S&P about Kazakhstan’s GDP growth downgrade and sovereign rating outlook
Sep 15. Tengrinews
By Dinara Urazova and Tatyana Kuzmina (Azhar Ashirova contributed to the story)
Standard & Poor’s senior director spoke about the possible downgrade of Kazakhstan’s sovereign rating and the reasons behind the 1.5% axing of the country’s GDP forecast that the agency declared in mid June, Tengrinews reports.
“We assigned the BBB+ rating to Kazakhstan in June. (…) It is the highest rating Kazakhstan has ever had,” Senior Director at Standard & Poor’s Sovereign Ratings division Christian Esters said at the third annual S&P conference on Kazakhstan held in Almaty on September 10.
“We assigned a negative outlook to (Kazakhstan’s) sovereign rating in June this year. Negative outlook is not a downgrade. Negative outlook is an indication that we see a possibility that in the next two years the rating may be downgraded under certain conditions that we specified in the documents we published,” the Senior Director continued.
He said that the probability of an actual downgrade of Kazakhstan’s sovereign rating “made about 30%”, and named the decisive factors: “We can downgrade the rating if the slowdown of the economic growth persists, and (…) if effectiveness of the monetary policy remains limited,” he said.
“We view the (tenge) exchange regime as a limiting factor, and the devaluation of the tenge (by 19% on February 11) did not help the situation from our viewpoint or improve the trust in the central bank. We see an escalation of the inflation rate, at least a temporary one. And we believe that the flexibility of (Kazakhstan’s) monetary policy is more constrained than that of other countries,” the expert said.
He admitted that abundance of natural reserves in Kazakhstan was one of its crucial advantages. But even through oil was boosting its economic growth, excessive dependance on raw materials undermined its long term prospects.
“A decline in the oil output, notably the delay in the launch of the Kashagan project that will affect the oil production and the country’s GDP in general, was one of the main factors” that influenced the agency’s decision to downgrade the forecasts, the S&P official admitted.
The expert assured that not all was lost and “the rating may even stabilize if we see an improvement in the functioning of the capital markets and liquidity conditions, and if we see an expanded agenda of diversification and reforms to overcome the country’s dependence on raw materials”.
He also mentioned the scheduled restart of production at Kashagan in 2016 as a good sign and an important improvement factor.
Speaking about the slowdown of Kazakhstan’s economic growth that he mentioned as one of the key reasons behind the negative outlook, Esters reminded that S&P’s 2014-2015 GDP growth forecast for Kazakhstan stood at 4.5%. The adjustment from the optimistic 6% was made in mid June, together with the adjustment of the rating’s outlook.
4.5% is lower than the growth rate that Kazakhstan managed produce in the previous several years despite the global economic recession. Kazakhstan’s GDP growth rate made 6% in 2013, 5% in 2012, 7.5% in 2011 and 7.3% in 2010.
Esters said that the GDP growth in the first half of 2014 was at 3.9%. “We expect the growth to continue in the second half, and possibly our forecast of 4.5% is somewhat conservative,” Esters admitted.
He also mentioned that geopolitical risks associated with the Russian-Ukrainian crisis negatively influenced the overall forecast. “We are not expecting it to influence the economy immediately, but it may have an effect in the mid term perspective,” since the conflict will undermine the trust of consumers and investors and indirectly influence the economy.
In the short-term the fallout of Russian-Urainian conflict has been fairly tangible for Kazakhstan. The slipping oil prices, the Russian ruble exchange rate swings (Russia is Kazakhstan’s largest trade partner) and the sanctions imposted by the West on Russia have all influenced the Kazakh economy in a negative way. However, Kazakhstan has a strength margin of its own that it can employ to absorb the external shock.
According to the foreign expert, oil reserves were not the only advantage that Kazakhstan had. Esters also mentioned Kazakhstan’s sound foreign balance and balanced foreign policies as the country’s strong sides capable of propelling it towards a better rating.
Kazakhstan’s fiscal policies were also commended as Kazakhstan’s strong point. According to S&P’s estimates they will enable Kazakhstan to remain in black as long as oil prices are above $65 per barrel. This is a threshold that few oil producing countries can boast.