Liquidity, FX Exposure – Key Risks For Kazakh Utilities

Kazakhstan to enable Clearstream for govt securities in 2018

High exposure to foreign-currency risk and potential challenges refinancing maturing debt in current difficult market conditions are key risks for most rated Kazakh utilities, the international ratings agency Fitch Ratings says in a report.

According to the report, titled “Kazakhstan Utilities Peer Comparison”, funding from state banks for utilities will be available, but any significant deterioration in the economy could put strains on the domestic banking system, limiting its ability to provide sufficient liquidity to all borrowers. Significant FX exposure and unfavorable regulatory changes have intensified these weaknesses for utilities.

The agency’s experts believe that KEGOC, Kazatomprom (KAP), Central-Asian Electric Power Corportation (CAEPCO) and Kazakhstan Utility Systems (KUS) are better positioned than Samruk-Energy, Ekibastuz GRES-1, Mangistau Electricity Distribution Company (MEDNC) and CAEPCO’s subsidiaries.

The currency mismatch between debt and revenue and the limited use of hedging by most rated Kazakh utilities means we would expect any potential further local-currency weaknesses to negatively affect rated companies’ credit metrics in the near future, all else being equal, says the report.

The agency also expects the rate of economic growth to limit business growth prospects for Kazakh utilities in 2017-2019.

“High-single-digit inflation will restrict the companies’ cost-cutting and most Kazakh utilities will remain under pressure from economic weaknesses, regulatory uncertainties and large capex programs, which will mostly be debt funded,” says the report.

The ratings of the largest Kazakh utilities continue to incorporate state support.

Potential privatization and subsequent weakening of state support may lead to a review of Kazakh companies’ ratings to reflect their standalone financial and operational profiles.