Why does the anti-crisis measures effect tend to zero?

Date: 11:49, 23-05-2016.

Almaty. May 23. KazTAG – Sergey Zelepukhin.

The results of a survey on situation in the real sector of economy for the first three months of this year the National Bank of Kazakhstan posted on its website back on May 13 seem to be quite alarming. The regulator’s data are literally crying for a serious deterioration in the financial standing of many companies. Moreover, for the government and monetary authorities it looks like a disappointing diagnosis of effectiveness of the anti-crisis measures and economic policies they pursued.

The information provided by the National Bank fully props up the conclusions KazTAG made about the causes of decline in business activity and difficult economic situation in the country. To prove the point, we go in for the survey’s the most interesting extracts.


Let well enough alone

According to the regulator, for the first three months of the year, compared to the fourth quarter of 2015, we observed an increase of negative processes in the economy due to declining credit, business and investment activities. This reflected in a further decrease in consumer demand for final products, deterioration of credit conditions and maintaining high interest rates on loans.

“The enterprises’ financial and economic state indicators, except for profitability ratios, got deteriorated due to optimization of business costs (reduction of employment and total wage fund, etc.),” the document states.

The calculations by the National Bank say, the so-called demand diffusion index (DI) (showing the change of this indicator over a particular period of time) on the real sector as a whole in the first quarter of 2016 made 42, compared with 41.2 in the fourth quarter of 2015. With this the demand for goods and services continued showing quite modest values. In January-March of this year it amounted to 44.5 versus 39.3 in October-December of 2015.

The worst index was recorded in the industry. “The demand for the final products continued declining in the mining and manufacturing industries. DI made 39.7 and 45.6, respectively,” the document states.

It should be noted that the regulator’s methodology says the index value higher than 50 means a positive change, if lower – the change is negative.

At the same time, according to the calculations of the country’s major bank, the share of unprofitable and low-profit enterprises increased in the first quarter of 2016 to 25.1% from 23.9% in the fourth quarter of last year. A slight increase is observed in the number of highly profitable enterprises with growth to 36.6% from 34.9%, though the number of medium-profitable companies got reduced to 38.3% from 41.2%.

A decline of the production efficiency indicators seems to be quite predictable against such background. The share of enterprises which have not reduced their production volume amounted to 54.8% in January-March this year. Only 51.9% of companies have not decreased their labor productivity. And only 54.8% of business entities have not reduced the total number of employees, while the share of illiquid companies increased to 37.6% with the total solvency ratio falling to 1.9.

It is noteworthy that deliberately or not but the survey does not call the specific reasons for the decline in business activity and consumer demand for the Kazakhstani enterprises’ goods and services. Some of the regulator’s data, though, directly or indirectly point to them. For example, according to the National Bank data, the average interest rate on loans in KZT increased to 14.2% in the first quarter of 2016 compared to 13.5% in the fourth quarter of 2015.

“The gap between the actual interest rate and the level of interest rates acceptable for the enterprises remained high for tenge: acceptable interest rates amounted to 9.3% per annum,” the document states and at the same time points out that rates on foreign currency borrowing rose to 9.5%, while the level of rates acceptable for the companies dropped to 5.7%.

Thus, it is hard to escape a conclusion that the loan rates – both in national and in foreign currency – have become one of the major reasons for the decline in business activity as unacceptable for businesses especially against the background of acute shortage of funds among enterprises.

What goes around comes around

It is easy to understand that with crediting and financing tightening the investment activity in the real sector continued to fall in the first quarter of this year. “The share of enterprises that have not financed the investments increased to 35.8%, with the share of enterprises which used for these purposes their own funds and bank loans decreased to 61.3% and 4.2% respectively,” the document specifies.

It is interesting that the number of businesses that received loans to finance investment within the government programs in the first quarter of this year made the paltry 0.8%, while the number of businesses using bank loans for working capital decreased to 14.3%.

The document states, “the share of enterprises that have received loans to finance their working capital under the government program

 made 1.4%. The majority of enterprises (83.4%), though, use their own funds for these purposes”.

As a result, the production volumes continued to lower in the first quarter of this year. Diffusion index for this indicator amounted to modest 36. The enterprises capacity utilization level in the first quarter of 2016 decreased: the share of enterprises with the capacity utilization within 70-90% range decreased to 18.4%, with the share of enterprises having a capacity utilization of less than 50% grew to 39.7%.

The experts of the National Bank believe, the key factors that have been blocking the ability of economic entities to finance and increase their production are the insufficient demand, shortage of financial resources and adverse state of the Kazakhstani economy.

The regulator also notes a low level of prices for raw materials, which continues to make up the lion’s share of Kazakhstan’s exports, also contribute to the negative impact on production volumes.

Though the latter factor is quite clear, the other ones seem to provoke many questions the regulator does not answer in the published document. E.g., what are the other reasons, in addition to the Kazakhstani unfavorable price situation for raw materials and capital on foreign markets, behind the insufficient demand for the Kazakhstani enterprises’ products in the domestic market and scarcity of financial resources, moreover, notwithstanding the implementation of “Nurly Zhol” program?

