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Kazakhstan macroeconomic report for the 4th quarter of 2021

In 2021, rising commodity prices, significant inflows of budgetary and non-budgetary funds to the real sector of the economy, as well as the acceleration of consumer lending, and the withdrawal of savings from the UAPF contributed to the recovery of the growth rate of the Kazakhstani economy to the pre-crisis level of 4% y/y. However, this could not but spur inflation growth, which amounted to 8.4% at the end of the year.

In 2022, the main impact on the economy of Kazakhstan will be exerted by geopolitical tensions, sanctions pressure on the main trading partner, the Russian Federation, as well as an increase in crisis phenomena in the global economy. We forecast the following macroeconomic parameters: Kazakhstan's GDP growth of 3.3%, inflation of 10-12%, the exchange rate of 490 tenges per US dollar.

Growth in oil prices and expansion of production against the backdrop of continued fiscal stimulus will ensure the growth of Kazakhstan's GDP by 3.3% in 2022. High oil prices and an increase in oil production from 85.7 million tons in 2021 to 88 million tons in 2022 will support the growth of the Kazakh economy. Also in the current year, the growth of state budget expenditures directed to support the economy will continue, including the inflow of the balance of pension savings is expected in the 1st quarter. However, the external economic situation is seriously complicated by close economic ties with the Russian economy, which is under severe Western sanctions, which indirectly suppress business activity in Kazakhstan and lead to a drop in household income due to the devaluation of the national currency and, as a result, the acceleration of inflation. As a result, we expect Kazakh GDP growth to slow down to 3.3% y/y.

Increased exchange rate volatility under the pressure of external shocks. In 2021, the national currency depreciated by 2.6% y/y to 431.7 tenge per US dollar. The weakening of the USDKZT pair took place against the backdrop of an increase in oil quotations (+50.2% at the end of the period to $77.8 per barrel) and a strengthening of the US dollar (+6.4% to 95.67pp). The Russian ruble weakened only 0.6% against the US dollar last year compared to the 2.6% y/y depreciation of the tenge, but the quarterly weakening of the Russian currency amounted to 2.1% QoQ to 74.3 rubles per US dollar.

In 2022, the dynamics of the tenge exchange rate will be determined, on the one hand, by high prices for oil and metals exported from Kazakhstan, on the other hand, by the growth of geopolitical tensions and dependence on imports from neighboring countries, the exchange rate of which will demonstrate volatility. At the end of 2022, according to our forecasts, the US dollar exchange rate will be formed at the level of 490 tenges. At the same time, we expect increased exchange rate volatility in the short term, followed by stabilization in the 2nd half of this year.

The rate of inflation will accelerate. After reaching a maximum value over the past 5 years of 8.9% y/y in September-October last year, consumer inflation slowed down to 8.4% y/y in December 2021. against the backdrop of high inflation rates in the countries-trading partners (global inflation accelerated almost three times to 5.7% y/y). The above factors will not lose their influence in 2022, however, their effect will be intensified by global geopolitical tensions, the exchange of sanctions, and the transmission of inflation through the exchange rate channel. We expect inflation to accelerate to 10.0-12.0% in 2022 on the back of reduced supplies from companies affected by sanctions, as well as increased exchange rate volatility.

Monetary conditions will remain relatively tight in 2022. In 2021, the NBK raised the base rate by 75bp to 9.75%. In January 2022, the NBK raised the base rate by 50 bp at once. to 10.25% and in February increased it to 13.25% as a monetary response to foreign economic and geopolitical shocks. Raising rates to limit currency speculation and conducting foreign exchange interventions in the face of high exchange rate volatility were quite expected steps. In the medium term, the continuation of such monetary conditions by the NBK will have a negative impact on the growth rates of the Kazakhstan economy. Taking into account the expected acceleration of inflation, the base rate of the NBK in 2022 will be 12-14%.

High oil prices and a sharp increase in oil production accelerated economic growth in the 4th quarter Kazakhstan’s economic growth in 4Q2021 accelerated to 4.0% from 3.6% YoY in 9M2021. Confidently reached pre-crisis growth rates (4.2% on average in 2017-2019). Economic recovery contributed to the recovery of the world economy and, as a result, increased external demand for raw materials goods of Kazakhstani production. According to the IMF, global GDP growth in 2021 amounted to 5.9% after a 3.1% reduction in 2020

The growing demand for energy commodities contributed to the increase in world oil prices by 9% in the 4th quarter to almost $80 per barrel on average for the quarter and by 66% to over $70 per barrel on average for 2021. At such high levels, oil prices have not been stable since the end of 2014. Oil production in the republic in 4Q2021 increased by 16.9% QoQ and by 11.3% YoY. Such the pace of production growth contributed to the acceleration of GDP growth at the end of last year.

We also note the effect of the low base in 2020, when the decline in the GDP of the Republic of Kazakhstan amounted to 2.5% y/y, in addition, the Bureau of National Statistics in 2021 revised the initial estimates of GDP dynamics every quarter.

Thus, at the end of 9M2021, the results improved from +3.4% YoY to +3.6% YoY.

Adaptation of the economy to quarantine restrictions, the degree of severity of which remained about at the same level since 4Q2020, positively influenced the level of business activity. So, the service industry most affected by quarantine restrictions in the economy, according to the results of 2021, was able to demonstrate growth by 3.9% y/y, which was quite comparable with the GDP growth rate of 4.0% y/y.

Withdrawals by the population of a part of their pension savings in the amount of almost T2.3 trillion in 2021 were an additional driver for the growth of economic activity not only directly in the areas of residential

real estate and healthcare but also through cross-industry links in other sectors of the economy. At the same time, in 1H2021, the vast majority of pension savings in the amount of T1.4 trillion was withdrawn, in 3Q2021, the volume withdrawals decreased to T281bn but rose significantly to T600bn in Q4 on news of an increased withdrawal threshold.

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