The impact of oil price on Kazakh economy and exchange rate of national currency

In conclusion it is worth mentioning that the economy of Kazakhstan has suffered a lot due to fluctuations in oil prices and because of the Western sanctions against Russia. There has been national currency devaluation already, so the oil price drops only made the whole situation worse. However, one had better admit the stability of Kazakh economy and its proper precaution. Apart from the National Fund, Kazakhstan had quite a substantial amount of foreign currency reserves, which more or less helped the country overcome the hard economic times.
Regarding the sanctions, at first Kazakh economy suffered some losses, as, for example the GDP percent. However, the government did not allow the crisis spread down to the working society and other citizens of the country. Instead, it found ways for ...

The Title 3
The research question 4
Hypothesis 4
A research methodology 5
Conslusion 5
Reasons for the oil price drop in 2014 6
Economic and financial consequences of oil price drops 10
The impact of oil price on Kazakh national currency tenge and the economy of the country 16
The effect of Russian sanctions on Kazakh economy 18
The current state of Kazakh economy and its perspectives 20
Summary 23
List of references 24

The title of my final project is “The impact of oil price on Kazakh economy and exchange rate of national currency”
I chose this topic because Kazakh economy is slowing down from the beginning of 2015 and I want to understand the main causes of such phenomena. Exports in Kazakhstan decreased to 4808 USD Million in January of 2015 from 5206.80 USD Million in December of 2014. Exports in Kazakhstan averaged 3406.65 USD Million from 1998 until 2015, reaching an all time high of 9788.50 USD Million in June of 2011 and a record low of 286.50 USD Million in January of 1999. Exports in Kazakhstan is reported by the Agency of Statistics of the Republic of Kazakhstan.
There are assumptions that if oil continues to fall in price, the Parliament and the Government of Kazakhstan will soon urgently nee d to sequester adopted November 25, 2014 the state budget for the period from 2015 to 2017. According to official figures, the current Republican budget is formed at the target price for Brent crude to 80 in 2015 and 90 in 2016-2019, respectively. The oil and gas sector provides 22% of the country’s GDP and up to 70% of all revenues to the state budget and 99% of the National Fund. This Fund was specially created 15 years ago in order to overcome the crisis in the socio-economic development of Kazakhstan.
Recently, I noticed that prices on goods and services are growing up in Kazakhstan and I decided to understand the reasons of it. Also, Kazakhstan cut budget to many programs and events that are going to happen. For example, EXPO 2017 is going to be in Astana, Kazakhstan and in March 2015 the Kazakhstan Government reduced by 10 billion tenge (national currency). The country is searching ways where they can save money.
The second thing I want to outline in my final project is how the on-going standoff between Russia and the West will influence on Kazakh oil price.The bulk of Kazakh oil, which is exported, it passes through the territory of Russia, on Russian pipelines and Russian ports. Thus, the economic situation in Russia and its relations with Western countries can directly affect Kazakh economy.

These findings are also consistent with those in some recent studies. For example, Arezki and Blanchard (2014) document that demand related factors contributed only 20-35 percent to the decline; instead, supply related factors and OPEC’s decision not to cut supplies were more important in driving the decline in oil prices . Hamilton argues that only two-fifths of the decline in oil prices in the second half of 2014 was due to weak global demand. Baumeister and Kilian report that more than half of the oil price decline reflects the cumulative effects of earlier oil supply and demand shocks and, among the remaining half, the most influential shock was associated with the weakening global economy while positive oil supply shocks were limited between June and December 2014 . Looking ahead, recent developments that led to the plunge in prices have appeared to affect the dynamics of oil markets in a lasting way. Unconventional oil supplies are likely to continue to be a highly flexible source of oil supplies. This could transform unconventional oil producers into the new swing producers in oil markets, especially if OPEC maintains its current policy stance over the near-term—as it did in the period following the 1985-86 plunge . A long-standing trend towards less oil-intensive production technologies will persist, exerting continuing pressure on oil prices.Economic and financial consequences of oil price dropsOil prices affect economy in different ways: directly on prices and activity for both importers and exporters; indirectly via trade and other commodity markets. They also cause monetary and fiscal policy responses and shake the reliability of investments. Through these channels oil prices can also have instant consequences on fiscal and outside balances. In oil-importing countries central banks may respond with extra monetary policy loosening, which, in turn, can support growth. This is because declining oil prices may reduce medium-term inflation expectations as well as external financing pressures. Whereas in oil-exporting countries lower oil prices might cause rapid currency regulations, and recalculating the price of credit and government