Kazakhstan Economics - Government To Dip Into National Fund

Faced with both a collapse in oil prices and the spread of the coronavirus, the Kazakh government has opted to support the economy by increasing spending and providing some tax relief, using the National Fund ($61.8 bln as of end-2019) to do so. While this should result in a less pronounced economic slump in the short run (we expect a 0.5% GDP contraction this year), both the budget and current account deficits will balloon, while the National Fund could shrink to $50 bln this year. The NBK has abandoned its attempts to defend the tenge for the time being and allowed the currency to weaken by 15%, which should help the economy adjust to the external shocks. However, if oil prices remain low for a long time, the government will be forced to adjust its fiscal policy accordingly, which could constrain economic growth in the longer run.The Kazakh economy is facing a double shock from the collapse in oil prices and Covid-19. Even before the pressure began to mount, government attempts to boost growth meant budget spending had been elevated, and this meant a high breakeven oil price (see our report, "Fiscal Boost Driving Growth"). Even with the significant drop in oil and gas revenues, the government has been reluctant to cut expenditures, seeing economic growth as its priority. It intends to actually boost spending to prop up the economy, having announced a package of support totaling around $7 bln, or 4% of GDP. Due to the higher spending and drop in budget revenues, the budget deficit could jump to 8.6% of GDP. In order to finance the widening funding gap, the government will dip into the National Fund, which could shrink to $50 bln this year if the oil price stays close to $30/bbl.The NBK had been trying to defend the tenge. It sold $1.5 bln of its FX reserves in March and hiked the key rate from 9.25% to 12.00% on March 16. The National Fund shrank by $2.5 bln in March, as FX was sold to finance the budget deficit (the contraction has also owed to revaluation). However, the pressure on the tenge continued to mount, so the regulator decided to allow it to depreciate (by 15% since the beginning of March) and cut the key rate to 9.50% on April 6.