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KAZAKHSTAN ECONOMY MAY LOSE KZT1.3 TRN DUE TO RECESSION IN TRADE – RESEARCH

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by May 4, 2020 General

March business activity index fell to multi-year lows. Entrepreneurs note a worsening situation in all real sectors of the economy. Even e-commerce does not allow businesses to contain the negative effects of quarantine measures and return former earnings, Strategy2050.kz reports with reference to FinReview.

The coronavirus pandemic has been spoken around the world since the very beginning of 2020. Until recently, it was possible to be skeptical of the danger of the virus and not take seriously news reports about it. To think that it will also pass unnoticed by the economy, like bird or swine flu. However, Covid-19 has been actively distributed in almost all countries of the world, and quarantine measures introduced to reduce virus infection have brought down business activity. There was no such fall even after the global financial crisis of 2008.

The business activity index, which characterizes the state of the economy and the prospects for the development of industrial production, the construction sector and the service sector in the country, fell to a multi-year minimum in Kazakhstan. The first negative changes in the sectors of the economy appeared in February 2020. Then the value of the index was 49.1 points and this was the first month since April 2017, when production in the country began to decline. But this was only the beginning of the consequences of the coronavirus. In March, the situation worsened more – the index fell to 41.5 points.

The business activity index is one of the key macroeconomic indicators that allows, based on surveys of business representatives, to determine how the conditions for entrepreneurship in the country are changing. When forming the index, three sectors of the economy are taken into account: industry, construction and the service sector. The marker value of the index is 50 points. If the value is above this level, then the situation is changing for the better, the forecast is positive. And if lower, then this means that the business sector is undergoing a negative change. Moreover, the higher or lower the index value from the marker level, the stronger the dynamics of change.

The decline in business activity occurred in all real sectors of the economy. But the service sector suffered the most – in March, the index was only 38.7 points. This drop was caused by the deterioration of the situation in almost all areas of the sphere: there were fewer new orders, delivery times increased, and the number of employees decreased. Moreover, the indicator drops below 50 points for the third month in a row. This means that the quarantine introduced only exacerbated the previously emerging problems.

Another sector of the economy that has also been significantly affected by coronavirus is construction. Due to a decrease in the number of new orders, a decrease in construction work and a reduction in employment, the index in March 2020 was only 43.5 points.

Of course, such a sharp drop in business activity in real sectors of the economy leads to a deterioration in economic sentiment and expectations of entrepreneurs. Their incomes are falling, and debts, on the contrary, are growing. On average, companies lost 72% of their income, in particular, the profit of the manufacturing sector decreased by 6 times, and the service sector – by more than 3 times.

As a result, in February 2020, the country’s business climate index for the first time since the beginning of 2016 dropped to the level of 1.1 points. And in March it fell to -24.5 points altogether.

The Business Climate Index is an assessment by entrepreneurs of the current financial situation of their company and how its financial position may change in the next three months. The average value of the index is 0, and if it is positive, then this indicates an improvement in conditions. And vice versa, in the case of a negative indicator, entrepreneurs note a deterioration in business. Moreover, the larger the value, the stronger this dynamics.

Due to the coronavirus crisis, even e-commerce does not provide previous business revenue

The widespread belief that online retail profits break all records is erroneous. The state of emergency introduced in the country limited the activities of enterprises, which led to financial losses of more than 2.5 million workers. Obviously, this affected the purchasing power of the population – now the main expense items are concentrated in the food and economic sectors. This is where sales in March grew almost 3 times.

However, profitability from sales of food and household goods looks rather modest compared to other trading sectors, such as the sale of airline tickets, clothes, household appliances, cars, whose sales decreased by 5 times. Therefore, the profit of the entire trading sector decreased by 39%.

To stimulate the sale of goods and services, entrepreneurs began to actively switch to electronic commerce. However, online sales for the first time in four years have shown a decline. The average daily sales in April fell immediately by 75%, for example, purchases of household appliances fell by 52%, goods for sports – by 78%, and the turnover of online hypermarkets – by 11%.

That is, the current quarantine situation completely paralyzed small and medium businesses in the country. This poses a threat of financial losses for the economy of Kazakhstan, since SMEs form 29.5% of the funds in the structure of GDP. And therefore, now the national economy may receive less than 1.3 trillion tenge.

Nevertheless, SMEs are weakened but not broken

The Government of Kazakhstan promptly developed an anti-crisis action plan, within the framework of which the National Bank began to implement a new program of preferential lending to SMEs. 600 billion tenge were allocated for these purposes. Loans are issued to replenish working capital in the amount of up to 3 billion tenge at 8% per annum for a period of one year. In turn, for individual entrepreneurs, the maximum available amount is 50 million tenge.

Twelve Kazakhstan banks are already implementing this program. According to the latest data, namely from April 10, 2020, they approved more than 470 projects in the amount of 292.2 billion tenge.

Also, the country implements lending mechanisms for priority projects – the so-called program “Economics of simple things.” According to its terms, banks lend to projects in the manufacturing sector, agriculture and services.

Under the program, the interest rate for borrowers is only 5% – 6%, and credit resources allocated for investment purposes are provided for up to 10 years. That is, the desire of the state to reduce the raw material dependence of the economy after the collapse of oil prices has gained particular relevance.

Investing can also help SMEs improve their financial situation

Obviously, in order to continue economic activity, enterprises will have to adapt to the current situation, transferring the business to electronic format. Such a transition and in the long run will increase profits, as global online trading increases every year, expanding sales markets. And the geographical features of Kazakhstan, located in the center of the Eurasian continent between the largest economically developed countries of Europe and Asia, create promising prerequisites for the development of international trade relations.

However, now entrepreneurs, including large and medium-sized business entities, are experiencing financial difficulties. Therefore, after quarantine closes, they will try to increase capital. This may lead to an increase in the lending to SMEs. Already in March, the volume of lending to legal entities increased by 6% and reached 7.4 trillion tenge, while lending to small businesses increased by 4%. Although the last five years, there has been a trend towards a decrease in loans.

More profitable financial instruments to increase capital are investments. Kazakhstan has already created all the necessary infrastructure to attract investment. Development banks, financial institutions, stock exchanges, venture funds successfully raise funds in Kazakh projects. For example, the Eurasian Development Bank invested  3.3 billion US dollars in 76 Kazakhstani projects, the European Bank for Reconstruction and Development is participating in an even larger number of projects – 263 projects worth almost 8.4 billion Euros, and Astana International Financial Centre for two years raised 2.5 billion US dollars of portfolio investment.

In turn, investments will not only attract funds, but also expand the geography of sales of goods and services, as well as improve the business processes of the company.

 

 

 

Source: Kazakhtan 2050

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