given the increased prices of energy commodities and slowed to 1.8% in March 2017 as their prices were going down. The increase in prices of rental housing and transportation services served as additional factors for acceleration of inflation. According to the data from the U.S. Bureau of Labor Statistics, in March 2017 the unemployment rate in the US decreased to 4.5% as compared to 4.7% in December 2016; Inflation Report | The First Quarter of 2017 9
10. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT this fact confirms that the US economy is approaching its full employment. The drop in the employment in the retail trade amidst slowing consumption can be referred to negative factors and a steady growth of employment in the sector which supports extraction of mineral resources (oil, in the first instance) can be referred to positive factors. The growth in hourly salaries and wages in March 2017 accounted for 2.7% as compared to March 2016, which is way above the inflation rate and reflects the shortage of labor force in the labor market. Therefore, such factors as inflation being at Figure 8. US Rates the levels close to its targets, steady Policy rate band % deceleration of unemployment, and moderate 1,2 economic growth were the reasons to increase 1 the US Fed’s policy rate band by 25 basis points 0,8 in March 2017 to 0.75%-1% (Figure 8). According to forecasts made by members of the 0,6 Federal Open Market Committee, the median of 0,4 the policy rate made up 1.4% by the end of 0,2 2017 remaining unchanged as compared to 0 forecasts made in December 2016; this came as 1 2 3 4 5 6 7 a surprise to market participants who expected 2016 more rapid rates of normalization of the Sources: Reuters monetary policy. Effective federal funds rate 8 9 10 11 12 1 2 2017 1.3 Economic Situation in Countries – Kazakhstan’s Trading Partners 1.3.1 China In the first quarter of 2017, the Chinese Figure 9. China’s Real GDP Growth, YoY economy accelerated by 0.1 pp as compared to % the previous quarter, with its growth 7,0 accounting for 6.9% in annual terms (Figure 9). Government investments into the infrastructure 6,9 and active lending for residential construction 6,8 as well as an outlining growth in private investments amidst an overall recovery of the 6,7 economic growth still represent the main 6,6 sources of the GDP growth. Negative factors constraining acceleration of the economic 6,5 1Q 2Q 3Q 4Q 1Q growth in the country include redundant 2016 2017 capacities in many sectors of the economy, and high degree of debt of the Chinese enterprises. Source: Bloomberg Given the Government’s declaration to decrease the target of GDP growth to 6.5% in 2017 as well as some tightening of the Inflation Report | The First Quarter of 2017 3 10
11. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT monetary policy at the beginning of the year, the Chinese economy may slow down because of cooled mortgage lending and the government stimulus package. A potential protectionist policy in the US as well as deceleration of the EU’s economy in connection with Brexit still represent external risk factors. The annual inflation, after its acceleration to 2.5% in January 2017, decreased to 0.9% in March (Figure 10). This fact is explained by a high base of the previous year when prices of vegetables and meat increased dramatically because of unfavorable weather conditions. At the same time, seven months in a row prices in the industry show a steady growth in annual terms (in March – 7.6%) reflecting expansion in the domestic demand for raw materials. This fact, alongside with a steady increase in prices of services speaks for a temporary nature of decelerating inflation and its future comeback to the rates of the previous year. In the first quarter of 2017, the People’s Bank of China pursued a generally neutral monetary policy while retaining its policy rate at the existing level (Figure 11). Nonetheless, with a view to curb the growth of arrears of the Chinese enterprises, to restrict an excessive growth in housing prices, mitigate systemic risks in the banking system and to ensure sustainability of the Yuan exchange rate against world major currencies, the People’s Bank of China twice raised short-term and mediumterm money market interest rates by 0.1 pp. During the first quarter of 2017, the exchange rate of the Yuan against the US Dollar was demonstrating a divergent pattern. So, in