The National Fund of Kazakhstan (NOF) was created in the early 2000s by the decree of the President of Kazakhstan, Nursultan Nazarbayev, “on the National Fund of the Republic of Kazakhstan” issued on August 2000. The fund was created to implement several functions, such as to save some portions of abnormal current income from natural resources for future generations (saving function), to be able to use these savings to stabilize the economy during internal (stabilization function) and external economic fluctuations, and to prevent the Dutch disease, which is a common problem for resource-rich countries. It is important to note that the NOF was created not as a legal entity, but it was created as a fund of assets that should be managed by another legal entity.
The NOF is essentially owned by the Ministry of Finance, overseen by a Management Council, and managed by the National Bank of Kazakhstan (NBK). The Management Council is the main governing body. The members of the council comprise 10 members all of whom are appointed by the President of the country. For instance, the members of the council are, the President, the Prime-Minister, the Governor of the National Bank, the Minister of Finance, the Minister of National Economy, the Head of the Administration of the President, the Chairman of the Accounting Committee and etc.
In 2014, by the decree of the President of Kazakhstan, a Commission for Control over Expenditure of Resources Allocated from the National Fund of the Republic of Kazakhstan was created. This commission, the head of which is the Governor of the NBK, was created to monitor the allocation of the expenditures of the NOF.
The Management Council is responsible for both setting the general governing policies of the NOF and setting general investment strategies. The investment strategies are usually set with advice of the Treasure Department of the NBK because it is the body, which in fact manages the investments. It is worth mentioning that this department also manages the foreign currency reserves of our country.
As for December of 2016, the department manages more than $90 billion, $60 billion of which is the NOF, while the remaining $30 billion is the foreign currency reserves. The assets of the NOF have grown considerably since its creation, from $660 in 2001 million to $60 billion in 2016, which is almost 9000% growth. The first receipt in the amount of $660 million was made with funds from the sale 5% of the state share in joint venture “Tengizchevroil” to American Chevron Company.
Figure 1 shows us how the assets of the NOF have been growing since its creation. The figure shows that between 2001 and 2009 the assets of the fund had been growing, but in 2009 its assets sharply decreased by 20%. The reason of such a fall was the global financial crisis, which seriously affected the country’s economy, especially the banking sector of the country. The government had to rescue the banking sector, especially BTA Bank that had significant solvency problems and could not pay back its debt to international financial institutions. Nevertheless, high oil prices allowed to the government to quickly compensate these expenditures, and after 2009 the Fund’s assets grew rapidly until the end of 2014 and reached its highest level of $77 billion in August 2014. However, since August 2014 the assets of the NOF have decreased by almost $16 billion, due to the significant reduction in oil prices in the middle of 2014. These assets are the main sources of the Fund, and they include huge transfers from the NOF to the state budget to cover budget deficits.
These assets are invested in two different portfolios. These portfolios are based on two main functions of the NOF. In order to implement its saving function, the Fund has to use its assets in long-term investments with high return and with a moderate level of risk, while for stabilization purposes, the Fund invests its assets into short-term assets and high liquid assets. Because there are two different types of investments, the Fund manages two different portfolios: saving and stabilization. According to the NBK, at the end of 2015, 72% of the assets of the Fund were in the saving portfolio, while remaining 28% of assets were in the stabilization portfolio. The stabilization portfolio was fully invested into the U.S. Treasure Bills, which are highly liquid assets. Meanwhile, almost 36% of the saving portfolio was invested in the U.S. Treasure Bills, while 44% of the portfolio was invested into government securities of countries, such as the EU, the UK, Japan, Canada, Australia, South Korea. The remaining 20% of the saving portfolio was invested in the stocks of companies from advanced countries.
The last function of the Fund is to prevent the Dutch disease. It prevents the Dutch disease by investing its assets into foreign investments. Therefore, most of the assets of the Fund (96%) are invested in instruments in foreign currency, but some portion of its assets (4%) are still invested in instruments in tenge. These assets in tenge are invested into National Wealth Fund “Samruk-Kazyna”, National Management Holding Company “KazAgro”, and National Management Holding Company “Baiterek”. The last time when the fund invested in an instrument in tenge was in 2015 when the Fund bought bonds of the Samruk-Kazyna to rescue its subsidiary company Kazmunaigaz.
Low oil prices not only decreased assets of the Fund, but it also affected the profitability of the NOF. In 2014 and 2015, the return of the Fund was negative in the amount of -1.19% and -2.44% respectively. However, during the previous 13 years, the Fund managed to gain positive return in 11 cases, while it failed to get a positive return in 2002 during the dot-com crisis and in 2008 during the global financial economic crisis. Overall, the average investment return of the Fund was 3.56%.
In Figure 1, we can see how the transfers to the state budget have been changing since creation. We can clearly observe that the transfers from the Fund have been growing rapidly since the global financial crisis in 2008. In 2016, the government received more than 2.8 trillion tenge from the Fund. In particular, 2.1 trillion tenge was received in terms of guaranteed transfers and 7.5 trillion tenge was received in terms of targeted transfers.
In general, the information presented above shows that the Fund has some problems due to decreased oil prices. However, we should not expect that the Fund would run out in near future due to low prices. First of all, the $60 billion is a huge amount of money. For example, these assets would allow the country to survive on these assets for more than two years, without any other budget revenues (presuming that the average state budget is $25 billion). Additionally, it is important to note that there is a law that restrains the government from using targeted transfers in budgeting purposes in cases when the assets of the Fund fall lower than 30% of GDP. Moreover, the government cannot take more than $9.2 billion of guaranteed transfers in a year. Finally, it is expected that oil prices will gradually grow, which along with the recommissioned Kahsagan oil field will increase the amounts of receipts to the Fund. For example, the U.S. Energy information Agency reported that it expected that in 2017 and 2018 the average prices of Brent would be $54.5 per barrel and $57.2 per barrel, while in 2016 the average oil prices were $43.7 per barrel. Therefore, we expect that the assets of the NOF will not drain out in near future, moreover, it can start to grow gradually.
Daniyar Nurbayev is a research fellow at the Eurasian Research Institute. Daniyar completed his bachelor’s degree in Finance in the Kazakh-British Technical University in 2013. In addition, he holds Masters degree in Finance from the Kazakh-British Technical University (2015).