Halyk Finance - Adjusting to Slower Growth - Macro Report 3Q2013 - October 23, 2013

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08 10 12 14 16 18

Economy growth, %YoY

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08 10 12 14 16 18

Inflation, eop, %YoY

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KZTUSD, eop

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08 10 12 14 16 18

Current account, % of GDP

Adjus t ing to s lower growth

October 23, 2013

Nurfatima Jandarova

[email protected](727) 330 01 57

Kazakh economy picked pace in 1H2013, posting growth of

5.1%yoy, but this is unlikely to push it away from the longer-

term deceleration trend. Industrial production in 1H was

supported by oil and base metal production. Service sector

continued to outpace the rest of the economy, with trade,

transportation and telecom in the lead. Private demand

benefitted from the deepening of consumer credit penetration,

but a sharp slowdown in public sector wages could heighten the

concerns about the credit quality. Investment demandcontinued to stagnate.

Low inflation reflects the broad-based deceleration of the

economy, but to be persistent it will require a more credible and

coherent exchange rate policy. Tight control of the exchange

rate will help to control credit and inflation, but under the

current exchange rate regime it can only be achieved at the

cost of high and volatile interest rates. Whether this strategy is

sustainable will depend on the ability of the National Bank to

communicate with the market effectively. A change at the helm

of the central bank made the challenge a bit more. Should the

National Bank devalue, inflation is bound to spike with little lag.

In September the National Bank switched to targeting the

currency basket (US dollar, Euro and Ruble), instead of USD.

The NBK will continue to „smooth the short-term fluctuations‟ ,

but now of the basket currency. We expect that the new target

will increase the volatility of USDKZT, improve the ability of

economy to respond to external shocks, reduce the need for

foreign exchange interventions. The stabilization of the

exchange rate will remain the main component and the

indicator of the monetary policy. Therefore, the problem of high

interest rate volatility remains unaddressed as well.

Bank lending has slowed in 1H2013 as well. Consumer lending

was the main driver of credit growth since 2011, whilecorporate lending decelerated. Funding conditions, particularly

the devaluation risk and unpredictable condition in the liquidity

markets, continued to curb the long-term credit growth. Higher

capital requirements for consumer lenders will contribute to the

slowdown of lending activity.

Fiscal deficit in 1H2013 was considerably less than planned,

mainly due to less spending. However, almost-zero growth of

tax-receipts and approach of the limit of guaranteed transfer

from the National Fund will, in our opinion, lead to the widening

of deficit in 2H2013.

Kazakhstan’s Quarterly Economic Report

3rd

quarter 2013



Kazakhstan’s economic report for 3 rd qu arter 2013

2

Содержание

Long-term deceleration of growth ........................................................................................ 3

Monetary policy ................................................................................................................. 4

Inflation ........................................................................................................................ 4

Exchange rate regime ..................................................................................................... 5

Money market ................................................................................................................ 6

External balances ........................................................................................................... 6

Banking sector ............................................................................................................... 7

Fiscal policy ...................................................................................................................... 8

Sectors in graphs ............................................................................................................ 10

Agriculture .................................................................................................................. 10

Export-oriented industry ............................................................................................... 11

Industries oriented on domestic demand ......................................................................... 13

Construction ................................................................................................................ 15

Consumer demand ....................................................................................................... 17

Financial sector ............................................................................................................ 19

Public sector ................................................................................................................ 23

Quarterly forecasts .......................................................................................................... 25




3

Slowing dow n

Kazakhstan‟s rapid growth in 2010-2011 was dependent on rising oil prices. When oil prices

began to stagnate, the economy began to decelerate. GDP growth fell from 7.0-7.5% in 2010-

11 to 5.0% in 2012 and 5.1% in 1H2013. In 1H2013 industrial output continued to grow

supported by oil and base metals. Service sector was growing faster than the rest of the

economy, with trade, transportation and telecoms in the lead. Demand was kept afloat by therapid expansion of consumer credit and despite a sharp deceleration of wage growth. As

households debt and will start to slow down over the next year to the extent that the level of

households‟ debt burden will reach the pre-crisis peak.

In the first nine months of 2013 industrial production increased by 2.1% yoy mainly thanks to

oil production (3.1% yoy). We expect that the volume of oil production in 2013 will reach

80.3mn tons (1.3% yoy). The long-awaited production at Kashagan started in September,

which, we expect, will support growth in 4Q2013. We expect that oil will remain the main

driver of growth in the medium term, but as consumption continues to grow the financing

capacity of current oil revenues will decline.

Extraction of copper ore (11.5% yoy) and production of refined copper (2.0%yoy) grew thisyear mainly thanks to the emergence of new producers, yet copper production is still 10%

below 2004-08 levels.

Production of ferrous metals remained at about two thirds of capacity. Production of steel in

9M2013 dropped by 17.8%yoy, and of rolled steel declined by 18.0%yoy. Production of

ferroalloys almost recovered (after the 2012 decline) to the level of the previous three years.