January-February, in the environment of tightened measures of control over the capital outflow as well as the increased borrowing rates in the money market, the Yuan was appreciating and in February it made up CNY 6.8698/1USD on average. However, given that the Fed’s policy rate was raised in March, the Yuan depreciated to CNY 6.8935/1USD (Figure 12). Figure 10. Inflation in China, YoY % 3,0 2,5 2,0 1,5 1,0 0,5 1 2 3 4 5 6 7 8 9 10 11 12 1 2 2016 3 2017 Source: National Bureau of Statistics of China Figure 11. Interest Rates in China Interbank rate % 5 4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 1 2 3 4 5 6 7 PBC's policy rate 8 9 10 11 12 1 2016 2 3 2017 Source: Reuters Figure 12. USD/CNY Exchange Rate, a Monthly Average 7,00 CNY/USD 6,90 6,80 6,70 6,60 6,50 6,40 1 2 3 4 5 6 7 2016 8 9 10 11 12 1 2 2017 Source: Reuters Inflation Report | The First Quarter of 2017 3 11
12. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT 1.3.2 European Union According to an initial estimate of the Eurostat, the annual growth in the European Union’s GDP in the first quarter of 2017 accounted for 2.0% (Figure 13). Such insignificant growth was related to a moderate consumption and fixed capital investments supported by ECB’s stimulative measures and a steadily decreasing unemployment as well as by recovery of global trade and a relatively weak Euro. Negative factors may include a potential decrease in consumption against a dramatic boost of inflation as well as remaining risks in the banking sector because of a significant percentage of NPLs within bank assets in some countries (Cyprus, Greece, Italy, and Ireland). Dynamics of inflation in the EU in the first quarter of 2017 was mainly determined by the behavior of prices of energy commodities. So, in February as compared to December 2016, the annual inflation rate increased to 2.0%, and in March it dropped to 1.5% because of the slowing growth in prices of gasoline and recreation services (Figure 14). Nonetheless, in future the pressure on the cost-push inflation will be made by the recovery of prices of raw commodities in 2016, and the pressure on the demand-pull inflation will be made by stimulative measures of the ECB’s monetary policy and the drop in unemployment. Given that the inflation boost was mainly associated with a volatile energy component, the ECB left the key monetary policy parameters unchanged (Figure 15). The regulator confirmed that the asset purchase program will be extended (EUR 60 bln. every month) till the end of 2017, with a possibility of its prolongation in case if a sustainable inflation trend is not in line with the inflation goals. Figure 13. EU’s Real GDP Growth Rate, YoY % 2,1 2,0 1,9 1,8 1,7 1,6 1Q 2Q 3Q 4Q 1Q 2016 2017 Source: Eurostat Figure 14. Inflation in the EU, YoY % 2,0 1,8 1,6 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0,0 -0,2 -0,4 1 2 3 4 5 6 7 8 9 10 11 12 1 2016 2 3 2017 Source: Eurostat Figure 15. ECB’s Rates Refinancing rate Loan rate Deposit rate % 0,4 0,3 0,2 0,1 0 -0,1 -0,2 -0,3 -0,4 -0,5 1 2 3 4 5 6 7 2016 8 9 10 11 12 1 2 2017 Source: Reuters During the reviewed period, the Euro appreciated from USD 1.0537/1EUR on average in December 2016 to USD 1.0686/1EUR on Inflation Report | The First Quarter of 2017 3 12
13. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT average in March 2017 (Figure 16). Such Figure 16. USD/Euro Rate, a Monthly Average USD/EUR appreciation is associated with depreciation of the US Dollar given the US Fed’s posturing 1,14 about retention of the pace of its policy rate 1,12 increase till the end of 2017 and the appearing uncertainty of the market regarding the support 1,10 of the intended US President’s policy by the US Congress. Nonetheless, the risks for a possible 1,08 depreciation of the Euro are the political 1,06 uncertainty related to implementation of Britain’s exit from the EU, outcomes of 1,04 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 elections in Germany in September 2017 as well 2016 2017 as the US policy in the area of trade. Source: Reuters 1.3.3 Russia According to the initial assessment by Rosstat, in the first quarter of 2017 the growth of the Russian economy continued a second quarter in a row and accounted for 0.5% versus 0.3% in the fourth quarter of 2016 in annual terms (Figure 17). The growing extraction of mineral resources; production and distribution of electricity, gas and water; agriculture; transport