FITCH DOWNGRADES RATINGS OF KAZAKHSTAN, OUTLOOK STABLE
11.05.16 12:10
/Fitch Ratings, Moscow, May 4, 2016, KASE headline/ – Fitch Ratings has
downgraded Kazakhstan's Long-term foreign currency Issuer Default Rating (IDR)
to 'BBB' from 'BBB+' and local currency IDR to 'BBB' from 'A-'. The Outlooks are
Stable. The issue rating on Kazakhstan's senior unsecured foreign currency bonds
has also been downgraded to 'BBB' from 'BBB+'. The Country Ceiling has been
revised to 'BBB+' from 'A-' and the Short-term foreign-currency IDR affirmed at
'F2'.
KEY RATING DRIVERS
The downgrade of Kazakhstan reflects the following key rating drivers and their
relative weights:
MEDIUM
Off-balance sheet spending, in response to low oil prices, has resulted in
Fitch's broader measure of the budget deficit widening sharply to 5% of GDP in
2015, compared with a surplus of 3.5% over the previous five years, as the
government funded infrastructure investment out of the NFRK (National Oil Fund)
and supported troubled state-owned enterprises (SOEs). Fitch expects the budget
deficit to narrow to 4.2% of GDP in 2016, above the 'BBB' median of 2.6%,
largely due to lower planned off-balance sheet spending. Downside risks arise
from state support for banks as well as SOEs.
Buffers are being drawn down to finance wider fiscal deficits. The NFRK's assets
were USD63.5bn (34% of GDP) at end-2015, from USD77.2bn in August 2014 and
Fitch expects them to fall further to around USD59bn by end-2016. However, the
ratio of oil fund assets to GDP will rise further because lower oil prices have
depressed the nominal value of GDP. Government debt jumped to 22.1% of GDP
in 2015 from 13.9% in 2014, due to increased external borrowing as well as the
sharp depreciation of the tenge. Despite the deterioration, Kazakhstan's
sovereign net foreign assets exceed 40% of GDP, well above the peer median of
0.8% of GDP.
The macroeconomic dislocation following the introduction of a free floating
exchange rate in August 2015 (the tenge has fallen 77% against the US dollar) is
expected to persist over the coming months. Inflation (15.7% in March) reached
its highest level in nearly seven years. While Fitch expects inflation to
moderate to 10% by end-2016, as the exchange rate pass-through fades, inflation
is forecast to remain well above the 'BBB' median of 3.3% over the forecast
horizon. The effectiveness of the monetary transmission mechanism is limited by
high levels of dollarisation as well as limited longer-term tenge liquidity.
The re-introduction of the base rate in February 2016 and the effective
implementation of the interest rate corridor (+/-2%) are improving money market
liquidity.
Dollarisation reached a peak of 69% in January 2016, more than double the 'BBB'
median reflecting limited confidence in the domestic financial system and the
tenge. The recent stabilisation of the tenge has resulted in modest
de-dollarisation. The National Bank of Kazakhstan (NBK) estimates that
dollarisation of 50% would allow for a more effective monetary transmission
mechanism.
Fitch expects the economy to contract by 1% in 2016, well below the five-year
average of growth of 4.6% and the 'BBB' median of 3.3%. Declining real wages
and a sharp fall in dollar income will cut consumer spending. GDP per capita has
fallen sharply from USD14,828 in 2013 to USD7,102 in 2016 - below the 'BBB'
median. The contraction in investment will be muted by the state programme of
infrastructure development, 'Nurly Zhol', funded by the NRFK. Part of the fall
in spending will be absorbed by a further sharp contraction in imports,
particularly consumer goods. Raising medium-term growth prospects above rating
peers will depend on successful implementation of the government's reform
initiatives, including privatisation and the '100 Step Programme', as well as
diversifying the economy away from oil.
The banking system remains a rating weakness, with a Fitch Banking System
Indicator of 'b'. Kazakh banks' asset quality and capital will remain under
pressure in 2016 from still large un-provisioned problem loans, estimated at
double NPL's (8% end March 2016) and the tenge devaluation, which will hurt
foreign-currency borrowers' ability to service debt.
Kazakhstan's 'BBB' IDRs also reflect the following key rating drivers:
The authorities maintain a cautious stance to fiscal policy, under the
assumption that oil prices are expected to remain lower for longer, scaling
back non-priority infrastructure projects and limiting foreign borrowing. The
2016 Republican Budget sees the deficit narrowing to 2% of GDP, from 2.2% in
2015, as real expenditure contracts sharply. Improving the efficiency of public
investment and tax collection, including reducing tax loopholes, is expected to
support fiscal consolidation. By 2018, the authorities expect to run a deficit
of 1%, assuming an oil price of USD35/b. In order to preserve the oil fund, the
government has indicated its commitment to not increase annual guaranteed
withdrawals from the oil fund, from the current USD8bn.
The drawdown in reserves has reversed, with the NBK adding to international
reserves in February and March as households liquidate dollar deposits. Gross
reserves have increased to USD28.4bn in March from USD26.8bn in January. The
NBK has reiterated its continued commitment to allow the tenge to float freely,
although Fitch expects that the NBK will continue to pick up dollars as de-
dollarisation continues in order to improve the structure of reserves. Fitch
expects the deficit on the current account (3% of GDP) to be fully financed by
external borrowing as well as foreign direct investment.
Structural factors are an important determinant of Kazakhstan's sovereign
ratings. The current ratings acknowledge that commodity dependence is high,
while Kazakhstan scores weakly on World Bank indicators for governance and
institutional strength.
RATING SENSITIVITIES
The following risk factors individually, or collectively, could trigger negative
rating action:
- Policy mismanagement and/or prolonged low oil prices leading to a further
weakening in the sovereign external balance sheet.
- Renewed weakness in the banking sector, which leads to contingent liabilities
for the sovereign.
The following factors, individually or collectively, could result in positive
rating action:
- A sustained recovery in external and fiscal buffers.
- Steps to reduce the vulnerability of the public finances to future oil price
shocks, for example, by reducing the non-oil deficit.
- Substantial improvements in the business climate and governance supporting
diversification and a sustained recovery in Kazakhstan's economy.
KEY ASSUMPTIONS
Kazakhstan's ratings are based on a number of key assumptions:
- Continued commitment to the policy framework.
- Political stability is expected to continue.
- Fitch assumes that Brent crude will average USD 35/b in 2016 and USD 45/b in
2017.
Contact:
Primary Analyst
Carmen Altenkirch
Director
+44 20 3530 1511
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Secondary Analyst
Richard Grieveson
Director
+44 20 3530 1811
Committee Chairperson
Andrew Colquhoun
Senior Director
+852 2263 9938
[2016-05-11]