Construction in 9M2013 grew by 2.5% yoy, in line with the five-year trend of stagnation. Real

estate prices virtually ceased to rise in July-August, after the acceleration in 1H2013. Mortgage

lending continued to grow (6.1% yoy by the end of August 2013), but the ratio of the

mortgage portfolio to wage bill remained at a minimum.

Despite slower growth of labor income, retails sales grew by 12.6%yoy in 9M2013, largely

supported, in our opinion, by consumer lending (+49.3%yoy for 8M2012). We expect that

consumer credit will decelerate within a year due to market saturation and regulatory

disincentives (higher capital requirements for consumer lenders), eventually affecting retail

sales and related activities.

Transportation sector in 9M2013 grew by 7.4%yoy, but the indicators of freight and passenger

turnover grew by just 2.9%yoy from a low base of 2012. Oil production at Kashagan should

support the development of the sector, but low metals production volumes will continue to

curb the growth of the sector.

Telecoms increased by 14.3% yoy, but slightly slowed down in 3Q. The growth was mainly due

to mobile sector amid declining tariffs, which ensured the solid growth rate despite a slowdown

in wage growth. Transfer of regulation of interconnect tariffs, which operators pay each other

for the connection to their customers, to the Agency for competition protection will, in our

opinion, lead to a reduction of entry barriers and increased competition. This will contribute to

the medium-term growth in the sector.

In 1H2013, investments in nominal terms accelerated to 12.4% yoy compared with the growth

of 9.4% in 2012, which is not sufficient to indicate the recovery of investment activity (Figure

1). In the breakdown by sectors of economy, the greatest acceleration in 1H2013

demonstrated investments in production of services - transportation, telecoms, financial and

business services. Investments in industry started to grow (8.9% yoy in 2012 and 13.1% yoyin 1H2013) due to increased investments in oil and gas, metallurgy and manufacturing.

Investments in oil and gas sector increased by 14.2% yoy in 1H2013 after falling by 22.8% in




4

2011-2012. We attribute the acceleration in investments in mining and metallurgy to the

implementation of large projects by Kazakhmys and ENRC, the two companies which we

estimate to account about 70% of all investments in the sector.

Wages began to slow in 2H2012, but remained above inflation until June 2013. In June and

July real wage stopped growing (-0.1% yoy in July 2013). We expect that real wages will

continue to stagnate in the medium term taking into account tightening fiscal policy and

expected deceleration of bank lending.

Monetary po l icy

Inflation

Inflation declined to 5.4%yoy in September. We attribute it mainly to fiscal tightening, which

implied slower wage growth, and more rigid control of utility tariffs1, and the increasingly

adverse credit conditions. Soft agricultural prices have also helped to relieve the external price

pressure on food products. Bank credit to households kept demand for durables (almost all

imported) on a growth trajectory, but the dollarization of money (fed by the poorly managed

devaluation expectations) will soon began to constrain the lending activity. The hikes in water

supply and sewage tariffs (badly needed after decades of underinvestment) led to an increase

(seemingly one-off) in the price level.

At present, a steady decline of inflation below 5.0% is unlikely given the current exchange rate

regime, aimed at "smoothing the short-term fluctuations". On the other hand, tightening fiscal

policy will curb domestic demand, in particular, through the wages of public sector employees,

the most inflationary component.

The pressure on the exchange rate, we expect, will periodically result in higher interest rates

on the money market and will lead to a significant deceleration, if not to a complete halt, of

the monetary base. These adverse conditions in the money market, in our opinion, will lead to

a slowdown in lending. Another factor to limit credit growth is the tightening of capital

1 The Agency on regulation of natural monopolies restricted the contribution of regulated tariffs to inflation at 0.76% in2011 and 1.20% in 2012, considerably lower than the official government target of 1.58% in 2011 and 1.9% in 2012.

Figure 1. Investment grows moderately Figure 2. Nominal investments index in industry, sa,2006=1003-month trailing average

Source: SARK, HF estimates Source: SARK, HF estimates

-20

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06 07 08 09 10 11 12 13

Nominal investments growth, % yoy

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IndustryOil&gas productionMetals extractionManufacturing less metallurgyMetallurgy




5

1.3%

9.6% 9.9% 9.5% 9.5% 9.8%

3.0%

7.5% 7.6%

0%

2%

4%

6%

8%

10%

12%

USDKZT USDRUB EURKZT EURRUB RUBKZT USDEUR

Historic Forecasted

* Average for the past three years 6-month volatility

requirements for consumer lenders (banks where consumer loans exceed 35% of the loan

portfolio), which has been the engine of credit growth in the past 18 months.

Exchange rate regime

On the part of monetary policy, we expect strengthening of the National Bank‟s mandate, in

particular, to control inflation. To perform this task, the NBK has already started to expand the

range of monetary and prudential policy tools. In particular, we expected a more active

participation of the NBK on the secondary market for government bonds, but still the

strengthening of the mandate was not accompanied by an increase of operational

independence of the central bank or by statements about the transition to a more flexible

exchange rate policy.

Currency basket

Starting September 2013 the National Bank of Kazakhstan switched to the policy of pegging

the national currency to the currency basket, consisting of US dollar (70%), Euro (20%), and

Russian Ruble (10%). Although this step will make the exchange rate more flexible and

sustainable to external shocks, the NBK will continue to track the exchange rate as closely as

before. The NBK will continue to intervene on the foreign exchange market to smooth short-

term fluctuations of the currency basket, which means that the problem of highly volatile

interest rates on the money market remains.