as well as a slowing decline in retail sales turnover served as positive factors. Negative factors include the increasing downturn in the construction sector and a temporary drop in the manufacturing industry. A gradual recovery in the consumer and investment demand serve as sources for the GDP growth whereas an unfavorable situation in the commodity markets may curb such growth in future. During the first quarter of 2017, the annual inflation in Russia decreased from 5.4% in December 2016 to 4.3% in March 2017 (Figure 18). Such dramatic deceleration of annual inflation was driven by appreciation of the ruble, moderate consumer demand as well as significant mitigation of inflationary expectations. In order to support the propensity to save as well as to entrench inflation at the target level of 4% in the short and medium term, the Bank of Russia continued to pursue a moderately tight monetary policy but due to a more rapid than expected deceleration of Figure 17. Russia’s Real GDP Growth, YoY 0,6 0,5 0,4 0,3 0,2 0,1 0 -0,1 -0,2 -0,3 -0,4 -0,5 -0,6 % 1Q 2Q 3Q 4Q 2016 1Q 2017 Source: Rosstat Figure 18. Inflation in Russia, YoY % 10 9,5 9 8,5 8 7,5 7 6,5 6 5,5 5 4,5 4 3,5 1 2 3 4 5 6 7 2016 8 9 10 11 12 1 2 2017 Source: Reuters Inflation Report | The First Quarter of 2017 3 13
14. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT inflation it lowered its key rate from 10% to 9.75% in March (Figure 19). Nonetheless, expiration of the pass-through effect of the ruble appreciation, a gradual recovery of real wages and exposure to external shocks represent the risk factors for the growth of inflation in future. The exchange rate of the Russian ruble to the US Dollar in March 2017 appreciated versus December 2016 by 6.6% (Figure 20); this was promoted by the growing supply of foreign exchange in connection with the recovery of oil prices, continuing attractiveness of Russian assets against high interest rates and by the reduced country risk premium. Purchase of foreign exchange by the Russian Ministry of Finance that was made as part of the transitional budget rule as well as actual external debt payments (according to the Bank of Russia’s estimates, up to USD 15.8 bln. in the first quarter of 2017) had not made a significant impact on the exchange rate behavior. The decline in oil price and a corresponding capital outflow represent key risks for depreciation of the ruble. Figure 19. Rates in Russia % CBR's key rate 12,0 RUONIA 11,5 11,0 10,5 10,0 9,5 9,0 1 2 3 4 5 6 7 8 9 10 11 12 1 2016 2 3 2017 Source: Reuters Figure 20. RUB/USD Exchange Rate, a Monthly Average rubles 80 75 70 65 60 55 50 1 2 3 4 5 6 7 2016 8 9 10 11 12 1 2 2017 Source: Reuters 1.3.4 Aggregate External GDP and Inflation Aggregate external GDP which is calculated Figure 21. Weighted External GDP , YoY on the basis of the data about Kazakhstan’s Russia's GDP input EU's GDP input % international trading structure and is China's GDP input Weighted GDP 3,0 characterizing the demand for Kazakhstani 2,5 exports had increased by 11 basis points in the 2,0 reviewed period (Figure 21). Such improvement 1,5 was caused by recovery of Russia’s economic 1,0 growth and an insignificant acceleration of the 0,5 EU’s and China’s GDPs. A sluggish growth of 0,0 aggregate external GDP of main trading partner -0,5 countries reflects a moderate improvement in -1,0 1Q 2Q 3Q 4Q 1Q the external demand in the first quarter of 2016 2017 2017. Aggregate external consumer price index Source: NBRK’s calculations which is calculated based on the share of main Inflation Report | The First Quarter of 2017 3 14
15. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT trading partners in Kazakhstan’s imports Figure 22. External Weighted CPI, YoY demonstrated a decline of 40 basis points China's CPI input Russia's CPI input (Figure 22). Such decline is caused by % EU's CPI input Weighted CPI deceleration of annual inflation in Russia and a 5 temporary deceleration in China. In general, the 4 decline in the indicator reflects a continuing 3 weakening impact of the external inflation on 2 the Kazakh consumer market. 1 0 -1 1Q 2Q 3Q 2016 4Q 1Q 2017 Source: NBRK’s calculations Inflation Report | The First Quarter of 2017 15
16. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT Inflation Report | The First Quarter of 2017 30.03.17 19.03.17 Source: KASE 30.03.17 08.03.17 19.03.17 25.02.17 08.03.17 14.02.17 25.02.17 14.02.17 03.02.17 03.02.17 23.01.17 23.01.17 12.01.17 12.01.17 01.01.17 01.01.17 03.10.16 11.10.16 19.10.16 27.10.16 04.11.16 14.11.16 22.11.16 30.11.16 09.12.16 21.12.16 29.12.16 10.01.17 18.01.17 26.01.17 03.02.17 13.02.17 21.02.17 01.03.17 10.03.17 18.03.17 31.03.17 2. DOMESTIC ECONOMY 2.1 Monetary Policy and the Financial Sector Development 2.1.1 Money Market and Operations of the National Bank of the Republic of Kazakhstan In the first quarter of 2017, there was still a Figure 23. NBRK’s Operations in the Domestic structural surplus of the tenge liquidity in the Market (exposure, KZT bln.) Cross-currency interest rate swap with IFIs money market. In this environment, volumes of Bank loans Cross-currency interest rate swap with banks operations for withdrawal of excess liquidity FX swap on the KASE Direct repo Reverse repo conducted by the National Bank were growing. Deposits Notes The bulk of liquidity in the money market was -4 000 withdrawn via the National Bank’s short-term -3 000 notes with maturities of 7, 28, 91, 182 and 364 -2 000 days. As compared to December 2016, the -1 000 volume of outstanding notes at end-March 0 2017 increased by 27%. The demand for 1 000 overnight deposits of the National Bank was also growing. As part of the measures to support the second-tier banks, in the first * NBRK’s securities buy/sell back auction quarter of 2017 the National Bank provided Source: NBRK short-term loans to banks, including as part of support for the announced bank consolidation Figure 24. Base Rate and TONIA Rate processes (Figure 23). Base rate Standing facility operations for withdrawal of liquidity Given favorable internal and external Standing facility operations for provision of liquidity environment in the economy, during the first TONIA quarter of 2017 the National Bank continued to 14% ease monetary terms and conditions by 13% lowering its base rate. So on February 20, 2017 the base rate was lowered from 12% to 11% 12% while retaining the band of +/-1%. 11% In January-February as well as in mid10% March 2017, there was a minor volatility of money market rates due to a high demand for the tenge liquidity in certain banks. As a result, the TONIA rate had been primarily above the Source: NBRK, KASE lower boundary of the interest rate band. Along Figure 25. Changes in the MMI and the Volume with that, the National Bank’s participation in of Transactions (KZT bln., right axis) the overnight repo market in the first quarter of Repo market Swap market MM Index, % pa 2017 decreased as compared to the previous 15 600 quarter. 14 500 From end-February, after the base rate was 13 lowered, the TONIA rate had been closer to the 12 400 lower boundary of the interest rate band 11 300 10 (Figure 24). 200 During the first quarter of 2017, the Money 98 100 Market Index was fluctuating with the band of 7 0 7.65-11.96%. The weighted average MMI for the first quarter of 2017 made up 10.30% (in the fourth quarter of 2016 – 11.11%). The major 16
17. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT share fell on the repo market (Figure 25). 01.10.16 11.10.16 21.10.16 31.10.16 10.11.16 20.11.16 30.11.16 10.12.16 20.12.16 30.12.16 09.01.17 19.01.17 29.01.17 08.02.17 18.02.17 28.02.17 10.03.17 20.03.17 30.03.17 2.1.2 Foreign Exchange Market and Foreign Exchange Operations of the National Bank of the Republic of Kazakhstan In the first quarter of 2017, the situation in Figure 26. Exchange Rate Behavior and the the foreign exchange market remained stable. Trading Volume in the Foreign Exchange Fluctuations of the exchange rate of the tenge Market USD mln. against the US Dollar were driven not only by Trading volume KZT/USD rate (right scale) world oil prices and the behavior of the Russian 350 345 ruble but also by internal factors, for instance, 300 340 the so-called “tax week” which takes place 250 335 every second month of a quarter and promotes 200 330 appreciation of the tenge. 150 325 During the quarter, the exchange rate of 100 320 the tenge was fluctuating within the range of 50 315 KZT 311.49-334.51 per US Dollar (Figure 26), 0 310 mainly demonstrating the appreciation trend. At the end of the quarter, the stock exchange (market) rate of the tenge against the US Dollar Source: KASE appreciated by 5.9%. Throughout the first quarter of 2017, the Figure 27. NBRK’s Interventions share of the National Bank’s participation in the USD mln. domestic foreign exchange market was equal to 1300 zero (Figure 27). The exchange rate of the tenge 1200 1100 was put into equilibrium impacted by external 1000 900 800 and internal factors. 