FITCH UPGRADES KAZAKHSTAN’S RATINGS; OUTLOOK “STABLE”
November 21. KASE
Fitch Ratings has upgraded Kazakhstan’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘BBB’ from ‘BBB-‘ and ‘BBB+’ from ‘BBB’, respectively. The Outlooks on the ratings are Positive. The agency has also upgraded the Country Ceiling to ‘BBB+’ and affirmed the Short-term foreign currency IDR at ‘F3′.
“Kazakhstan’s sovereign balance sheet has strengthened, with sovereign net foreign assets affording a growing cushion against revenue shocks, and underpinning the Positive Outlook,” says Charles Seville, Director in Fitch’s Sovereign team. Fitch forecasts sovereign net foreign assets to reach 49% of GDP by end-2013, up from 37% of GDP at end-2010.
Fitch forecasts that the general government will record a surplus of 6%-7% of GDP in 2011-2013. Oil price assumptions in the budget are conservative and the government would be in surplus in 2012 even if the oil price dipped to USD80/b.
Mining and oil output expansion underpins one of the strongest growth outlooks among the major emerging markets, thanks to credible projections of increased oil and mining output. Real GDP is forecast to grow by 6% in 2011-13 and should be relatively resilient to slower growth in major advanced economies. The main risk comes from a severe downturn in commodity prices or external demand.
The growth outlook and sovereign balance sheet outlook effectively outweigh risks emanating from the troubled financial sector, which continues to be a rating weakness. At 37%, non-performing loans are among the highest in the world and are concentrated in institutions under state control. Sector profitability is poor and progress in cleaning up bank balance sheets is slow.
However, banking assets have shrunk to 43% in 2011 from 56% of GDP in 2008, so the sector represents less of a threat to sovereign creditworthiness than before. The state has the resources to step in and restore banks’ balance sheets where necessary. Otherwise, incremental reforms to encourage loan write-offs, and the slow growth in banks’ balance sheets should gradually reduce the scale of contingent liabilities. Moreover, after some banks defaulted on and restructured external debt, the sector is much less dependent on foreign capital than in 2008, reducing vulnerability to disruptions in external capital flows.
Further strengthening of the sovereign and external balance sheets could trigger positive rating action. Greater sovereign assets would mitigate dependence on oil revenues and would, as in 2009, provide flexibility to contend with any future terms of trade shocks. At a national level, gross external debt is high at 70% of GDP, including borrowing by state-owned enterprises that form a contingent liability of the sovereign. However, given present trends, the economy could become an external creditor by end-2013.
A major clean-up and improvement of the health of the banking sector could also lead to an upgrade, although this is not Fitch’s base case.
Nevertheless, a major commodity price shock that resulted in a weakening of the sovereign balance sheet could prompt a negative rating action. Given a CAGR of 9% in oil output over the past decade, added to rising prices, Kazakhstan’s ability to adjust to a severe and prolonged revenue shock has not been tested.
A domestic or regional political shock could exert downward pressure on the rating. President Nursultan Nazarbayev is secure and largely unchallenged after winning a fourth term in April 2011, but this has not settled the long-term issue of succession and how or if Kazakhstan will develop a more pluralistic political system. The president’s ruling Nur Otan party will retain its dominance of parliament in elections recently called for 15 January 2012.