We believe that the volatility of USDKZT will increase, and the volatility of EURKZT and

RUBKZT, on the contrary, will decrease (Figure 3). The rise of USDKZT volatility is a result of

higher volatility of the basket itself, not of a more flexible exchange rate regime. Higher

volatility will weaken the speculative pressure on Tenge. A more flexible exchange rate will

reduce the necessity in foreign exchange interventions that lead to contraction of the monetary

base and to rise of short-term rates. The former will break the habit of stable exchange rate

expectations, while the latter will reduce the necessity to increase interest rates. But this step

in the right direction is very small: neither of these improvements solves the problem ofhighly-volatile money market interest rates.

Figure 3. Targeting currency basket will increase the USDKZT volatility and reduce the EURKZT and RUBKZTvolatilities

Source: Bloomberg, HF estimates

For our expectations of the exchange rate this means that USDKZT rate will depend also on

EURUSD and RUBUSD. If previously we attributed Tenge weakening to the oil price decline,

now in the base scenario where oil price remains stable at $100 – 110/bbl, we forecast the

gradual depreciation of Tenge. Our year-end forecast of the exchange rate for 2013 is

156KZT/USD with a subsequent weakening by 2% a year. At the same time, in case of

negative scenario where the oil price falls to $90/bbl and Ruble weakens to 38RUB/USD, the

devaluation pressure on Tenge will be too strong for the banking system to sustain it. In this




6

case it is possible that Tenge will devalue to 160–165KZT/USD. However, the probability of

this scenario sharply declined due to the decision of the Fed to postpone tapering.

Money market

Devaluation expectations increased in summer, which continued strengthening as the

exchange rate was weakening, behaving as a self-fulfilling prophecy. In accordance with the

mandate of "smoothing the short-term fluctuations", the NBK intervened in the foreign

exchange market, which was accompanied by a drop in the supply of primary liquidity (Figure

4) and a rise of rates on the money market, especially on the repo and currency swap markets

(Figure 5). High interest rates slowed down the depreciation of Tenge, but increased the cost of

liquidity for banks. In August during the tax week, the shortage of Tenge liquidity aggravated

and rates reached 30% on the swap market, until the NBK provided liquidity through the repo

market.

In September, money market rates decreased substantially, which we attribute to the

transition of the NBK to targeting a currency basket and the weakening of the pressure on the

exchange rate amid the U.S. Fed's decision to postpone the tapering of monetary stimulus.

Despite the adoption of a more flexible regime, the stabilization of the exchange rate remains

the key focus of the monetary policy, while stabilization of money market conditions remains

subordinate to the task of exchange rate control. We expect that in the short term, this trend

will continue, as well as high volatility on the money market with a periodic rise of rates in

response to increased pressure on Tenge. We expect growth of interest rates at the end of the

year due to the issuance of government bonds to finance the repayment of short-term bonds

issued last year and the necessity to finance the budget deficit through the domestic public

debt.

External balances

In the 1H2013 the surplus of the current account decreased by $5.0bn yoy to $2.2bn. The

reduction was caused by the contraction of the trade balance from $25.9bn in 1H2012 to

$18.1bn in 1H2013. The FDI balance decreased from $7.1bn to $2.8bn mainly as a result of

the slowdown of FDI inflow. The BOP deficit amounted to $0.3bn. We expect, the balance ofpayment will remain low in the 2H2013 as the capital outflow will be partly offset by the export

revenues growth amid Tenge depreciation, higher oil prices and the start of production at

Kashagan field.

Figure 4. Excess bank reserves gradually declinedduring last two yearsThe excess reserves is calculated as the difference

between the bank deposits with NBK and reserverequirements

Figure 5. Short-term money market rates respondedto the new exchange rate regime by a rapid growth

Average weekly interest rates on the money market

Source: NBK, HF estimates Sources: IRIS, Bloomberg, HF estimates

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Excess bank reserves, bn tenge

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May 11 Jun 12 Dec 12 Aug 13

SWAP 1D REPO 1D NDF 1M




7

By the end of 9M2013 international reserves of the NBK declined by $4.1bn mainly as a result

of foreign exchange interventions (currency reserves fell by $3.9bn). Gold reserves in nominal

terms almost did not change (-$0.3bn) amid the gold price decline of 19.7%ytd. External

assets of the National Fund rose by $8.9bn to $66.6bn. External debt of Kazakhstan rose by

$12.7bn yoy in the 2Q2013 as external debt of the real sector continued rising (+$15.4bn) and

external debt of banks continued declining (-$3.0bn).

Banking sector

Lending growth decelerated in the 1H2013. Consumer lending remained the major driver of

growth, while growth of corporate loans started to slow down. As the pressure on exchange

rate weakened, the dollarization of loans that took place in May – July 2013 stopped. The

profitability of banks continued to grow thanks to increase of interest rate margin, assets

profitability, fee and commission income and decrease of cost of risk.

