Kazakhstan ratings are confirmed at BBB- with Stable Outlook

Elmira ArnabekovaMarch 12, 2018

S&P improved forecasts for the current account deficit to 1.5% of GDP this year (against 3.5% of GDP in the previous rating action). Forecasts for Kazakhstan's economic growth are maintained by the agency at 3% in 2018-2021 due to increased investment and oil production at the Kashagan field.

Ratings remain supported by the government's still relatively strong balance sheet, built on past budgetary surpluses accumulated in the NF during the era of high commodity prices. Kazakhstan's liquid external assets exceeding external debt in projections to 2021 also support the ratings.

The ratings remain constrained by that future policy responses may be difficult to predict given the highly centralized political environment; Kazakhstan's moderate level of economic wealth; and remaining challenges to monetary policy credibility, such as our perception that central bank independence is limited.

S&P also notes that on January 23, 2018, the Dutch freeze on the NF assets was lifted. However, the rating agency believes that the Belgian freeze remains in place. A decision from the Belgian courts is expected during Spring 2018.

Moreover, should Kazakhstan post security for the Swedish court award, the freeze could be lifted. For now, the frozen NF assets are not available to the government for any purpose. Despite this, agency assesses the Kazakhstan's fiscal and external positions as sufficiently strong to withstand these unexpected events.

Given relatively low debt of about 20% of GDP, the government was in a net asset position of 25% of GDP in 2016, but this fell to 2% in 2017 as a result of the asset freeze. If the freeze is maintained, Kazakhstan will move to a small net debtor position through to 2021.

About half of the government debt stock is in foreign currency, making the debt stock and debt service susceptible to exchange rate movements. However, the risk is mitigated by oil revenues, which are denominated in US dollars. Moreover, estimated by S&P debt-service ratio can rise even further when depreciation-induced inflation effects on the government's stock of inflation-indexed debt is factored in, which accounts for around 14% of the government's total debt. The rating agency expects the government interest costs to remain above 5% of revenues on average over 2018-2021. According to S&P forecasts, the deficit of the consolidated budget will be reduced to 1% in 2018 due to the absence of further expenditure associated with the banking sector.

In 2017, the current account deficit was lower than the expected (4%) and amounted to around 3% of GDP, which is due to the growth of oil production and oil prices. The agency expects further reduction of the current account deficit to 0.1% of GDP by 2021, in part due to the deferred effect associated with the depreciation of the tenge in 2015. S&P has improved the outlook for the current account deficit to 1.5% of GDP in 2018 (against 3.5% of GDP in the previous rating action).

Forecasts for Kazakhstan's economic growth are maintained by the agency at 3% in 2018-2021 due to increased public investment and increased exports due to some improvement in the forecast of oil prices and an increase in production at the Kashagan field.

Our opinion

Affirmation of the country's credit rating, in our opinion, is an expected and neutral event. Earlier in January, despite the freeze of some of the NF's foreign assets, the agency confirmed ratings and outlook at the current level due to the relatively strong external position and moderate debt burden of the Government. Confirmation of the credit assessment of the sovereign debt of the country, in our opinion, contributes to the increased investment attractiveness of the issued Eurobonds.

Spreads on credit default swaps for 10 year securities are declining since September last year - after the S&P changed outlook from negative to stable, reaching 143 basis points (a decline by almost 100 bp). Due to improved macroeconomic indicators and the consolidation of oil prices at a relatively high level of yield, 10 and 20-year sovereign debt obligations of the country since February this year are also decreasing (by 0.1-0.2pp).