Moody’s Changes Outlook On Kazakhstan’s Rating To Stable From Negative
New York, July 26, 2017 — Moody’s Investors Service (“Moody’s”) has today affirmed the government of Kazakhstan’s Baa3 foreign and local currency issuer and foreign currency senior unsecured ratings, respectively, as well as the (P)Baa3 senior unsecured MTN rating. Concurrently, the rating outlook has been revised to stable from negative.
The change in the outlook and affirmation of the Baa3 ratings are underpinned by Moody’s assessment that the adjustment of Kazakhstan’s economy, public finances and banking system to structurally lower oil prices has significantly advanced, leaving the sovereign’s credit metrics consistent with a Baa3 rating. In particular:
1) Kazakhstan’s effective policy response to the global oil price shock, driven by countercyclical government spending and increased exchange rate flexibility, has supported the economy and bolsters prospects of future shock absorption capacity;
2) Its very strong fiscal position has only slightly eroded during the oil shock despite higher foreign-currency debt costs and recapitalization of some banks, thereby providing flexibility and ample financial resources to manage potential further contingent liability risks; and
3) Recent government actions to strengthen and recapitalize the banking system help address banks’ solvency risks. However, moving forward, still weak asset quality, remaining high deposit dollarization and higher concentration in the banking system signal ongoing contingent liability risk to the sovereign.
Kazakhstan’s long-term local currency bond and deposit ceilings remain unchanged at Baa1. The foreign currency long- and short-term bond and deposit ceilings also remain unchanged at Baa2/P-2 and Baa3/P-3, respectively.
RATIONALE FOR THE STABLE OUTLOOK
Kazakhstan’s economy suffered significantly from the negative oil price shock in 2014-15, which has resulted in structurally lower prices for the country’s main export product and engine of growth, while also weighing on the health of the banking system. The policy response to the shock and available financial buffers have stabilized the economy and the government’s fiscal strength. Although the banking system remains weak and a source of contingent liabilities, the most immediate source of risk for the government has been addressed, also contributing to a stable outlook on the rating.
EFFECTIVE POLICY RESPONSE TO OIL PRICE FALL BOLSTERS FUTURE SHOCK ABSORPTION CAPACITY
First, the government’s countercyclical policy response to the oil price shock demonstrated policy effectiveness, which bodes well for future shock absorption capacity.
The country’s low debt burden and past accumulation of fiscal reserves provided the government with ample fiscal space to apply a strong fiscal stimulus to the economy, which avoided recession. Meanwhile, a shift in the exchange rate regime to a floating currency from a peg to the U.S. dollar has helped preserve foreign exchange reserves and strengthen the economy’s external shock absorption capacity. Although the initial de-peg led to a 45% depreciation of the tenge, which raised inflation to a peak of nearly 18% in July 2016, the central bank’s management of monetary policy contributed to the anchoring of inflation expectations and avoiding of further escalation of inflationary pressures. Going forward, we believe that the new monetary flexibility will strengthen policy effectiveness compared to the prior fixed exchange rate regime.
VERY HIGH FISCAL STRENGTH
Second, the government’s very strong fiscal position, with a low debt burden, high debt affordability, and ample fiscal buffers, continues to provide flexibility and financial resources to respond to economic shocks and manage contingent liability risks. While debt has increased somewhat and the government has tapped into the assets of its sovereign wealth fund, the National Oil Fund, Kazakhstan’s fiscal strength remains very high.
The government debt burden remains low at around 21% of GDP in 2016, which is approximately half the 44% of GDP median for Baa-rated sovereigns. Over the next two years, Moody’s expects the debt burden to stabilize at around 22% of GDP based on government plans for fiscal consolidation and the assumption that the tenge and oil prices will be broadly stable. Kazakhstan’s debt affordability is also very high, as interest payments accounted for only 2.2% of government revenues in 2016, compared to 7.6% for the Baa-rated median.