Asset quality indicators stabilized and in the medium term we do not expect any significant

deterioration on historical part of the loan portfolio. Measures to stimulate the cleaning up of

balance sheets and asset restructuring, which the regulator adopted in 2012, are expected to

push banks to improve the reported asset quality indicators, but their impact on the creation ofeconomic value for banks and borrowers, according to our estimates, will be negligible. These

measures include the temporary exemption from a “write-off tax”, the possibility of the sale of

stressed assets to the state fund, and opportunity to gain control over the nonfinancial pledge

through the creation of special subsidiaries. Low participation on a voluntary basis was the

reason of introduction of compulsory measures. In 2013 the regulator imposed a restriction on

the share of overdue loans at 20% of the gross loan portfolio and will tighten it to 15% in

January 2014. We expect that by the end of 2013 this measure will accelerate the transfer of

stressed assets to subsidiary “bad banks”. Stressed assets w ill remain on the consolidated

balance sheets of bank groups, but will not violate the regulator requirements for banks.

In regard to new portfolio there is a rise of risk of quality deterioration of consumer loans.Consumer lending growth not backed by the growth of households‟ income could lead to

quality deterioration of consumer loans, which now constitute 17% of the gross loan portfolio

of the sector. Given the current pace of wage and household debt growth, their ratio will reach

the pre-crisis levels in 12–18 months. International comparisons of this ratio reveal that

consumer lending has large potential for growth, but it does not take into account much higher

interest rate burden of Kazakh borrowers. The National Bank is planning to tighten the

requirements for banks aiming to curb the consumer lending growth, but it will not help to

decrease interest rates. Reduction of interest rate would allow the demand for consumer loans

to grow significantly without increasing systemic risks.

Another risk factor for the banking system is the risk of credit condition deterioration on

money market as a result of the exchange rate defense through the reduction of primary

liquidity supply.

Funding remains a major constraint to the growth of long-term corporate lending. Tight

regulation of lending and funding in foreign currency decreased the appetite of healthy banks

for the use of cheap long-term money on foreign capital markets. In the 1H2013 the external

debt of banks decreased from $13.6bn to $11.5bn.

Deposits continued to substitute external debt in the capital structure, but could not replace it

as a source of long-term funding. The deposit stock grew rapidly in the last three years thanks

to the growth of wages (retail deposits) and the return of assets of national companies from

off-shore bank accounts (corporate deposits). Retail deposits growth decelerated from 23.6%

by the end of 2012 to 19.9% by the end of July 2013, while the corporate deposits growth

accelerated from 1.7% to 6.7%.

mailto:http://www.halykfinance.kz/en/site/index/research/news:86041








8

The process of reduction of interest rates on retail deposits was completed in 2012 as the

inflow of deposits slowed down and competition for deposits from fast-growing banks

increased. Meanwhile deposits remain expensive source of funding and often have a high

concentration, short-term maturity and a high risk of early withdrawal. The ability of banks to

carry out the maturity transformation is limited because of the unwillingness of the National

Bank to act as a lender of last resort. This trend will continue in the medium term, in our

opinion, at least as long as the exchange rate remains fixed. The process of further reduction

of interest rates on deposits and the formation of a healthy deposit market is interfered with

the presence of some banks lacking liquidity and ready to attract funds on terms that are

attractive only for participants with very short investment horizon or for the banks engaged in

consumer lending.

Attempts to regulate retail deposit interest rates by Kazakhstan deposit insurance fund (KDIF)

in the summer 2012 had a limited effect. On September 16, 2013 KDIF lowered the maximum

interest rates on retail deposits in foreign currency from 5.5% to 4.5%. Interest rate on Tenge

deposits remained at 9.0%. We believe that this step was taken in order to reduce the

speculative pressure on the exchange rate. However, if devaluation expectations will grow

again, for instance in case of an oil price falling to $95–$100/bbl or a more dynamic weakeningof Ruble, the interest rate differential of 4.5% may not be sufficient to deter the conversion of

Tenge deposits to foreign currency.

Bank lending by the end of August 2013 increased by 14.8% yoy, faster than 13.4% by the

end of 2012, continuing to outpace nominal GDP (+13.2% in 1H2013). Credit growth

continues to be driven mainly by growth of consumer loans (+49.6%), which has become

more attractive for banks because of better maturity matching and thanks to the growth of

household income and their confirmed ability to repay debts in adverse economic conditions.

Corporate loans grew by the end of August by 9.8% yoy, lagging the retail loans due to lack of

long-term funding in local currency and the continued vulnerability of certain corporate

borrowers. In May–July 2013 there was a sharp increase of foreign currency loans (on averagegrew by 59.1% annualized), but with the weakening pressure on Tenge dollarization of loans

completed in August (-0.7 % yoy), in our opinion.

Corporate loans rates declined slowly in 1H2013, continuing the trend of the past four years.

The consumer loans rates growth stopped at an average level of 23%. Interest rates on

mortgage loans did not change significantly. In the short term interest rates will depend on the

availability of long-term funding in Tenge, as mentioned above.