risk. Unforeseen changes in oil prices can also reduce investment and long-term merchandise consumption. To the extent that the return from an irrevocable investment project depends on the price of oil, increased doubt about the future price of oil could cause the delay of investments and shorten large expenditures. The situation is similar when speaking of uncertainty caused by rapid changes in oil prices can also stimulate the consumption of durable goods. In addition, rising uncertainty of future oil price can also lead to more preventive demand of crude oil, with second-order impacts on activity. The reduction of oil prices also lower total energy costs should the prices of other energy products be reduced. Moreover, oil-fired electrical power becomes cheaper to generate. For energy-intensive areas, this might lead to higher profit markups and better conditions for investment and employment. In addition, since oil is raw material for various industrial branches, the price drops affect a wide range of further produce. However, lower energy costs and declining inflation usually increase consumers’ interest in purchasing commodities. Combining cyclical and structural forces at work in the global economy, one can end up with gains for growth from the drop in oil prices lower than suggested by the standard model simulations. Nevertheless, there is still a possibility that these drawbacks appear to be weaker than expected. Demand-driven changes in oil prices have a tendency to have a smaller impact on growth, for their being outcomes rather than sources of economic instability. Furthermore, uncertainties connected with financial vulnerabilities, sharp growth of household debt, greater level of unemployment, and declining long-term growth opportunities may stimulate households and firms to save real income gains from falling oil prices, and not to invest or consume. A sharp decline in oil prices usually causes abrupt improvement of investments in new oil exploration and development. Leveraged and higher production cost investments in shale oil (United States), tar sands (Canada), deep sea oil fields (Brazil, Mexico), and oil in the Arctic zone could be especially prone to rapid changes in prices. Not to mention, the sudden decline in oil prices is straining both private and public sector balance sheets among main oil exporters. This sometimes causes sharp slowdowns with significant spillovers. Vast real income shifts from oil-exporting to oil-importing countries come together with development in global oil markets. Nevertheless, the eventual effect is influenced by a variety of factors, which include the share of oil in their exports or imports, the reliance on the oil sector for tax revenues, finencial policy room to react. Whereas the drawbacks are immediate and in some cases intensified by financial market pressure, the positive side of the question is more vague and the effects require some substantial time. Rapid slowdowns in oil-exporters might expand in neighboring countries, including some oil-importing ones. The oil importers may benefit from lower oil prices as this usually raises household and corporate real incomes in a way similar to a tax cut . A 10 percent decrease in oil prices could raise the level of some oil-importing economies by some 0.1–0.5 percentage points, in accordance with the share of oil imports in GDP. Oil-importing countries’ current state could also improve to a great extent but the impact might differ according to the underlying drivers of oil price development. The precise scale of improvement mostly depends on country-specific conditions. Above all, falling oil prices might affect oil-exporting economies indirectly. In many of them, government finances rely heavily on taxing the oil sector. For instance, in the MENA (Middle East and North Africa) region, oil-based income accounts for more than half of total tax revenues. Financial pressure on oil exporters may be enlarged by corporate sector weakness, to a greater extent in oil companies. Most of the largest oil companies are owned by the state. Concerning publicly traded companies, they have high debt-to-asset ratios. If governments do not safeguard spending, a significant loss of revenues may prompt a sharp financial unit. Furthermore, a decline in oil prices usually urges currency depreciations. Currency rate fluctuations are an important mechanism which helps non-oil tradable goods sector gain increased value over the medium term. Nevertheless, financing pressures might be rather significant in the short term. The consumer would benefit from lower prices, however, trade lapse would lead to lower incomes, which, in turn, would worsen household balance sheets and slow the housing market. The perversion of current account balances could be emaciated by well-developed financial systems.The decline in oil price might also be followed by temporary falls in global inflation. Though the decline in inflation has been quite lucid in countries with high income, the impact across countries has varied significantly. This reflected the importance of oil in daily products supply, exchange rate developments, state of monetary policy, the extent of fuel contributions and other issues. Speaking generally, the pass-through from oil prices to inflation seems to have declined because of the reduced oil dependence of production and consumption and a better fixing of inflation expectations. This has substantially reduced the second round effects of oil price fluctuations on core-inflation. The dissemination of commodity price shocks confirm a limited influence