Kazakhstan macro: The transformation of foreign trade flows will gradually reshape the economy

KAZAKHSTAN - Report 24 Apr 2023 by Evgeny Gavrilenkov and Alexander Kudrin

The Kazakh economy continued to expand in 1Q23 as the short-term indicator grew 1Q23 by 5.1% y-o-y. Most domestically oriented manufacturing segments expanded rapidly in 1Q23, while export-oriented ones struggled to grow fast. Domestic demand continued to recover steadily as retail sales and investment in production capacity posted double-digit growth. The fact that imports were up by an impressive 39.1% y-o-y in 2M23 (the latest available data) confirms that domestic demand was strong. During this period, imports reached $8.6 bn while exports moved to $12.2 bn, implying that the trade surplus was relatively narrow as imports soared. The current account may turn negative in 1Q23 as exports remain constrained (0.7% growth in 2M23).

The geographical structure of imports changed dramatically in early 2023 compared to the first couple of months of 2022. A year ago, nearly half of Kazakhstan's imports used to come from the CIS (mainly Russia). In 2M23, it is now only around one third. Russia’s share fell from 40.3% in 2M22 to 26.7% in 2M23. The proportion from Europe grew to over 19%, while Asia's share soared to over 40% from about one third in 2M22. Exports of some products to the CIS grew, and it seems that an essential part of Kazakhstan’s machinery exports to CIS is re-exports to Russia. However, overall, the figure in US dollars for such re-exports is not high.

In the foreseeable future, commodity exports (including energy) will dominate Kazakh exports. One can count only on gradual growth of manufacturing exports as expanding the latter requires new investments. The country will remain very dependent on manufacturing imports, including food products. This means that for the time being, the country’s domestic manufacturing (excluding semi-products, such as metals) will not depend much on the exchange rate. Finding the combination of the nominal exchange rate and inflation will have a more meaningful impact on social stability in the country than on the competitiveness of the economy in general.

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