We expect that in 2013 the assets of the system will grow by 6-7%, lagging the nominal GDP,

while the credit stock will rise about 14%, slightly faster than the nominal GDP, with a

subsequent deceleration to 10%. Thus, the competition for quality should increase both in

corporate and retail segments.

Fiscal pol icy

The YtD performance of the budget (cash deficit) was better than expected, but mainly

because of the intra-year reallocation of spending and revenues. This leaves our expectation of

2013 deficit unchanged at 2.5%: we expect spending to accelerate in the second half of the

year, tax receipts to stagnate (they already decelerated in the last three months), and

transfers from the National Fund to reach the limit in September-October.

Budget revenues in January-August 2013 rose 5.1% yoy to 4.30 trln tenge. Tax receipts grew

14.9%yoy, albeit from the low base. Collections of profit tax have been on decline for the lastthree years due to a slowdown in industrial production. VAT receipts have flattened after a

spike in late 2012 (apparently, deferred from mid-2012). Revenues from taxation of




9

international trade grew rapidly in 1H2013, which we attribute to an increase in the oil export

duty from $40/ton to $60/ton.

During 9M2013 the government withdrew T1,325bn from the National Fund, pretty much up to

the limit (T1,380bn).

Figure 6. Tax receipts, 3m trailing average, bntenge sa

Figure 7. Budget expenditures, 3m trailing average,bn tenge sa

Source: MinFin, HF estimates Source: MinFin, HF estimates

According to MinFin disbursement data, government spending has been tightened more than

planned. In the first eight months of 2013 budget expenditures rose 8.2%yoy, considerably

less than in the budget plan (13.4%yoy). Social security was the greatest contributor to

growth, while all other types of outlays virtually stagnated (Figure 7). As a result, fiscal deficit

on cash basis in 8M2013 was only T97.7bn, much less than the planned T870bn for the wholeyear. However, we expect that the deficit to rise sharply in the remaining four months.

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Profit tax Individual income taxVAT Tax on international tradeOther

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Defense and public order EducationHealthcare Social securityOther




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Sectors in graphs

Agr icu l tu re

80

100

120

140

160

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200

-40

-20

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20

40

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06 07 08 09 10 11 12

Seasonally-adjusted index

YoY growth, % (rhs)

Real value added index, 1Q2006=100

Source: SARK, HF estimates

50

100

150

200

250

300

06 07 08 09 10 11 12

Global price of wheat, index

PPI of meat, saPPI of dairy products, sa

Price indices, 1Q2006=100

Sources: SARK, Bloomberg, HF estimates

100

150

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250

300

350

400

15

20

25

30

35

40

45

06 07 08 09 10 11 12

Loans to agriculture, bn tenge eop

Ratio of loans to agriculture VA*, % (rhs)

Stock of loans to agr iculture

Sources: SARK, NBK, HF estimates

10

12

14

16

18

06 07 08 09 10 11 12

On loans to agriculture, %

Interest rate on loans

Source: NBK

80

90

100

110

120

130

140

-10

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10

20

30

40

50

06 07 08 09 10 11 12

Employment, sa, th people

Wage in agriculture, %YoY (rhs)

Wage in Kazakhstan, %YoY (rhs)

Labor market


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10

20

30

40

50

06 07 08 09 10 11 12 13

Debt instruments Foreign investments

Own funds Budget

Investments financing, bn tenge/qtr sa

Source: SARK

*VA - value added




11

Export-or iented indu stry




12

Export-or iented industry (con t inued)

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450

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Stock o f credit to EO sector, bn tenge eop

Ratio of loans to VA(1), % (rhs)

Stock of loans to EO industries


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06 07 08 09 10 11 12

Mining Metallurgy

Interest rates on loans, %

Source: NBK

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45

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70

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60

06 07 08 09 10 11 12

Employment, th people

Wage in o il production, %YoY (rhs)

Wage in EO sector, %YoY (rhs)


Labor market in oil production


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60

70

80

90

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20

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40

06 07 08 09 10 11 12


Wage in ore mining, %YoY (rhs)



Labor market in ore mining


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140

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06 07 08 09 10 11 12


Wage in metallurgy, %YoY (rhs)



Labor market in metallurgy


(1) Value added of resource sector of industry




13

Indus t r ies o r iented on dom est ic demand




14

Indus t r ies o r iented on dom est ic demand (cont inued)

0

20

40

60

80

100

06 07 08 09 10 11 12 13


Own funds Budget

Investments financing in manufacturing withoutmetallurgy, bn tenge/qtr sa

Source: SARK

320

360

400

440

480

520

560

0

5

10

15

20

25

30

06 07 08 09 10 11 12


Wage in NEO sector, %yoy (rhs)Wage in Kazakhstan, %yoy (rhs)

Labor market


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40

80

120

160

06 07 08 09 10 11 12 13

Debt instruments Foreign investmentsOwn funds Budget

Investments financing in utilities, bn tenge/qtr sa

Source: SARK

-40

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40

80

120

160

0

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100

150

200

250

06 07 08 09 10 11 12

Food process ing Chemica l p roductionMachinery Utilities (rhs)

