S&P AFFIRMS CREDIT RATINGS OF REPUBLIC OF KAZAKHSTAN, OUTLOOK NEGATIVE
13.09.16 11:56
/Standard & Poor's, Moscow, September 9, 2016, KASE headline/ – S&P Global
Ratings affirmed its 'BBB-/A-3' long- and short-term foreign and local currency
sovereign credit ratings on the Republic of Kazakhstan. We also affirmed the
Kazakhstan national scale ratings at 'kzAA'. The outlook on the long-term
ratings is negative.
RATIONALE
Our ratings on Kazakhstan remain primarily supported by the government’s
strong balance sheet built on past budgetary surpluses, accumulated during the
era of high commodity prices. The ratings remain constrained by Kazakhstan’s
limited institutional effectiveness owing to the highly centralized political
environment; the country’s moderate level of economic development
characterized by high commodity dependence; and limited monetary policy
flexibility.
Kazakhstan's economy depends heavily on the oil sector: official estimates
suggest it directly comprised about 15% of GDP and accounted for over half of
exports by value in 2014. We anticipate that, as oil prices remain low,
Kazakhstan will this year register its weakest economic performance since 1998,
with output stagnating in real terms. We believe export volumes will decline not
only due to price effects but also due to the aging of the main oil fields,
resulting in flat or slightly reducing oil output. At the same time, private
consumption will contract in real terms as consumer purchasing power is hurt by
the considerable Kazakhstani tenge depreciation in 2015.
We project that the economy will return to moderate growth rates from 2017 with
output expansion averaging 2% over 2017-2019. The projected macroeconomic
dynamic will be supported by stronger investments and recovering private
consumption. Importantly, it will also be supported by stronger export
performance as the oil price outlook improves (see "S&P Lowers Its Hydrocarbon
Price Deck Assumptions On Market Oversupply; Recovery Price Deck
Assumptions Also Lowered," published Jan. 12, 2016 on RatingsDirect) while the
giant Kashagan oil field will finally be launched after a long string of delays.
The latter should lead to a substantial growth in oil production volumes.
We believe that the weak global commodity environment has also had a number
of negative implications for Kazakhstan beyond the deceleration in headline
growth. Specifically, it has exerted pressures on the country’s fiscal
position.
At present, we continue to view the government’s strong balance sheet as a key
factor supporting our ratings. We forecast that general government liquid
assets - largely consisting of the predominantly foreign-invested National Oil
Fund of the Republic of Kazakhstan (NFRK) and government deposits at the
central bank - will amount to roughly 50% of GDP at the end of 2016. (We have
excluded NFRK’s tenge financing of Kazakh state-owned enterprises [SOEs] from
our calculation of liquid assets because these loans and bond purchases are
generally characterized by concessional rates, very long maturities, and
uncertain repayment prospects.) Given a relatively low debt level of about 20%
of GDP, the government therefore remains in a net creditor position of over 30%
of GDP.
However, the government’s budgetary performance has deteriorated notably
over the last two years in tandem with the fall in oil prices. We have refined
our revenue and expenditure calculations to better capture the general
government sector's fiscal stance (the general government comprises the central
government, local governments, and NFRK). Specifically, we have started to
explicitly include the government off-budget economic support programs,
channeled through SOEs and financed by the NFRK, in our calculation of general
government expenditures. In contrast to the authorities, we also do not count
the upward revaluation effect of NFRK's foreign currency assets expressed in
tenge (such as the one stemming from last year’s sizable tenge depreciation) in
our general government revenue calculations. We estimate that, under the
revised approach, the general government deficit deteriorated to a high 8.6% of
GDP in 2015 from an average annual surplus of about 3.5% of GDP during the
preceding five years.
Our baseline forecast envisions a gradual budgetary consolidation with deficits
steadily declining over the next three years and reaching a slight surplus in
2019. We base our expectations on the following assumptions:
A gradual increase in the oil price (see "S&P Lowers Its Hydrocarbon Price Deck
Assumptions On Market Oversupply; Recovery Price Deck Assumptions Also
Lowered") and oil production volumes as the Kashagan oil field in the Caspian
Sea becomes operational. Both should support higher NFRK revenues.
Containment of capital spending. We believe that the current high share of
capital spending in the overall general government expenditures affords the
government additional flexibility because this spending could be reduced to keep
deficits under control. We anticipate that over the next several years, the
government will increasingly concentrate on priority projects while some
expenditures – including under the Nurly Zhol infrastructure program – will be
implemented over a period longer than initially planned.
Improved government revenue performance. The authorities plan to improve tax
administration and collection as well as focus on optimizing tax legislation,
for example through raising VAT thresholds, which should generate additional
income.
At the same time, there are a number of risks that could derail the projected
consolidation and ultimately put pressure on the sovereign ratings. We believe
the government may find it challenging to control spending for political
reasons, while further unanticipated delays in bringing Kashagan on-line could
lead to revenue underperformance. We also see some risks from contingent fiscal
liabilities even though we assess those as limited under our methodology.