of oil price changes on core-inflation, in contrast with the more lasting effect of food price shocks, particularly in emerging and developing countries. The change in the price of oil is added to a standard Phillips curve model, in which inflation is regarded as inflation expectations and economic slack. A simple vector autoregression (VAR) model is estimated to study the dynamic mutual influencies between headline consumer prices, producer prices, output gap, exchange rate and the oil price.Results show that the pass-along to headline inflation in most cases is moderate. A 10 percent decline in the oil price usually reduces inflation by up to 0.3 percentage point at its highest impact. Country-specific circumstances could sometimes affect the impact of oil prices on domestic inflation. For instance, for oil-importing economies currency appreciation or depreciation would strengthen or lessen the deflationary impact of the oil price decline. In countries where household energy consumption is supported, the pass-through of global oil prices to local energy prices may be weakened. The impact of oil price movements on global inflation is estimated to be substantially unequalled, reaching its peak after three to five months, and fading gradually afterwards. To be more precise, a 45 percent decline in oil prices, would reduce global inflation by about 0.7-1.2 percentage point through 2015. In the course of 2016, however, inflation would return to levels observed prior to the plunge in oil prices.The recent decline in oil prices could also lead to massive declines in other commodity prices. To explain, it will most likely diminish natural gas prices in Europe and liquefied natural gas (LNG) prices in Asia. If oil prices continue to decline, the price of LNG, might drop further. Low oil prices will also put downward pressure on European natural gas prices, as they partly are linked to oil prices. Prices in the United States will be less influenced for they are determined by domestic supply and demand conditions. As for natural gas, it is a key input into fertilizer production. Therefore, lower oil prices will also impact agriculture. The largest problem is that falling fuel prices are expected to reduce production and transportation, including cost of chemicals and fertilizers, some of which are crude oil byproducts or directly made from natural gas. Reduced oil prices could also deteriorate the opportunity cost of biofuel production. Nevertheless, the declining attractiveness of biofuels production in an environment of low oil prices will likely to be allayed by current policies. Because most diversion of food commodities to biofuels is policy mandated, the increase in oil consumption caused by low oil prices may, actually, increase deflection of grains and oilseeds to the production of biofuels. The changes in non-oil commodity prices also affect activity in various countries. For example, lower prices for agricultural goods would generate a second round effect on commodity-dependent countries. Developing countries have large market shares for various other commodities and are heavily dependent on the exports of a few raw materials. Because of the dependence of low income countries on agriculture, the connection between oil and agricultural commodities has particularly important consequences in respect of growth and poverty. Fluctuations in oil prices affect oil and energy-related incomes and therefore government budgets of oil-exporting countries. In oil exporters in the Middle East and Africa, oil-related revenues account for more than half of government income. In oil-importing countries, savings from oil import bills can diminish government budgets. Pre-tax investments are high in many developing and emerging economies. They usually appear when energy consumers pay less than the actual supply cost of energy. The high real oil prices prevailing before the crisis contributed to mounting fiscal pressures in some countries as they responded to increasing global oil prices by raising price subsidies on domestic fuels. A decline in oil prices, therefore, presents an opportunity for many of these countries to reduce these subsidies and in the process remove long-standing distortions associated with them. Several oil-exporting countries are vulnerable on the global arena. Among them are such as Russia, Venezuela, Colombia, Nigeria, and Angola. Through second-round effects, economic slowdowns in oil-exporting countries could also cause tension between balance sheets of corporates and those of banks. Although banking systems in most oil-exporting countries have been considered flexible to oil price changes, financial pressures could eventually become more intense. Therefore, oil-exporters have directed a substantial amount of savings from oil revenues into a broad range of foreign assets, which include government and corporate bonds, equities, and real estate. If oil prices do not increase, the return of foreign assets could produce immense outflows and financial strains. Finally, while the direct impact of falling oil prices on poverty is likely to be limited, the indirect effects may be substantial and mostly profitable. The consumption of energy by the poor is relatively low: below 10 percent. Consequently, the direct effects of falling oil prices on the poor population are expected to be small. Anyway, indirect effects might eventually decrease the food prices. To prove this one should take into consideration that above 70% of the poor population are citizens of oil-importing countries. So the real incomes would grow and