FDI inflow to NEO industries, bn US dollars/qtr

Source: NBK, HF estimates




15

Const ruct ion

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06 07 08 09 10 11 12

Seasonally-adjusted indexYoY growth, % (rhs)

Real value added index, 1Q2006=100

Source: SARK, Hf estimates

150

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250

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450

06 07 08 09 10 11 12

On primary marketOn secondary market

Real estate prices in Almaty, th tenge/sqm

Source: SARK

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1,200

1,600

2,000

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140

06 07 08 09 10 11 12

Loans to construction companies, bn tenge eopRatio of loans to construction VA*, % (rhs)

Stock of loans to construction companies


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800

1,000

1,200

20

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06 07 08 09 10 11 12

Mortgage loans, bn tenge eopRatio of mortgage loans to wage bill, % (rhs)

Mortgage loans


*VA - value added




16

Const ruct ion (cont inued)

8

10

12

14

16

06 07 08 09 10 11 12

On loans to construction companies, %On mortgage loans, %

Interest rate on loans

Source: NBK

170

180

190

200

210

220

230

-10

0

10

20

30

40

50

06 07 08 09 10 11 12

Employment, sa, th peopleWage in construction, %YoY (rhs)


Labor market


0

5

10

15

20

06 07 08 09 10 11 12 13


Own funds Budget

Investments financing, bn tenge/qtr sa

Source: SARK






18

Consumer demand (cont inued)

0

400

800

1,200

1,600

2,000

20

30

40

50

60

70

06 07 08 09 10 11 12

Consumer credit, bn tenge eop

Ratio o f loans to wage b ill, % (rhs)

Stock of consumer credit


16

18

20

22

24

26

06 07 08 09 10 11 12

Interest rate on consumer loans , %

Interest rate on consumer loans

Source: NBK

320

360

400

440

480

520

560

0

5

10

15

20

25

30

06 07 08 09 10 11 12


Wage in sector, %YoY (rhs)


Labor market


0

100

200

300

400

500

06 07 08 09 10 11 12 13


Own funds Budget

Investments financing in sectors of

domestic demand, bn tenge/qtr sa


(1) Sector of domestic demand includes trade, hotels&restaurants, transportation and telecom




19

-40

0

40

80

06 07 08 09 10 11 12

Financial sector Rea l GDP

Growth of financial sector, %yoy


-50

0

50

100

150

06 07 08 09 10 11 12 13

Total Corporate RetailLong-term Short-term

Credit growth, %yoy


0

10

20

30

40

06 07 08 09 10 11 12

WC* financing Capital inv. financingConstruction loans Mortgage loansConsumer loans Securities purchaseOther purposes

Loans structure, % of total


4

8

12

16

20

24

06 07 08 09 10 11 12

Corporate in KZT Corporate in USDRetail in KZT Retail in USD

Interest rate on loans, %

Source: NBK

-20

0

20

40

60

80

100

06 07 08 09 10 11 12 13

Total Corporate Retail

Deposit growth, %yoy


0

10

20

30

40

50

60

06 07 08 09 10 11 12

Corporate in KZT Corporate in USDRetail in KZT Retail in USD

Deposit structure, % of total

Source: NBK

* WC - workin ca ital

Financia l sector




20

Financia l sector( cont inu ed)




21


0

10,000

20,000

30,000

40,000

50,000

06 07 08 09 10 11 12

TONIA TWINAInterbank deposits in tenge NBK notes

Interbank deposits and volume of TONIA and

TWINA transactions, mln US dollars/qtr

Source: KASE, NBK

0

4

8

12

16

20

JAN-10 JAN-11 JAN-12 JAN-13

TONIA TWINAKazPrime Interbank deposits in tenge

Short-term interest rates, %

Sources: KASE, Bloomberg, NBK

0.0

0.5

1.0

1.5

2.0

2.5

06 07 08 09 10 11 12

NPLs in sector ex 2*Overdue loans in sector ex 2*Provisions in sector ex 2*

Provisions, overdue loans and NPLs,

trln tenge eop

Source: FMSC NBK

0

50

100

150

06 07 08 09 10 11 12

Government BanksReal sector

External debt, bn US dollars eop

Source: NBK

50

60

70

80

90

100

110

-20

-10

0

10

20

30

40

06 07 08 09 10 11 12


Wage in fin.sector, %YoY (rhs)Wage in Kazakhstan, %YoY (rhs)

Labor market in financial sector


-4

0

4

8

12

16

2006 2007 2008 2009 2010 2011 2012 2013


Own funds Budget

Investments financing in fin.sector,

bn tenge/qtr sa

Source: SARK

* Sector excluding BTA and Alliance Bank




22


5

10

15

20

25

30

35

1

2

3

2008 2009 2010 2011 2012 2013

Government securities (rhs)

Foreign securities (rhs)

