Some thoughts on Kazakhstan, commodity prices and policy Space

The protests in Kazakhstan have increased the focus on the impacts of rising food and fuel prices across many countries. The spike in natural gas prices and power costs across Eurasia has strained many countries, and amplified the impact of already increasing prices that related to supply chain disruption. While a badly executed fuel price spike seems to be the trigger of the protests, the pressures and grievances are much more broad in Kazakhstan, which struggled to redistribute its commodity wealth and stalled on governance and structural reforms for many years, despite significant access to global capital markets. Overall, it highlights the challenges of growth and redistribution present in many countries – and how countries have struggled to use their policy space as previous challenges have been eroded by the pandemic and its recovery.

Others will point to the uneven energy transition as the trigger – this would be a dangerous simplification. While decisions in EU and elsewhere to shift power supply away from coal and nuclear, and the politicization of natural gas supply from Russia are clearly contributing factors, its too simple to just chalk developments in this ongoing saga towards rigidities in the energy transition . While its too early to draw many conclusions, the speed of protests, deterioration of the security situation and the involvement of regional neighbors like Russia suggest these developments are concerning.

More broadly it illustrates the challenge that countries have in using their limited policy space, space that seems to be shrinking as policy stance (fiscal and monetary) tightens, mobility drops to some extent and commodity suppliers face challenges responding to uncertain demand. Many countries face challenges about how to pass on hikes in raw materials, with those that had held on to subsidized prices (including some fuel producers) more exposed. Richer countries may be more able to cushion the blows to more affected populations, but the big challenge is one of growth. The combination of tighter policy stance and uncertain demand is amplifying the growth challenges and is likely to lead to less syncronicity of growth.

Whether it turns into more political and social unrest depends both on how countries respond to energy prices – do they pass it on, how quickly and to what segments of the economy are sheltered but also whether there are other underlying grievances and conflicts. The trigger point in Kazakhstan was energy costs but there was a lot of other economic grievances and governance and economic challenges that people were concerned about. 

Kazakhstan stands out as one of the few countries that was still subsidizing fuel to consumers, at least of some products. Globally, many countries scaled back their fuel subsidies over the last decade, with oil producing nations being the most notable laggards. Many importing countries especially in Asia reduced or eliminated the degree of subsidies. The recent spike in natural gas and related liquid prices is unique, given the increase in spot prices – countries that rely on spot electricity and natural gas outputs have been struggling. What’s unique about this increase in prices though has been the debris the speed of increase particularly linked to natural gas linked to power particularly across Eurasia and so even countries that haven’t typically subsidized consumers have been implicitly put in positions where they are reimposing controls. 

High prices of fuel could amplify food shortages via fertilizer price hikes, and the impacts of climate stress – in turn weakening reducing purchasing power and encouraging export bans of key commodities. We’ve seen energy intensive industries including fertilizer plants shut down because of very power costs that in turn might add to some pressures on food supplies  prices that were already impacted by the supply chain disruption. For countries that have struggled to generate jobs this would be explosive. 

There is a real growth challenge across many EM countries, despite the revival in global activity and commodity prices. These growth pressures won’t necessarily fuel protests everywhere but it is a more difficult policy environment. Across the emerging world right now is the set of policies have reduced the risk of currency and financial crisis by crimping growth and undermining imports. Aside from some notable exceptions like Turkey, there is much less risk of a BoP challenge as growth restrictions based on tight fiscal policy last stimulus and tightening and rising interest rates have actually reduced domestic demand. Sluggish growth has dampened imports and exports have been less effected. For some commodity producers export revenues have risen and we’ve seen an improvement of  external balances.  In 2020 we were worried about that emerging market economies lacked policy space some actually had more space than expected due to global easing and several one-off interest rate deferrals, but now with interest rates rising and needing to get ahead of the Fed as local inflation is rising, assumed fiscal and monetary challenges are mutually reinforcing.  Forecasts from the IMF and the World Bank  assume that many countries are to cut back a lot on fiscal spending to return to balance, which increases economic and social costs of more austere policies.  

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