Despite the fact that assets of the National Fund in the amount of $22.6 billion (13% of GDP) have been frozen, as a result of dispute between the Government and foreign investors, S&P considers that the budgetary and external positions of the country are sufficiently strong to withstand these unexpected events and remain one of the key factors supporting ratings. The Stable Outlook reflects the agency's expectation that no significant new financial obligations will arise in the next two years as part of ongoing disagreements over investments in Kazakhstan's oil and gas industry.
The ratings of the Republic of Kazakhstan are still supported mainly by strong government balance built on NF funds. Ratings are constrained by the difficulty to predict future political decisions due to high centralization of political environment, a moderate level of economic wealth and remaining problems to monetary policy credibility, despite the transition to the "floating" exchange rate regime.
The S&P forecast of economic growth is kept at the level of 3% in 2018-2021 supported by government investment spending and stronger exports (both due to a price factor and increase in physical volume - oil production growth at the Kashagan field).
The agency expects that the current account will improve due to the deferred effect of devaluation and increase in oil production (export growth in real terms is expected at 2.5% in 2018). According to S&P forecasts, the current account deficit will improve from 4% in 2017 to 3.5% of GDP in 2018.
Despite the state program for recapitalizing the banking sector, the agency believes that this measure is not sufficient to improve the ability of banks to act as intermediaries of lending in the economy. Since, given the adjustments to off-balance-sheet loans and the volume of problem loans, according to IFRS, the real level of non-performing loans, by S&P evaluation, is at 35-45%.
According to the agency, the transition to a "floating" rate of tenge and inflation targeting, announced by the NBRK in 2015, led to an exchange rate adjustment and allowed a slight reduction in external risks. At the same time, problems remain that impede confidence in monetary policy credibility, such as excessive liquidity in the national currency amid moderate growth in lending in the banking system and a short-term nature of the KZT yield curve due to a limited supply of medium- and long-term government debt. This leads to a shortage of collateral for interbank transactions and limits the ability of market participants to price the value of financial products and make investment decisions.
In our opinion, the rating action is a neutral event for the market instruments and it meets our expectations. The NF assets freezing in the current situation does not put pressure on the creditworthiness of the country, its level allows the Government to remain a net creditor in relation to the rest of the world (although the difference between assets and liabilities decreased after imposing a restriction on part of NF funds).
We also expect an improvement in the fiscal position: due to a reduction in government spending and an increase in tax revenues due to a further economic growth, the consolidated budget deficit will reach 2% of GDP in 2018, which is a favorable rating factor.
The yields of sovereign bonds due to the confirmation of the country's credit rating remain stable: since the previous rating action (in September) 10-year Eurobonds YTM have not changed, at 3.3%. Improved macroeconomic indicators are also reflected in the current pricing of CDS (the spread for 10-year rates has decreased by 0.28pp since September to 1.71pp).