Other securities

Total nominal volume of securities, trln tenge eop

Source: KACD

0

1

2

3

4

2008 2009 2010 2011 2012 2013

Total Held by corporate sector

Held by private sector Held by depositors

Held by residents Held by non-residents

Government securities, trln tenge eop

Source: KACD

0

100

200

300

400

500

600

2008 2009 2010 2011 2012 2013




Foreign securities, bn tenge eop

Source: KACD

0

10

20

30

40

2008 2009 2010 2011 2012 2013




Other securities, trln tenge eop

Source: KACD




23

Publ ic sector

-4

0

4

8

12

16

06 07 08 09 10 11 12

Public sector, real value addedReal GDP growth

Growth of public sector*, %yoy


0

400

800

1,200

1,600

06 07 08 09 10 11 12

Profit tax Personal income taxVAT Customs duties

Other tax revenues

Tax revenues breakdown, bn tenge, sa

Source: MinFin, HF estimates

0.0

0.4

0.8

1.2

1.6

2.0

06 07 08 09 10 11 12

Education Healthcare

Social security Other

Budget expenditures breakdown, trln tenge, sa

Source: MinFin, HF estimates

-10

-8

-6

-4

-2

0

2

06 07 08 09 10 11 12

Budget balance Non-oil budget balance

Budget deficit, %GDP

Source: MinFin, SARK, HF estimates

* Public sector includes public administration, education and healthcare




24

Publ ic sector(cont inued)

0

2

4

6

8

10

0

400

800

1,200

1,600

2,000

06 07 08 09 10 11 12

Government bond yield 1 year, %Government bond yield 5 years, %

5Y sovereign CDS spread, bp (rhs)

Government bonds interest rates and sovereign

CDS spread

Source: Bloomberg, HF estimates

0

50

100

150

200

0

2

4

6

8

06 07 08 09 10 11 12

External NF assets, eopInflow per quarter (rhs)

Transfers per quaerter (rhs)

National Fund assets, bn US dollars eop

Sources: MinFin, NBK, HF estimates

1.2

1.3

1.4

1.5

1.6

0

10

20

30

40

06 07 08 09 10 11 12


Wage in public sector, %yoy (rhs)

Wage in Kazakhstan, %yoy (rhs)

Labor market in public sector


-40

0

40

80

120

06 07 08 09 10 11 12 13


Own funds Budget

Investments financing in public sector,

bn tenge/qtr sa

Source: SARK



Kazakhstan’s economic report for 3 rd quarter 2013

25

Quarter ly forecasts

2011 2012 1Q 2013 2Q 2013 3Q 2013 4Q 2013 2013 2014 2015 2016 2017 2018

GROSS DOMESTIC PRODUCT

Nominal GDP , KZT bn 27 301 30 347 6 817 7 189 9 074 11 248 34 328 38 967 44 378 50 516 56 966 65 389

Nominal GDP , USD bn 186.2 203.5 45.2 47.6 59.3 72.6 225.2 245.8 274.0 308.2 343.4 389.5

Nominal GNP , USD bn 158.4 175.5 38.6 42.1 51.6 65.6 198.0 217.0 241.7 272.0 304.2 346.0

Nominal GDP growth, %YoY 26.1 11.2 14.1 9.6 15.7 12.8 13.1 13.5 13.9 13.8 12.8 14.8

Real GDP , %Q oQ sa - - -0.4 2.0 2.1 1.0 - - - - - -

Real GDP , %YoY 7.5 5.0 4.6 5.5 6.7 4.8 5.4 5.1 5.1 5.2 5.1 5.7

PRICES

Deflator, %YoY 16.5 3.9 5.5 7.1 8.5 7.7 7.2 8.0 8.3 8.2 7.3 8.6

P rice of oil, Brent, USD/bbl 111.1 112.0 112.8 103.0 110.0 108.3 108.5 107.0 106.0 103.0 93.5 90.0

Exchange rate KZT/USD, eop 148.5 150.4 150.9 151.8 153.8 156.0 156.0 161.0 162.9 164.9 166.9 168.9

Exchange rate KZT/EUR, eop 192.5 199.2 193.3 197.5 208.1 210.6 210.6 217.4 220.0 222.6 225.3 228.0

Exchange rate KZT/RUB, eop 4.62 4.93 4.86 4.62 4.75 4.77 4.77 4.78 4.77 4.75 4.74 4.72

REER, 2000 = 100 107.1 112.7 112.4 113.7 111.0 111.6 112.2 111.1 111.8 112.8 113.4 114.2

C PI, % change, for quarterly % saar - - 6.1 3.9 4.9 6.4 - - - - - -

C PI, % change, eop, YoY 7.5 6.0 6.8 5.9 5.4 5.3 5.3 5.2 5.0 5.0 5.2 5.6

NBK refinancing rate, eop 7.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5

Money market rate (Kazprime), eop 1.1 3.1 0.4 1.3 3.9 3.0 3.0 3.0 3.0 3.0 3.0 3.0

KZT depos it rate, ave 3.4 3.7 4.0 4.2 4.6 4.6 4.3 4.3 4.3 4.3 4.3 4.3

KZT corporate depos it rate, ave 2.8 2.4 2.7 3.2 3.8 3.8 3.4 3.4 3.4 3.4 3.4 3.4

KZT retail depos it rate, ave 6.3 6.4 6.4 6.3 6.1 6.1 6.0 6.0 6.0 6.0 6.0 6.0

KZT lending rate, ave 13.6 13.3 13.0 12.3 13.1 13.1 12.9 13.3 13.3 13.3 13.3 13.3