700 600 In the reviewed period, volumes of on500 400 exchange and off-exchange trades in the 300 200 KZT/USD currency pair decreased slightly by 100 0 5.2% and by 4.6%, respectively. -100 Source: NBRK 2.1.3 Deposit Market A stable situation in the domestic foreign exchange market and persisting attractiveness of deposits in the domestic currency kept having a positive impact on the growth in the volume of the tenge deposits. During the first quarter of 2017, deposits in the domestic currency increased by 7.6% against the 11.3% decrease in foreign currency deposits. As a result, the volume of the tenge deposits exceeded that of foreign currency deposits for the first time after October 2014 and as at endMarch dollarization of deposits accounted for Inflation Report | The First Quarter of 2017 Feb.17 Mar.17 Jan.17 Dec.16 Nov.16 Oct.16 Sep.16 Jul.16 Aug.16 Jun.16 Apr.16 May.16 Mar.16 Feb.16 Jan.16 -200 17
18. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT 49.8%, having decreased from 54,6% in the Figure 28. Volumes and Interest Rates on fourth quarter of 2016 (Figure 28). Deposits in the Tenge and in Foreign Currency Reduction in foreign currency deposits was In foreign currency In the domestic currency caused both by revaluation as a result of KZT bln. Weight. av. % on KZT deposits (right axis) % Weight. av. % on FX deposits (right axis) appreciation of the tenge (by 5.9% on the year20000 30 to-date basis) and by a physical outflow (6.1%). 25 During the first quarter, foreign currency 16000 20 deposits of corporate entities decreased by 12000 15 12.2% against the 8.7% increase in the tenge 8000 10 deposits, thus resulting in the decreased share 4000 of foreign currency deposits of corporate 5 entities from 49% in December 2016 to 43.6% in 0 0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 March 2017. The foreign currency structure of 2016 2017 retail deposits also showed the decreased dollarization of deposits – from 62% in Source: NBRK December 2016 to 58% in March of this year as a result of the 10.3% drop in foreign currency deposits and the 5.6% increase in the tenge deposits. The weighted average interest rate on deposits attracted in the domestic currency decreased from 10.6% in December 2016 to 9.7%, and on foreign currency deposits – from 2.2% to 1.9%. 2.1.4 Credit Market In the first quarter of 2017, the credit market showed the decrease in lending Figure 29. Volumes and Rates on Loans volumes associated with seasonal factors at the KZT bln. Credits volume (at end-period) beginning of the year. Weighted average % on provided loans (right axis) Over the quarter, the lending volume had decreased by 1.6% (Figure 29). The decrease in 12 000 lending volumes was caused by the decrease in credits to corporate entities (by 2.3%), while retail lending remained unchanged. 10 000 However, in the first quarter of 2017, new loans exceeded those provided in the corresponding period of 2016 by 3.6%. 8 000 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 As per the currency structure, credits in the 2016 2017 domestic currency continue to grow (by 1.9%) and rates of lending in foreign currency are Source: NBRK decreasing (by 8.8%). A positive contribution to the growth of lending that in the first quarter was made by such sectors as agriculture, transport and construction was offset by the reduced lending to the sector of trade which accounts for one Inflation Report | The First Quarter of 2017 % 21 18 15 12 9 18
19. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT fifth of the total lending volume. Credits to sales Figure 30. Contribution to Growth Rates of outlets decreased by 7.2% (in the fourth quarter Lending by Sectors, quarter versus the previous of 2016 – the growth of 1.3%). The largest quarter, % reduction in lending volumes occurred in the Industry Agriculture Construction Transport sector of communication (by 19.5%) (Figure 30). Communication Trade Other sectors Credits (right axis) During the first quarter of 2017, lending to 3,0 3,0 small enterprises increased by 1.5% and 2,0 2,0 amounted to KZT 3 trln., accounting for nearly one fourth of total credits to the economy 1,0 1,0 (24.4%). 