What is the reason behind the interest rates on loans of Kazakhstani banks being unacceptable to the real sector of the enterprises? And why the government and monetary authorities’ contribution to the processes can be considered as a negative one?

The answers are quite obvious. In fact, with the data above, the National Bank, figuratively speaking, whipped itself along with the government. The point is that since August 20 last year, while putting the national currency in the so-called free-floating, the regulator, at the same time, took a course to hold the extremely tight monetary policy.

To remind for those who have forgotten it reflected in a sharp rise in the base rate in October 2015, firstly up to 16 -/+1% on withdrawal and liquidity to the second-tier banks. Later, this February, it was raised even higher – up to 17 -/+2%, followed by a slight decrease in May to 15 -/+1%. Indeed, the National Bank explained this with the benevolent intentions: the desire to stabilize the situation in the foreign exchange market and reduce inflationary pressure, with following keeping the prices growth within the range of 6-8%.

Sad, the regulator has not achieved neither of the goals set. That is without a stop in the oil prices fall at the end of January, followed by their gradual growth in the coming months, the dollar could rise to the level of KZT400 for $1 or even higher. Clearly, in this situation, there could be no talks of a slowdown in inflation, despite the regulator’s tight monetary policy.

The National Bank got lucky with the “black gold” prices coming up and bringing a Tenge marked strengthening. The cost of imported products went down then easing the inflationary pressure a bit. It is clear, this cannot be written to the regulator’s achievement list. But even in this situation, the monetary authorities are still far from achieving their main objective – keeping the inflation within the corridor announced.  

Moreover, unable to cope with inflation and weakening of Tenge on one’s own the regulator, while carrying out its tight monetary policy, have created preconditions for increasing shortage of affordable tenge liquidity in the banking system and, through it, in the real sector. This became one of the major alarming reasons the regulator saw as a result of survey on the situation in the real economy.

This all can be added with a sharp reduction in the state budget expenditures experienced both last and this years, which contributed to the drop in demand for products and services of domestic enterprises.

In general, the government and National Bank reap what they sowed.

 

With such a policy, you do not even need enemies

Despite the National Bank’s tight monetary policy and the government’s tight fiscal policy, prices for goods and services continued to grow in January-March. It is strange, yet the results of the regulator’s survey also prove this.

“In the first quarter of 2016 the prices for final products in the real sector continued to rise, with the growth speed lowered a bit (DI decreased from 60.2 in the fourth quarter of 2015 to 59.3). In the mining sector in the first quarter of 2016 decline in prices was replaced by increase (DI = 51.5), though in the manufacturing industry the rise in prices continued (DI = 61.5). Growth of prices for raw materials remains at a high level (DI = 81.1),” the National Bank survey says.

This all only confirm the conclusions we’ve done in the previous articles saying with their exchange rate and monetary policies the regulator not only have not reduced the inflationary pressures, but rather strengthened it.

Deficit and high cost of credit resources were reflected in the growth of production costs. Ultimately, this resulted in an increase in prices for final products and services by the Kazakhstani enterprises, particularly in manufacturing industry, working on the imported equipment and using the imported component in their goods production. This all led to inflation.

A significant contribution the exchange rate policy carried out by the monetary authorities made in the devaluation is once again confirmed by the regulator’s survey results. The National Bank recognizes, the tendency for the negative impact of the weakening of the national currency on the activities of economic entities was recorded in the first quarter of 2016.

“A sharp increase of share of enterprises that have experienced a negative impact on the economic activity of exchange rate of tenge was due to the transition to the regime of free-floating exchange rate as of August 20, 2015,” the document explains.

After that, according to the regulator, the number of enterprises that experienced a negative impact of sharp exchange rate changes grew more than twice in the third quarter of 2015, compared to the second quarter of 2015, from 23% to 61.1%.

In the fourth quarter of last year and in January-March 2016 the negative impact of exchange rate volatility continued. As a result, according to the National Bank, the share of enterprises that have experienced a negative impact by the exchange rate fluctuations, made 55.8%. “33.6% and 45.8% of the respondents noted the negative impact of the exchange rate of tenge to euro and Russian ruble on their activity,” the document says.

From all that has been said above one conclusion comes: the results of the survey presented by the regulator cannot be called anything but a failure of the economic policy and anti-crisis measures by the government and the National Bank. To paraphrase one known saying we can state – with such a policy we do not even need enemies.

The most important part is – it is alarming that in case of further following the current policy of the government and monetary authorities without further skyrocketing oil price growth the negative trends specified in the regulator’s survey will still remain in force. It is obvious that this will have an inevitably negative impact on economic growth and budget revenues.

As a result, we cannot exclude it all can once again end with new cuts or suppression of budget spending growth, escalating public debt or another decision to patch the budget holes using the funds of the National Fund and pension fund. Ultimately, it can have a negative impact on sustainability of public finances and the material well-being of citizens through higher inflation and lower revenues.

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