“When a Crisis Hits an Economy Modest Devaluation Is Good”
According to Eric Livny, lead economist of the European Bank for Development and Reconstruction (EBDR) for Central Asia, Kazakhstan has a relatively good financial cushion at the moment. Moreover, local authorities try to support businesses and can get a good economic effect in general even if some of these efforts will end without any result. The expert interviewed by Kursiv said how EBDR assesses the current situation in the republic.
– Recently, two types of crises hit Kazakhstan at the same time. On the one hand, oil prices went down and the country was forced to devaluate its national currency. On the other hand, Kazakhstan has to cope with the pandemic and all its negative consequences. Do you think Kazakhstan can pass through this without huge losses?
– Definitely. Many neighboring countries have no reliable financial cushion, which is why they are so suspicious to the perspective of strong measures for preventing the virus from spreading. For the last several years Kazakhstan accumulated enough money. The currency reserves and assets of the central bank and National Fund is about 50% of GDP.
Therefore in this country, the government can fight the pandemic, spend money to save people’s lives, support vulnerable categories of the population and even compensate for some losses of small businesses. Kazakhstan has huge oil resources and because of ongoing oil production, the country can get money even during this severe crisis. Of course, this can’t last too long, and I hope the pandemic will be gone soon. If businesses will not go back to regular work, the government will lose the reserves it needed. Thank God this is not our case.
– When the government tries to prevent coronavirus from spreading, it also hurts businesses. What do you think about all these efforts by the Kazakhstani authorities?
– In general, I think the government does the right thing. First of all, there is no panic in the markets. Because of active measures the government and central bank set into place, the currency rate of tenge is still at a very good and sensible level even though it declined by 15%. Moreover, when a crisis hits an economy modest devaluation is good. Exporters can get profit on 15% more and this will be good for everybody – companies, employees and the state budget. Imports will be more expensive and it’s also good for the balance of payments.
Secondly, the supporting measures by the government are very important as they cover the delay in payments for taxes, utilities and rents; businesses can even reconstruct loan schedules or use forward contracts to buy agricultural products. Cheap money for small businesses and special programs to maintain the job level are also among these supporting measures. Perhaps, some of them will turn out to be ineffective but when you act in a very urgent situation, you have no time to choose what you have to support. You just see that as a whole. This is helicopter money.
– Every crisis in Kazakhstan hits the bank system most. How can you assess this sector now?
Sustainability of the banking system is a key issue during a crisis. The country has learned lessons from various crises of recent years. The local bank system went through both sanitation and consolidation processes. In 2017 banks made an additional capitalization and now have enough stocks of cash. This finding was also proved after the AQR test for all 14 banks in Kazakhstan. I think the idea that regular depositors should be worried about their money has little foundation so far. However, we don’t know exactly how long and how deep this crisis can be.
– What about recovery after the crisis? Who should pay for that if many banks resisted crediting businesses even before the lockdown?
– Yes, it’s true. Even before the current crisis, banks did not hurry to provide businesses with loans, which is why they have a lot of money now. However, I don’t think that only banks should be responsible for that. You see, even though Kazakhstani authorities try to diversify the country’s economy, the raw commodities are still the main sources of national wealth. Moreover, foreign investments pour directly into the oil or mining industries. Of course, the food industry and the service sector are also under development but there is little expectation of any crucial pivots.
The government set out some incentives trying to replace imports with local products and invest a lot of money into the economy of simple things. However, this model could not last forever and may lead to low demand for investments and loans. The Kazakhtstani market is not so big and has limitations.
Even if Kazakhstan will achieve its goal and replace all imports by local products, the country has to go further and produce much more for export. Before that, the country has to develop new technologies, produce something useful and competitively priced on the open market, and create unique brands and products. I hope we’ll see that in the future.
– What if the government will play a more important role in the economy. Is it good for the country’s future or not?
– I think that the government shouldn’t act as a prime player here and own or control all main assets in the country. Usually, private investors have better knowledge about what’s going on in the market; they can provide better incentives for managers and supervise them. The government must play another role. It has to oversee the whole market and guarantee that players do not break rules.
Secondly, the state has to produce things that the private sector is not interested in or may charge too much for. For instance, nobody except the state would fight the epidemic, prepare a financial cushion, develop green sources of energy or provide medical services for small villages and remote areas.
Third, the government has to be a coordinator for the future development of the country, facilitating new production clusters and new economic directions. Market players can’t do that. This is a real challenge for all players, which have to work as one, and for the government, which has to act as a director.
