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№2 (235) 28 January - 10 February 2009

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Main theme: stable tenge, imports and domestic production     Subtle tuning
The government has to revise its forecast and plans for the future. New polices are due to be shaped. The state has to respond the crisis in a different way, as new threats ,facing the domestic economy are really grave. New problems have arisen due to devaluation of the national currencies of the CIS states, the variety of cheap goods that flooded local markets and fall in budget revenues caused by the lower world prices for raw materials, scarce money supply. In other words the government should get ready to a subtle economic tuning.

Alexey Ikonnikov

New turn

On January 14, 2009 at the two day session of Ministry of Agriculture Mr Kasimov the PM of RoK said that deflation in the countries neighbors of our republic may became a main challenge for the government. Officials have to elaborate a package of measures to ward off importers of cheap commodities. Abrupt fall in prices might cause certain troubles for the local producers. In 2008 prices grew twofold and anti- inflation policies were designed to protect the consumers. "Between 2009 -2010 prices for basic commodities might plummet thus the government has to support local producers", says Mr. Kasimov. On January 13, 2009 Vladimir Shkolnik, the Minister of Industry and Trade says that Kazakhstan might introduce new tariffs on imports of cheap Russian and Ukranian goods, since the prices for some produce hit lows due to depreciation of the national currencies of both states. " Rampant inflation combined with devaluation of national currencies on the markets of the states , neighbors of RoK might affect negatively our republic", said the head of the Ministry of Industry and Trade. Cheap imports from the aforementioned states might reduce competitiveness of domestic goods. We have to get ready for this, said the Minister of Industry and Trade.

According to world agencies Kazakhstan is the last in the list of CIS countries, currencies of which are losing in value against the greenbuck. Tenge is the most stable of currency on the post soviet space. Dollar grew only 1.1% against tenge( In August , 2008 dollar was exchanged at the rate of 120.1tenge against 1 USD In January 20, 2009 it grew up to 121.4 tenge against one greenbuck. Between early September,2008 and January 2009 hryvna slid dramatically against dollar from 4.85 hryvna against one buck to 10- 10.4 against one dollar. Ruble tumbled as well. It lost 22% of its value against dollar. Ruble dropped against tenge also. In August 2008 one could exchange one ruble against 4. 8. In January you could exchange 3.68 against one ruble. Imports of Russian goods crossing the boundaries of Kazakhstan increased dramatically. Inflation in Kazakhstan reached 9.5%, in Russia 13.3% in Ukraine it was rampant and hit 22.3%. The Minister of economy added that the government will regulate imports using subtle and intricate system of tariffs levied on different categories of imported goods, taking into consideration also value and fluctuations of currencies issued by main importers of goods to the territory of our country. Finacial regulators are looking for compromise by countering pressure on the market by reducing or raising export and import tariffis, manipulating taxes, distributing benefits. They have to stave off rise in unemployment and save Kazakh ailing businesses improving their completive abilities on the one side, and prevent spike in prices like in 2007 on the other side.It appears that the government is going to adhere to its anti-inflationary strategy as "we have to find a golden mean as usual, which lies in the middle", summed up V. Shkolnik.

Between late November and late December the officials encouraged imports, by abolishing tariffs on imports of food, in order to send food prices down. These policies brought good results. Between December 2008 and January 2009 vegetable oil, chicken, dairy products flour rice and other agricultural produce cost less than months prior to anti-inflation measures of the state. Petroleum and gas prices also plummeted. Some services of public utilities also became cheaper. The data provided by the statistic agency showed that inflation (growth in prices for basic commodities)hit targeted level 9.5%, overall inflation (food prices only) reached 10.8%. Inflation is going lower. Petroleum prices dropped 10%, construction materials prices fell 10 %. The same is true about electrical appliances, automobiles and spare parts. The question is the following: should we expect that the government will make a considerable shift in its policies after facing new deflationary threat? Should deflation be regarded as economic threat at all? Is new economic strategy of the state justified?

Whatever the exact cause of the shift of governmental policies two factors really matters: cheap imports that exert pressure on local producers and slowing export earnings of the state. Deflation and imports

There were few deflation precedents in the history of the global economy. Over nearly a decade the prices for different markets had been falling steadily on the Japanese markets. Deflation was accompanied by market stagnation, sluggish consumer spending and nearly zero GDP growth. Japanese economy managed to survive due to the exports of goods and services of top-rate Japanese banks. Deflation is good for consumers' pockets. Many middle sized and small businesses that usually take loans in the banks turned insolvent. While demand for basic commodities is scarce, it is becoming hard for small and middle sized businesses to service their debts. Cheap imports also cause troubles for local companies. They are battling to prevent their bankruptcy. In addition all credits seized up and it is next to impossible to raise a loan in any of local bank paying at least tolerable interests rates not the excessive draconian ones. Only few companies have access in Kazakhstan to governmental coffers ( Kazakh officials allot credits to some businesses within a program of funding of middle sized and small businesses)

