FITCH AFFIRMS KAZAKHSTAN RATINGS, OUTLOOK “STABLE”

November 14. KASE

FITCH AFFIRMS KAZAKHSTAN RATINGS, OUTLOOK "STABLE"Fitch Ratings has affirmed Kazakhstan’s Long-term foreign and local currency IDRs at ‘BBB+’ and ‘A-‘ respectively. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling is affirmed at ‘A-‘ and the Short- term foreign currency IDR at ‘F2’.

KEY RATING DRIVERS

Kazakhstan’s ratings reflect the following key rating drivers:

– Kazakhstan has a strong sovereign balance sheet, with low debt and the third-highest net sovereign foreign assets in the ‘BBB’ category, estimated at 42% of GDP. The main sovereign wealth fund, The National Fund of the Republic of Kazakhstan (NFRK), added USD10.9bn between January and October 2013, putting it on course to surpass USD100bn by end-2015.

– Fitch expects the public finances to stay in surplus in 2014-2016, even under its assumption that oil prices will soften to an average of USD100/b in 2014-2015 from an average of USD105/b in 2013. The draft three year budget targets a state budget deficit of 2.2% of GDP in 2014 at an oil price assumption of USD90/b, while the consolidated budget (including NFRK) will run a surplus.

– Kazakhstan is growing faster than the ‘BBB’ median. Although domestic demand is slowing, Fitch expects the economy to grow by around 5% in 2013-2014, rising to 6% in 2015, boosted by higher oil output as the long-delayed Kashagan oilfield reaches commercial production levels. Kashagan started production in September 2013 before output was halted by technical problems. It will resume in 2014.

– The tenge, which trades in a narrow range against the US dollar, has depreciated 2% so far in 2013 on balance of payments weakness, triggering sizeable National Bank intervention to support it. Following September’s switch away from the US dollar to a currency basket as the reference for the tenge, the National Bank may allow greater exchange rate flexibility from 2014. If well-managed, Fitch would consider this credit-positive, as it would help the economy to absorb terms of trade shocks, make monetary policy more effective and help lower inflation.

– The current account surplus (CAB) is in decline. The National Bank revised down the CAB surplus estimate for 2012 to 0.3% of GDP (down from 3.7%). Fitch expects the current account to be near balance in 2014-2015. The balance of payments impact of Kashagan will be limited as external debt repayments and profit repatriation are expected to increase along with exports.

– The banking system is still a rating weakness, and continues to make slow progress in resolving the large stock of non-performing loans (NPLs), which are concentrated at a handful of lenders. Nevertheless, bank lending growth accelerated to 14.7% year on year in September 2013, with consumer lending and SME lending growing even faster.

– Governance indicators continue to lag the ‘BBB’ median, while human development is broadly in line. Efforts to improve the business environment are paying off with a steady climb in the World Bank Doing Business ranking to 50th place.

– Commodity dependence is high. Oil and gas account for 70% of goods exports. Including metals and ores, commodities account for at least 90% of exports.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently well balanced. The main factors that individually or collectively might lead to rating action are as follows:

Positive:

– Positive rating action may result from substantial strengthening of the sovereign and external balance sheets over the medium term. Larger sovereign assets would provide greater buffers against commodity price shocks

– Entrenching low and stable inflation under a more flexible exchange rate regime

– An effective restructuring of bank balance sheets would address a weakness relative to the peer group and alleviate an ongoing contingent liability to the  sovereign

Negative:

– A departure from prudent policy that leads to a sustained decline in sovereign assets

– A severe, sustained commodity price shock would negatively impact the balance of payments and public finances

– Excessive lending growth and inadequate risk management in the banking sector

KEY ASSUMPTIONS

– Fitch assumes average oil prices of USD100/b in 2014-2015

– President Nazarbayev is secure in power and largely unchallenged, but Kazakhstan has not experienced a change of leadership since independence and the long-term issue of succession is not settled. While Kazakhstan’s rating factors in below-average governance indicators, Fitch assumes that constitutional mechanisms would operate in the event of a transfer of power.

– Fitch assumes broad policy continuity in the long-term management of oil revenues.

– Fitch’s forecasts assume that the Kashagan oilfield will restart in 2014 and reach commercial production levels in 2015, although there are downside risks.

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