S&P affirms ratings on Kazakhstan at ‘BBB+/A-2’ with stable outlook

July 5. Trend

By E. Kosolapova

S&P affirms ratings on Kazakhstan at 'BBB+/A-2' with stable outlookStandard & Poor’s Rating Services affirmed its ‘BBB+/A-2’ long- and short-term foreign and local currency sovereign ratings on the Republic of Kazakhstan. The outlook is stable. The long-term national scale rating was affirmed at ‘kzAAA’, the agency reported on Friday.

“The ratings on Kazakhstan are supported by its strong fiscal and external surpluses and above-average GDP per capita growth, which come from the country’s large natural resources endowment. The ratings are also supported by the government’s net asset position,” Standard & Poor’s said.

However, according to the agency, the ratings remain constrained by political risks–the political environment is highly centralized with little clarity about eventual presidential succession–and by limited monetary policy flexibility. The moderate level of economic development (GDP per capitais just over $13,000 in 2013) and the high dependence on oil also constrain the ratings.

Standard & Poor’s forecasts GDP growth in Kazakhstan in 2013 at just above 5 percent, based on an expected modest boost in oil production volumes (82 million tons compared with 79 million tons in 2012); an average oil price in line with 2012 levels; continued weak external demand for metals; and an average agricultural harvest.

“We believe a more-pronounced boost will come from the offshore Kashagan oil field when it comes online after 2014; however, we do not expect growth to return to above 6 percent over our forecast horizon(2014-2016),” the agency said.

Standard & Poor’s estimates Kazakhstan’s GDP per capita at just over $13,000 in 2013, and long-term GDP per capita growth averaging 4.4 percent over 2007-2016.

“Downside risks to our base-case assumptions are primarily related to weaker external demand and lower oil prices,” the agency said.

According to Standard & Poor’s, Kazakhstan’s government plans to transfer a limited sum from the National Fund to the budget each year, which may be an important fiscal buffer against external shocks given the high dependence on commodity exports.

“The government meanwhile is borrowing to fund the “deficit” (the gap not covered by the transfer from the National Fund) predominantly on the domestic capital market, and we estimate that the annual change in general government debt will average 1.8 percent of GDP over 2013-2016. Under our base-case assumption that the transfer from the NFRK to the budget will remain within the current annual maximum allowance of $9.2 billion, we estimate the government’s net asset position will strengthen to 26 percent of GDP in 2013,” the agency said.

Kazakhstan’s net external liability position declined to an estimated 24 percent of current account receipts (CARs) in 2012, from 80 percent in 2009. External liquid assets currently exceed external debt. Kazakhstan’s gross external financing needs increased to 95 percent of CARs in 2012, but were still down from the 2007 peak of 115 percent. Standard & Poor’s expects gross external financing needs will increase further over our rating horizon.

“We project the reported current account will remain in surplus, albeit narrower than 2011, buoyed by a large trade surplus. This is despite our expectation of increasing FDI-related and demand-driven imports,” the agency said.

Standard & Poor’s could consider lowering the ratings if there were a sustained slowdown in growth or a significant deterioration in the fiscal and external balance sheets. The ratings could also come under pressure if the political environment deteriorated, either due to policies that did not support sustainable medium-term economic growth, or if risks surrounding the transition of power were to increase.

Standard & Poor’s could consider an upgrade if the political environment improved such that policymaking became much more transparent and predictable, and the political institutional framework strengthened. The agency would also view a more aggressive reform and diversification agenda, as well as efforts to increase monetary policy flexibility, as positive for the ratings.