Proposal of the Ministry of Industry regarding import tariffs worried Russian exporters. Articles about the protectionist import tariffs hit headlines; leading Russian analysts issued negative comments on new policies of Kazakhstan. It is evident what markets players can't stay immune when it comes to cheap imports: those of them that operate in food industry and agriculture. Representatives of these companies push for protectionist measures and tariff on imports. Between September 2008 January 2009 imports of candies and other sweets from Ukraine rose 16%. For the same period imports of alcohol drinks from Russia, Moldavia and Georgia increased seriously and reached 150% if compared to figures issued in 2007. On the internet sites one could find the following information: Ukranian sugar was twofold cheaper than Kazakh one due to devaluation of hryvna. Local sugar producers could keep afloat because Kazakh officials haven't lifted moratorium on imports of sugar, declared in 2007

"We would appreciate it if the state will protect the markets by rasing tariffs on import of oversease food. In the Southern region we are OK due to logistics advantage. Meanwhile, importers set dumping price for their produce. It is a cost of our production. Our colleagues from Northern and Western Kazakhstan work in harsh economic environment. They are not in superior position as far as logistics is concerned. They can't cover distances faster than our competitors from Russia or any other country", mentiones Taxir Tolebekov, the head of the poultry factory. Georgiy Leibman , the director of the wholesale house revealed an important information: sales of food (spirits, sweets, dairy products vegetable oil )of foreign origin jumped 46%- 60% from August, 2008. They account for nearly half of the trade turnover of the company

Not long ago Kazakh officials alleviated inflation pressure on consumers by setting zero tariffs on imports of food. These program covered wide variety of products. Today anti-inflationary measures are combined with devaluation of currencies of CIS countries. This produces a double effect. Anti-inflationary measures triggered cheap imports. The state sacrificed interests of the domestic producers of food to tame inflation.

Cheap imports compounded problems of the domestic food producers On the one hand share of food in imports is not so big. The National statistic Agency published the following data: in 2008 Kazakhstan imported 40.9% of equipment, vehicles, appliances operated on the territory of the republic. Imports of Chemicals and other derivatives amounted to 16.8% . Imports of metals reached 15.8%. Food accounted for 7.5% of total. Only food market is critical for Kazakhstan. Imports of Food seriously influence inflationary or deflationary factors. This vividly illustrates a notion of some experts that other market players are somehow detached from market realities. Equipment, pipes, transports, aggregates, machines, chemical reagents are costly products. Meanwhile prices for these products can't send overall prices down or up. All the aforementioned products can fall into category of investments. They are imported by big TNCs to boost production of raw materials. All pipes, pumps, machinery, cranes serve the needs of big companies or the sub economic sector within Kazakh economy. In the statistcs reports they figure as the external debt of Kazakh companies to overseas suppliers

In 2007 statistics looked otherwise. At the peak of speculative cycle imports of construction materials and influx of foreign labor fueled inflation. Some experts think that foreign workers rendered services for 5 billion dollars. Construction firms turned high profits raising already excessive prices. Housing bubble burst and things changed dramatically. Today households and businesses face shortage of capital. Pockets are empty. Purchasing power is decreasing. Spending is falling. According to the Statistics Agency of RoK consumer spending fell from 17% in September to 10% in September 2008. Trade retail turnover went down as well (it fell from 8.5% in November 2007 to 3.5% in November,2008 ). Imports declined too from 43% in 2007 to 18% in 2008. The share of food in the structure of imports grew from 23% in December 2007 to 40% in December 2008.

That is why the state has to develop instruments to counter deflationary pressures. Actions of the Ministry of Industry are justified: the state is to job cuts and hundreds of companies are operating in food industry. Officials have to elaborate rescue packages for agricultural sector. Liquidity injections into domestic companies operating in food industry in 2008 grew nearly twofold if compared to subsidies issued in 2007. The government continues to provide low interest credits to the key companies. Domestic food producers qualify for the variety of tax benefits: including exemption from paying VAT. Overreaction is as dangerous as no reaction at all. Today agrarians cover only 50% of the domestic demand. The supply is scarce. Local producers deliver to the market only 34% of pasta, purchased by households, 21% of all cereals consumed by Kazakhs and 35% of vegetable oil. Industry badly needs modernization. It is hard to attract investment taking into account a fact that crisis has already taken its toll on the market. Stagnation struck economy badly. "Few market players operating in food industry acquire modern equipment or materials. They have run out of cash and no way to find any, as cheap loans are not available anymore. It is risky to put money that seat in the books as assets into modernization. Cheap imports flood the markets and prices are tumbling. Maslodel managed to construct modern factory on the suburbs of Almaty, but most of the companies failed to do so. Chances that production will increase soon are slim", laments Aidar Doskaliev, representative of the local company Maslodel.