0,0 0,0 In March 2017, the weighted average -1,0 -1,0 interest rate on loans in the domestic currency -2,0 decreased from 15.6% in December 2016 to -2,0 1Q 2Q 3Q 4Q 1Q 14.8% in March 2017. 2016 2.1.5 Monetary Aggregates In the first quarter of 2017, the money supply was stabilizing in annual terms (Figure 31). During January-March 2017, the reserve money expanded by 0.7%, the money supply contracted by 3.1%, and cash in circulation decreased by 5.9%. The main positive contribution to the formation of money supply in annual terms was made by the National Fund’s account in the tenge and other net domestic assets. A negative contribution to the formation of money supply was made by claims on the Government as the National Bank’s liabilities exceeded claims on the Government (Figure 32). The main constraining factor for the growth in the reserve money is the reduction in net international reserves. Along with that, in the structure of domestic claims on the economy positive contributions from the reduction of the National Fund’s account in the tenge and capitalization of the Problem Loan Fund were fully offset by a negative growth in dues from banks as a result of short-term note placements with a view to withdraw excess liquidity. So, at end-March 2017, the volume of outstanding notes exceeds that as at end-March 2016 by about 8 times. 2017 Source: NBRK Figure 31. Growth in Monetary Aggregates, YoY % 60 50 40 30 20 10 0 -10 -20 -30 -40 Reserve Money Money supply Cash in circulation 26.3 8.4 4.1 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 2015 2016 2017 Source: NBRK Figure 32. Dynamics of Contributions to the Formation of Money Supply, YoY Net foreign assets Net claims on the general government Claims on the economy Other net assets NOF's tenge account Money supply (М3) % 40 20 0 -20 -40 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 2015 2016 Source: NBRK Inflation Report | The First Quarter of 2017 2017 19
20. I . MACROECONOMIC ENVIRONMENT AND THE FINANCIAL SECTOR DEVELOPMENT 2.2 Prices and Inflationary Processes 2.2.1 Consumer Price Index Inflation has been decelerating and since Figure 33. Annual and Core Inflation Pattern, the beginning of 2017 it has been within the YoY National Bank’s target band. Inflation Core inflation* Appreciation of the domestic currency, a 18 stable price behavior in the global food markets 16 as well as moderate inflationary expectations 14 served as factors for deceleration of annual 12 10 inflation. target band целевой коридор 8 2.2.2 Prices in the Consumer Sector The annual inflation decreased from 8.5% in December 2016 to 7.7% in March 2017 (Figure 33). Core inflation excluding prices of fruit and vegetable production, regulated services, and energy resources decreased from 8.9% to 7.7%; this indicates that the most stable part of the consumer price index (without the effect of volatile and seasonal components) continues its downward trend. However, coincidence of its value with that of the headline inflation shows that there are still risks in the structure of core inflation. The annual inflation structure showed the decreased contribution of non-food products (excluding fuel and lubricants), regulated services as well as a minor decrease in the contribution by non-regulated services and the food inflation (excluding fruits and vegetables) (Figure 34). In general, in March 2017 the food inflation remained at the same rate as in December 2016 (9.7%). The increased growth rates of prices of vegetables and meat were slightly offset by slowing growth rates of prices of other foodstuffs categories (bread and bakery, sugar, soft beverages, etc.). The non-food inflation decelerated from 9.5% to 8.5%, and the growth in tariffs for paid services – from 6.1% to 4.7%. 6 4 1 2 3 4 5 6 7 8 9 10 11 12 1 2016 2 3 2017 Source: CS MNE RK *excluding prices of fruits and vegetables, utilities, railway transport, communication, gasoline, diesel fuel and coal Figure 34. Contribution of its Components to Inflation, YoY Fuel&lubricants Fruits&vegetables Non-food products excl. fuel&lubricants Non-regulated services Regulated services Foodstuffs excl. fruits and vegetables Inflation pp 18 16 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 9 10 11 12 1 2016 Source: CS MNE RK, NBRK’s calculations 2.2.3 Prices in Real and External Sectors Producer prices increased in annual terms from 15.5% in December 2016 to 26.7% in March 2017 due to accelerated growth of prices Inflation Report | The First Quarter of 2017 2 2017 3 20