be supported by decreasing oil prices. This situation might appear beneficial as for low-class as for more wealthy citizens. In case falling oil prices caused the government to subsidy pro-poor programs, the poverty rates themselves would begin to diminish. In contrast, in oil-exporting countries, the dilution of total growth and more tightened fiscal policy, the hopes for the poor might fade. As it has been already mentioned, the decline in oil prices may affect the cost of other merchandise, such as food. Changes in global foodstuffs prices will surely influence most countries' domestic food prices. Nevertheless, these might be suppressed by transport costs and conditions of local supply and demand.Anyway, although the poor might see some benefit in oil price drops, the very poorest part of the population will surely suffer hard times. The reason is the fact that most households are net buyers, whereas in low-income countries they tend to be net food sellers and just marginal net food buyers. Thus, the poorest part of the population might suffer a great deal from vast income losses. The impact of oil price on Kazakh national currency tenge and the economy of the countryThe Trend magazine interviewed the expert of the Institute of Political Solutions of Kazakhstan Sergey Smirnov, who said that the oil price drop and the decision of OPEC affected the economy of Kazakhstan badly. According to him, the revenues of the country, which economy is mostly based on crude oil and metal industry, dropped together with the above-mentioned oil prices. It means that the social welfare is under threat, the inflation may rise and so do the delays in salary rises.Not less important is the fact that the national currency tenge has already been devaluated in February 2014. In addition, Kazakhstan’s tenge was traditionally connected with the ruble. The February devaluation of 20% has de facto interrupted the tight connection with the Russian currency, and the National Bank of Kazakhstan has chosen a floating exchange rate with the dollar, with a band of approximately 185 tenge per dollar. In Kazakhstan, where the exchange rate regime is a tightly managed float the government spent an estimated 9 billion U.S. dollars (or about half of their foreign exchange reserves) between July and October 2014 to stabilize the tenge. This put the budget of the country in the already shaky position. Further drops in oil prices caused the reorganizing of Kazakhstan budget-plans for further years. Kazakhstan does have reserves in currency as well as a National Fund, which in November 2014 was estimated by 76 billion U.S. dollars. However, it is not free money: lower oil prices mean less revenue and more expenditures, so any fluctuation in the oil price will be reflected directly in the income of the National Fund. Moreover, the vast borrowings from the fund may cause an outrage from society. Revenues from natural resources, especially oil and gas, are quite unstable, uncertain and depend on demand from abroad. In order to gain long-term success rich economies should either save resource revenues in order to multiply financial assets or to invest them in physical assets, i.e. use them for capital expenditure in the future. The short-term challenge for both macroeconomic management and fiscal planning stems from the unpredictability of oil prices. This often contributes to a government expenditure in resource-exporting countries and calls for a smoothing of public expenditure by using strong fiscal anchors.In October 2014 the First Deputy Energy Minister of Kazakhstan Uzakbay Karabalin said that the prime cost of Kazakh oil is around 50 U.S. dollars per barrel, compare with average 80 U.S. dollars per barrel. Which, in turn, means that together with transportation the cost of oil sale will be the same as the prime cost of the produce itself. Therefore, there will be no income to the national budget and hence the decrease of social welfare.More unfortunate news for Kazakhstan was the postponement of the Kashagan oilfield opening. It was meant to be one of the largest oil production points, however, due to technical problems, namely gas leaks in the field's pipeline network, in October 2014 the reopening of the oilfield was postponed until 2016. These economical misfortunes affected the image of the President Nursultan Nazarbayev’s image and his policies. The President still looks for an appropriate way to manage the country in his authoritarian way so that the people do not turn against the government. Another reason for worrying is the decrease of GDP. In October the government scaled back its 2014 growth target from 6 percent to 4.3 percent. Annual revenue would fall $2.3 billion below target, and the government revised its deficit forecast upward, from 2.3 percent to 2.6 percent of GDP.Falling oil prices also cause the government to revise the 2015 and 2016 budgets, which were previously based on an oil price of $90 a barrel, to a more conservative $80. Oil has been trading at around $86, below the $95 set in this year’s budget (though for most of 2014 it was above).Regarding volatility, the low price of oil is inspiring a new series of currency devaluation rumors, which the government has denied. Still remembering the February’s devaluation, Nazarbayev’s administration is keen not to react to public discontent. The government has pledged not to cut social spending, but analysts have controversial opinions on whether officials can keep this promise. Kazakhstan, according to experts has to make changes in its economy and reduce its dependency on Russia.