Kazakhstan Local Currency Credit Rating Cut to Baa2 by Moody’s

Jonathan Schiffer, a Moody’s vice president: “Shortfalls in government revenues connected with worsening growth prospects may come at a time of increasing stresses in the banking system, as non-performing loans grow rapidly. The government’s financing gap may widen considerably because of overly optimistic forecasts for the budget outcome.’’

By Nariman Gizitdinov

May 12 (Bloomberg) – Kazakhstan’s rating was cut to Baa2 by Moody’s Investors Service, two levels above junk, reflecting “continuing fragility’’ in the country’s banks because of “large” foreign debt.

Moody’s lowered Kazakhstan’s local currency government rating to the same level as its foreign currency rating from Baa1, the rating service said in a statement today. The outlook was lowered to negative from stable.

State revenue may shrink after oil prices dropped, reducing the government’s ability to bail out its debt-laden banks should the need arise. The central Asian economy, which has 3.2 percent of the world’s oil reserves according to BP Plc, devalued the tenge by 21 percent against the dollar on Feb. 4 after oil prices dropped 67 percent in six months. Kazakhstan’s economy shrank 2 percent in the first quarter, according to preliminary figures from Economy Ministry.

“Shortfalls in government revenues connected with worsening growth prospects may come at a time of increasing stresses in the banking system, as non-performing loans grow rapidly,” Jonathan Schiffer, a Moody’s vice president, said in the statement. “The government’s financing gap may widen considerably because of overly optimistic forecasts for the budget outcome.’’

Two of Kazakhstan’s four biggest banks, BTA Bank and London- listed Alliance Bank, have defaulted on debt payments as they struggle to generate funding during the country’s worst financial crisis in a decade. President Nursultan Nazarbayev’s government has spent more than 734 billion tenge ($4.9 billion) supporting banks and businesses, including the February takeover of BTA.

‘Great Doubt’

“The health of the banking system may worsen,’’ Schiffer said. “If this combines with a worse-than-expected current account deficit, speculation against the currency may build alongside pressure for greater government financial intervention into both the financial system and real economy,’’ and could lead to a substantial drawdown in Kazakhstan’s foreign exchange reserves, he said.

“I am personally in great doubt about the ability of any of the three biggest ratings agencies to really assess the risks of Kazakh banks or government,’’ central bank Chairman Grigori Marchenko told reporters in Almaty before the rating cut was announced. The agencies “got their fingers burnt in the U.S. and now they’re over-compensating in Kazakhstan and other emerging markets,’’ Marchenko said.

The cost of insuring Kazakh government debt against default climbed after the rating downgrade. Credit default swaps for Kazakhstan rose to 578 basis points from 573 basis points yesterday, according to CMA DataVision in London.

“This is pure catching up with the recent ratings actions’’ by Fitch Ratings and Standard & Poor’s, said Luis Costa, Commerzbank AG’s emerging-markets debt strategist in London.

In related rating actions, the foreign currency country ceiling for bonds was downgraded by Moody’s to Baa1 with a negative outlook from A2 and the local currency country ceilings for bonds and bank deposits both were also downgraded by one notch to A2 and A3, respectively. The outlook on the Ba1 foreign currency country ceiling for bank deposits was cut to negative from stable.

http://www.bloomberg.com/apps/news?pid=20601095&sid=aKD5A.qVt9s0

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