Kazakhstan Macroeconomic Performance -- Fiscal Policy

Budget revenues

Budget revenues in the 1H98 increased compared to the 1H97 and reached USD 1,814 billion (16.6% of GDP). Tax revenue (USD 1,402.8 million in 1H98) became the major source of revenue for the budget (12.0% in 1997 and 16.6% in 1H98). Tax revenue alone is almost five times higher than the budget deficit and the tax collection rate (over 92%) is among the highest in the CIS.

Industry

The National Statistics Committee reported growth in the output of the mining sector (3.6%, 1H98 as compared to the 1H97) due to the growth in: primary metals processing (11.8%), natural gas extraction (13.8%), mining of the ore of non-ferrous metals (11.0%), and crude oil output (2.1%).

Expenditures	‘Other Expenditures’ item in budget dominated throughout 1997 but tended to decline in 1H98. The major component of ‘other expenditures’ was the financing of construction in the new capital, Astana. We believe the budget financing of this construction is virtually over since the new capital was officially presented in June 1998. Apart from construction, this line item also represents subsidies for agriculture, transportation, communications, housing, etc.
Outlook	Falling world oil and metals prices together with the delay in blue chip privatisation led to a significant decrease in budget revenues (estimated at about USD 400 million). As a result of the financial crisis in Russia and unfavourable market conditions, the Government could reschedule the issue of eurobonds (USD 500 million). In response to these external shocks, the Government decided to cut the expenditure side of the budget by about USD 500 million (KZT 45 billion) by the end of 1998. This could help to keep the budget balanced and avoid expensive borrowing.
Concerns	The major concern for potential investors is the continuing trend of covering the budget deficit through issuing short term T-bills. Although the absolute figures are small (USD 125 million as of July 1998), the bias towards short term debt papers raises concerns. Another concern is the significant fluctuation in the deficit of the budget throughout 1997 and 1H98 (see table below).

	1Q97	2Q97	3Q97	4Q97	1Q98	2Q98
Deficit, USD mln	-1.4	-84.3	-123.0	-561.5	30.5	-318.3
Deficit, %of GDP	-0.3	-1.1	-1.6	-2.8	0.4	-2.0
Tax Revenues/GDP, %	10.5	11.9	9.7	15.6	13.1	12.6

Prospects for 1998

We do not see serious reasons to worry in regard to Kazakhstan’s budget deficit and general budget figures. There are a few distinct differences between Kazakhstan and Russia:

· Budget approval by the Kazak Parliament usually is done in time, without serious delays as it has happened in Russia,

· Tax revenues are high and are the dominating source of budget revenues; the volume of tax revenues is growing,

· Kazakhstan also has a different tax administration system. The tax collection ratio is over 90% and does not pose serious problems as in Russia,

· The low absolute figures of the budget deficit (even within the tough Maastricht criteria) do not raise concerns over the Government’s ability to serve the debt.

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This report has been prepared by Kazkommerts Securities and provided solely for information purposes to recipients only. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. This information does not constitute an offer to buy or sell securities. Kazkommerts Securities or its affiliated persons may be buying, selling or holding long or short positions, acting as investment bankers, be represented on the Board of the issuers in securities mentioned herein. This report is not intended for the use of private investors. Investment in Kazakhstan markets is an extremely risky activity and many persons, physical and legal, may be completely or partially restricted from dealing in the Kazakhstan securities markets.

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