Specifically, some of these could materialize if the government were called to
support one of its many SOEs (the non-government portion of debt for which is
estimated at over 20% of GDP) or a systemic bank, such as KKB (see
"Kazakhstan-Based Kazkommertsbank JSC Rating Lowered To 'CCC+' On
Weakened Financial Performance; Outlook Negative," published on May 16,
2016).
In our view, Kazakhstan’s external profile remains under pressure, although it
is still relatively strong and supports the ratings. The current account posted
a deficit of 3.2% of GDP in 2015 ending a five-year string of consecutive
surpluses averaging 2% of GDP. We expect the deficit will peak at 4% of GDP in
2016 but gradually tighten thereafter as oil prices recover and the Kashagan
oil field becomes operational. In the short term, the current account will
remain supported by the reduction of import volumesas private consumption
declines in the wake of sizable tenge depreciation last year.
We continue to see balance of payments risks from Kazakhstan’s sizable stock
of inward foreign direct investment (FDI) of a debt-like nature. We estimate
this was about $80 billion in 2015, which is close to 45% of GDP or over 140%
of current account receipts. We understand that debt-type FDI is principally
concentrated in the oil and mining sectors. Although it generally presents
smaller risks to the financial account of the balance of payments than
confidence - sensitive flows, we note that repayment of inter-company advances is
easier to effect than declarations of large dividends.
Our ratings on Kazakhstan are constrained by the limited flexibility of its
monetary policy. The central bank announced a switch to a floating exchange
rate and inflation targeting in August 2015. The subsequent exchange rate
adjustment has eased the accumulated external pressure. That said, we believe
that the implementation of effective inflation targeting will take time as
appropriate instruments are developed and credibility is improved. In our view,
the National Bank of Kazakhstan's (NBK) full commitment to the stated policy
and ability to keep inflation within the stated target band remains to be seen.
We believe NBK could also be subject to political influence as exemplified by
some activities in which it has participated over the last year. These have
included becoming a shareholder of the National Company KazMunayGas and
compensating tenge-denominated deposits after last year’s currency
depreciation.
We also view the high level of resident deposit dollarization in the economy as
limiting Kazakhstan’s monetary flexibility. Although the share of foreign
currency deposits to total deposits has recently fallen to below 60% from a
peak of about 70% at the end of last year, the level remains high. Foreign
currency denominated bank deposits at NBK also comprised about half of
international reserves at the end of 2015. In addition, NBK is engaged in
currency swaps with domestic banks of about $4 billion (close to 15% of
international reserves) to support the banks' local currency liquidity,
effectively shifting these external assets from the banks to NBK.
In our view, Kazakhstan’s banking system remains weak. We expect a rise in
reported nonperforming loans (NPLs) this year as last year’s tenge depreciation
affects the capacity of some borrowers to service their foreign-currency
denominated loans. We also believe that the official NPL statistic of close to
8% as of July 2016 underestimates the credit risk in thesector. This is because
some banks have created special purpose vehicles to which they have offloaded
NPLs at face value. Adjusting for this effect, the underlying NPL level is
likely to be considerably higher.
Our ratings on Kazakhstan also remain constrained by the sovereign’s weak
institutional effectiveness. We believe that decision making remains highly
centralized, which can reduce policymaking predictability. The government has
announced a number of institutional reforms over the last two years but it
remains to be seen if these will be fully implemented. Considerable
uncertainties surround the eventual presidential succession. There have been no
precedents of transfer of power since Kazakhstan’s independence in 1991, with
President Nursultan Nazarbayev (currently aged 76) having governed ever since.
That said, Kazakhstan has benefited from one of the most stable political
environments in the region during the past 25 years.
OUTLOOK
The negative outlook reflects our view of risks to Kazakhstan's external and
fiscal profiles over the next 18 months in the current weak and volatile global
commodity environment.
We could lower our long-term ratings if Kazakhstan's fiscal, external, or
economic performances do not improve in line with our baseline expectations.
Further delays to Kashagan coming on-stream is one example of a development
that could negatively impact the country’s credit profile.
The ratings could stabilize at the current levels if the present balance of
payments pressures abated or monetary policy flexibility improved. The latter
could occur if resident deposit dollarization reduced substantially, improving
the ability of the central bank to influence domestic economic conditions
RATINGS LIST
Rating
To From
Kazakhstan (Republic of)
Sovereign Credit Rating
Foreign and Local Currency BBB-/Negative/A-3 BBB-/Negative/A-3
Kazakhstan National Scale kzAA/--/-- kzAA/--/--
Transfer & Convertibility Assessment BBB- BBB-
Senior Unsecured
Foreign and Local Currency BBB- BBB-
Short-Term Debt
Local Currency A-3 A-3
Primary Credit Analyst:
Karen Vartapetov, Moscow (7) 495-783-40-18;
karen.vartapetov@spglobal.com
Secondary Contact:
Maxim Rybnikov, London (44) 20-7176 7125;
maxim.rybnikov@spglobal.com
Additional contact:
SovereignEurope;
SovereignEurope@standardandpoors.com
[2016-09-13]