Kazakhstan macro: budgetary spending slows; the strong tenge is dragging on tax revenue
In the past week, the KZT weakened from the awkwardly strong levels seen since 4Q23 and reached USD/KZT466 a couple of days ago, having retreated from about USD/KZT440 seen in early May. We have repeatedly mentioned that the long-lasting stability of the nominal exchange rate amid persistently high inflation can create various macroeconomic distortions. These distortions will be eventually removed one way or another, but the key question is the cost of such adjustments once they become unavoidable. In recent years, the tenge’s exchange rate was influenced by many factors, including various interventions by the state, such as permanent amendments to the republican budget, accumulating international reserves in the National Fund, and the discretionary selling of these reserves to finance inflated budgetary expenditures via various mechanisms (we also covered these issues in our previous reports). The most peculiar effect of these combinations was an excessively strong tenge.
Recent statistics from the Ministry of Finance confirm our longstanding view that a strong tenge distorts the structure of the budget—now not only the revenue side but expenditures, as well. As an excessively strong tenge suppresses corporate profits, total revenues of the republican budget reached in 5M24 only 37.0% of the annual target. The overall figure looked relatively high despite the fact that tax revenue amounted only to 26.1% of the annual plan. The lack of tax revenues was offset by faster utilization of budgeted transfers as the government depleted the annual quota of transfers (mainly from the National Fund) by 65.9%. Non-tax revenue collection, which includes various proceeds from state-owned companies including dividends, various fines and other penalty charges, soared. In 5M24, the government accumulated 88.6% of its non-tax revenue annual target by somehow squeezing the finances of business entities (although this is a relatively small item).
A more equilibrium exchange rate could help to eliminate such imbalances. Apart from that, more borrowing may also help despite the fact that the capacity of the local market remains limited. An inflow of international investors is required to increase it. Currently, one of the reasons for their modest presence may be high devaluation expectations. Once the USD/KZT is corrected, the local market could be seen as less risky.
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