Moving forward, Kazakhstan’s National Oil Fund will continue to provide ample fiscal reserves, which, despite declining to $62 billion as of June 2017 from a high of $77 billion in August 2014, remain almost twice as large as its outstanding debt and, hence, could provide a buffer to manage economic shocks and contingent liability risks for several years. Moody’s expects these savings to stabilize at around $60 billion this year and remain near this level over the medium term. With oil prices around $40-60 per barrel, transfers from the National Oil Fund will broadly offset contributions to it from revenues generated by oil production.
BANKING RISKS CONTAINED IN THE NEAR TERM, ALBEIT STILL SIGNIFICANT OVER THE MEDIUM TERM
Third, recent government actions to strengthen and recapitalize the banking system have helped to limit near-term banking sector risks. However, contingent liabilities to the sovereign remain, due to ongoing asset quality issues, remaining high deposit dollarization and elevated concentration risk.
While Kazakhstan’s banking sector is small, with total system assets of only 55% of GDP in 2016, asset quality issues have weighed on the system’s solvency. The banking sector is burdened by a legacy of problem loans dating back to the global financial crisis. Moody’s estimates that problem loans stood at about 37% of gross loans as of end-2016. Although the government has allocated about 4.6% of GDP in 2017 to help recapitalize the banking sector, asset quality remains weak with banks’ loan loss reserves, which amounted to 11% of gross loans as of 1 July 2017, not yet sufficiently covering system-wide problem loans.
With a still relatively weak, albeit more stable, banking system, credit growth and financing of investment in Kazakhstan are likely to be muted, hindering the economic recovery. Meanwhile, although dollarized deposits as a share of total banking system deposits have declined to about 50% in June 2017 from a high of about 70% in January 2016, they remain high and are a risk to the banking sector.
Further, as part of its efforts to recapitalize the banking system, the government supported the merger of Kazakhstan’s two largest banks, resulting in one single systemically significant institution with 37% market share. While this has helped mitigate some near-term banking sector risk by shoring up Kazkommerstbank, a large and particularly weak bank, it has also materially increased concentration in the sector which poses contingent liability risks for the sovereign.
Implementation of future reforms that strengthen banking sector regulation and supervision would help mitigate some of this risk and provide positive support to the sovereign credit profile.
RATIONALE FOR AFFIRMING THE Baa3 RATING
Kazakhstan’s Baa3 rating incorporates credit strengths, including: the relatively large size of the economy, high per capita income levels, very low level of public debt, and very high debt affordability. The sovereign credit rating is also supported by Kazakhstan’s sizable fiscal reserves held in foreign assets.
At the same time, the Baa3 rating reflects constraints on the credit profile, including: low, albeit improving, institutional strength; a relatively high proportion of foreign-currency government debt, which raises the vulnerability of public finances to a potential sharp depreciation of the currency; susceptibility to event risk related to presidential succession which, if it were to proceed in a disorderly manner, could affect economic, external and fiscal trends; and banking sector risk.
Structurally lower oil prices have dampened the economy’s growth potential and fiscal strength, while also raising external vulnerability risks, albeit from relatively low levels.
WHAT COULD MOVE THE RATING UP
Upward pressure on Kazakhstan’s rating could develop if banking sector risks were to decline materially, supported by a sustained improvement in banking system health and enhancements to the sector’s regulation and supervision. Resolution of political risk, through an orderly presidential succession, would provide additional credit support. Meanwhile, further progress on institutional, economic, and fiscal reforms, would also be credit positive.
WHAT COULD MOVE THE RATING DOWN
Downward pressure on the rating could develop if Kazakhstan’s economic and fiscal metrics were to deteriorate substantially and durably, e.g. because of the need to provide significant additional financial support to the banking sector or real economy. An increase in domestic political risk could also put downward pressure on the rating.
GDP per capita (PPP basis, US$): 25,147 (2016 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.1% (2016 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 8.5% (2016 Actual)
Gen. Gov. Financial Balance/GDP: -4.5% (2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -6.3% (2016 Actual) (also known as External Balance)
External debt/GDP: 121.3% (2016 Estimate)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 24 July 2017, a rating committee was called to discuss the rating of the Kazakhstan, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s governance and/or management, have materially increased. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risks has not materially changed. Banking sector risk has decreased.
The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
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