KZT corporate lending rate, ave 11.9 11.1 10.2 9.8 10.7 10.7 10.4 10.4 10.4 10.4 10.4 10.4

KZT retail lending rate, ave 20.4 21.0 21.1 19.5 20.0 20.0 20.2 20.2 20.2 20.2 20.2 20.2

MONETARY

Money base, KZT bn, eop 2 836 2 890 3 045 3 095 2 782 2 777 2 777 3 005 3 257 3 559 3 919 4 274

FX reserves of the NBK, USD bn eop 29.3 28.3 28.1 26.1 24.2 23.0 23.0 24.0 25.4 27.4 30.2 34.2

National Fund, USD bn eop 43.7 57.8 59.8 63.5 66.6 69.1 69.1 80.6 92.8 104.8 115.8 126.1

M3, KZT bn, eop 9 751 10 522 11 078 11 579 11 108 11 200 11 200 12 677 14 384 16 642 19 252 22 457



Kazakhstan’s economic report for 3 rd quarter 2013

26

2011 2012 1Q 2013 2Q 2013 3Q 2013 4Q 2013 2013 2014 2015 2016 2017 2018

C redit to economy, KZT bn, eop 8 781 9 738 10 118 10 545 10 865 11 101 11 101 12 766 14 553 16 445 18 418 20 444

Pension funds, KZT bn, eop 2 651 3 183 3 306 3 407 3 546 3 713 3 713 4 258 4 854 5 507 6 229 7 033

Pension funds, %GDP 9.7 10.5 10.6 10.7 10.7 10.8 10.8 10.9 10.9 10.9 10.9 10.8

FISCAL

Public debt, KZT bn, eop 3 267 3 828 3 843 3 861 4 001 4 576 4 699 5 641 6 619 7 583 8 571 9 563

Budget revenue inc l. transfers 5 371 5 813 1 504 1 644 1 571 1 520 6 240 6 799 7 087 7 549 7 857 8 334

Transfers from the National Fund, KZT bn 1 160 1 380 380 435 510 49 1 406 1 530 1 380 1 380 1 380 1 380

Budget outlays 5 423 6 269 1 419 1 789 1 807 2 095 7 110 7 741 8 065 8 513 8 845 9 325

Budget balance -569 -890 85 -145 -236 -575 -871 -942 -978 -964 -989 -991

Budget balance, %GDP -2.1 -2.9 1.1 -1.8 -2.8 -6.5 -2.5 -2.4 -2.2 -1.9 -1.7 -1.5

Non-oil budget balance,%GDP -6.3 -7.5 -3.7 -7.1 -8.7 -7.1 -6.6 -6.3 -5.3 -4.6 -4.2 -3.6

LABOR MARKET

A verage wage, KZT th/month 89.9 102.1 102.2 107.2 109.6 113.7 108.2 116.1 125.5 136.1 148.6 163.9

Real wage, %YoY 7.1 6.9 0.7 0.7 0.3 -1.0 0.7 2.0 2.9 3.3 3.7 4.5

Employment, th people 8 303 8 507 8 546 8 591 8 608 8 630 8 601 8 696 8 791 8 888 8 986 9 085

Unemployment rate, % 5.4 5.3 5.3 5.2 5.2 5.2 5.2 5.2 5.2 5.2 5.2 5.2

LFPR, % 71.7 71.8 71.5 71.8 72.1 71.9 71.9 72.0 72.0 72.0 72.0 72.0

Population, mln people 16.7 16.9 17.0 17.0 17.1 17.1 17.1 17.3 17.5 17.7 17.9 18.1

BALA NCE OF PA YMENTS

C urrent account, $bn 12.3 6.2 1.9 -0.2 0.9 0.9 3.4 5.1 5.8 6.4 3.1 2.6

Export of goods and services, $bn 91.9 96.9 21.4 22.1 26.8 26.8 97.2 104.2 115.1 127.6 136.2 150.2

Import of goods and services, $bn -51.7 -61.7 -12.7 -15.9 -17.9 -18.7 -65.3 -69.4 -76.0 -84.0 -92.9 -103.1

Income balance, $bn -27.8 -28.1 -6.6 -5.4 -7.7 -7.0 -26.8 -28.8 -32.3 -36.2 -39.2 -43.5EXTERNAL DEBT

External debt of Kazakhstan, $bn 125.2 137.1 140.0 145.4 145.7 148.6 148.5 171.2 198.3 235.6 282.5 330.2

External debt of government, $bn 5.1 5.5 5.2 5.3 5.3 5.3 5.3 5.8 6.4 6.7 7.3 8.3

External debt of banks, $bn 14.6 13.6 12.7 11.5 11.4 11.4 11.4 9.9 8.3 6.8 5.6 4.7

External debt of real sector, $bn 105.5 118.0 122.1 128.6 129.0 131.9 131.8 155.5 183.5 222.1 269.6 317.2



Kazakhstan’s economic report for 2nd qu arter 2012

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Halyk Finance - Adjusting to Slower Growth - Macro Report 3Q2013 - October 23, 2013

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