Tariffs on imports of cheap produce can be regarded as extreme measures. Implementation of protectionist policies requires subtle tuning and caution from financial regulators. Expensive imports can provoke spike in food prices as in December 2007 or visa versa low tariffs can result in inability of local producers to withstand competition with Russian Ukranian etc. counterparts. Purchases of TNCs account for the lion share of imports. Meanwhile main financial injections are made into financial sector. The state and Government fund Samruk Kazina pumps millions into banking industry and help local financial institutions to service their external debt. In 2009 the banks are due to return $12 billion, including interest rates to their lenders. At the same time, banks stepped back from basic services and loans available for the local businesses dried up.

It appears that only food industry was hit by recession and falling prices. Agrarians and main players in the food market hope that the state will bail them out, applying numerous instruments such as tax benefits, cheap loans and protectionist tariff. Meanwhile the state has to remember that imports can cause certain damage to the market. Classic deflation like that in Japan in the early 90s or Great depression affected all markets. In Kazakhstan only food industry appears to be afflicted. The market on the whole might benefit from cheap imports. Inflationary pressure and weak tenge might impose far greater costs on businesses. Financial regulators has to solve the riddle and find a right path even when squeezed between the Devil and the Deep Blue Sea namely protect local producers of food and not to trigger inflation, sending up prices for basic commodities.

Keeping balance?

What conclusion can be drawn from our report? After assessing all policies of Astana(amendments introduced in tax code, changes in budget planning, protectionist tariffs) one can say for sure that the government masterminded a due rescue package. Astana does its best to defend interests of local producers in all key economic sectors, but not by all means. To be exact the state is to staunch the crisis but not at such a cost as inflation and devaluation of local currency. This strategy is being applied by our neighbors. In Russia ,say,the state is pumping millions of dollars from their reserves to prop up or push down ruble.

The state encourage companies that export raw materials abroad to increase production. on January 1st, 2009New tax code came into force. Amendments that were designed to alleviate pressure on many sectors that have nothing to do with mining or oil industries at the expense of exporters of raw materials discussed in the summer, 2008 were not introduced in the final version of the document. The tax code benefited practically all market players. The government took harder line when it came to oil exporters(except for those that were immune due to 15% of PSAs and Tengizshevroil). VAT was cut from 13% to 12%. Debit caused by export VAT is compensated within 14 days. What companies qualify for this very benefit? They are 300 key companies 250 of them operate in oil industry. Amortization norms for the subsoil users: the mining company can ascribe 50% of assets value and oil companies 30% to deductions. Individual royalties were replaced by the tax on fossils extraction (TFE) and tariff on export of oil by rent tax. By 2014 companies that realize infrastructure projects are exempted from VAT (Karachaganak, Kashagan, Kurik Marine Port).

The government intends to slash spending. Budget 2009 is being revised downward: the most pessimistic scenario is applied as oil might hit new lows $25 per barrel. "The first quarter of 2009 might become hard time for us. We have to correct the budget on the first stage before it will be send to the Parliament, says Bolat Zhanishev , the Minister of Finance. The state will stick to protectionist policies. In addition to import tariffs the government has to develop other instruments such us target investment and funding of middle sized businesses from the resources of the fund Damu. Governmental infrastructure projects are likely to be launched as well.

Monetary policy is now being kept tight. Astana is getting to economize on basics taking into account budget deficit and scarce money supply. Wealth is being squeezed. Monetary aggregates fell 15-16% if compared to those in 2007. On January 20, 2009 money supply reached 6 trillion 17.8 billion tenge. Rigid monetary policy proved to be efficient in the early 90s. Cheap imports and fall of domestic demands might even help to sort out the mess and mitigate consequences of the crisis. Relatively controlled inflation will allow for less rigid monetary policies. Tenge will remain pegged to dollar, it will be sent down gradually. Credit risks are high as the debt should be serviced in dollar terms, points out Mr. Saidenov. If tenge drops certain financial institutions might face problems with risk management and paying interests on the loans. On January 20, 2009 Bahit Sultanov said that tenge might go down but the target rate is set at 130 tenge against one greenbuck. These measures might will help all market players to weather the storm. Prices will be more or less controlled as well

Tight monetary policies somehow contradict the line chosen by the Ministry of trade such as protectionist import tariffs, mentioned by Mr Shkolnik. Inflation might cause more damage than deflation. Psychological aspect of the problem also matters Sudden tumble of tenge will dampen domestic confidence. Kazakhs like Russians will try to invest in other currencies. Firm currency still helps the government to stem panic

Russian Central Bank is closed in the vicious circle. On the one hand it injects liquidity in key big banks, that buy up stable foreign currency and sell these banknotes to households. Meanwhile Russian regulators do nothing to prop up ruble causing panic and inviting speculators to play against ruble. Central Bank pushes ruble down; encouraging people and businesses buy up stable dollar. Spiral is unfolding and there is no end, says one of the leading Russian analysts. Reserves that are actively spent by Central Banks are vital for Russian companies not for speculators that play with currencies on the open markets.

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