Moody’s: Kazakhstan More Resilient Than Azerbaijan In Adjustment To Lower Oil Prices
Moody’s Investors Service (“Moody’s”) says that policymakers in Kazakhstan (Baa3 negative) and Azerbaijan (Ba1 negative) have faced similar challenges from the decline in oil prices from their mid-2014 highs, including a sharp fall in growth, double-digit inflation, a drop in foreign exchange reserves, and weakening banking sectors.
However, Kazakhstan’s greater economic diversification, stronger institutions and lower debt levels — when compared with the situation in Azerbaijan — mean that it is more resilient to these pressures.
Moody’s conclusions were contained in its just-released comparison of the two Commonwealth of Independent States oil-exporting sovereigns, “Governments of Azerbaijan and Kazakhstan – Peer Comparison — Variations in Economic Resiliency, Institutions and Debt Burden Explain Difference in Credit Profiles”.
Both countries rely heavily on hydrocarbon exports for growth and government revenue, but Azerbaijan is more vulnerable to the low oil price, given that its economy is more than three and a half times smaller and half as wealthy. Kazakhstan has also made more progress addressing business climate challenges and other structural impediments to growth.
For Azerbaijan, oil and gas accounted for 89% of goods exports and 26% of nominal GDP in 2015, and provided 60-70% of consolidated government revenues. By comparison, for Kazakhstan, oil and gas exports accounted for a lower 76% of goods exports and roughly 18% of nominal GDP, and provided around 42% of consolidated government revenues.
In addition, Kazakhstan’s institutions are stronger than those of Azerbaijan, allowing for more effective policy responses. It shows better Worldwide Governance Indicators, data availability is greater which enhances the transparency and effectiveness of policy decisions, and its reform drive is more advanced, which will contribute to institutional strength over the medium term. Furthermore, a smoother transition to a floating exchange rate and a more rapid monetary policy response to rising inflation allowed Kazakhstan to more effectively manage the oil price decline.
Geopolitics are more of a risk in Azerbaijan due to its ongoing conflict with Armenia (B1 stable) over the disputed territory of Nagorno-Karabakh. By contrast, Kazakhstan maintains good relations with Russia and China, as well as with Japan, the US, and the EU in pursuit of its “multivector” foreign policy strategy. Relations with Russia are especially strong, above all in security and defense matters.
Banks in both countries are under pressure. The outlooks for both banking systems are negative, with problem loans accounting for 25% of gross loans in Azerbaijan and 37% in Kazakhstan. However, the risks are mitigated by the recent steps taken by both countries to shore up their banking systems and both sectors’ small size: total domestic assets accounted for 53% of GDP in Azerbaijan and 60% in Kazakhstan in 2015.
Finally, Azerbaijan’s government carries more debt, but both enjoy ample fiscal space. The country’s debt-to-GDP ratio rose by close to 30 percentage points between 2014 and 2016 as a result of the direct support it provided to the banking sector. In contrast, Kazakhstan’s debt-to-GDP ratio rose by less than 10 percentage points over the same period. However, sizable reserve buffers and high debt affordability underpin high levels of fiscal strength in both countries.