Fitch affirms ratings of Kazakhstan

Fitch Rates Kazakhstan's Real Estate Fund Samruk-Kazyna 'BB+'; Outlook Stable

Fitch Ratings has affirmed Kazakhstan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB’ with a Stable Outlook, the Kazakhs Stock Exchange reported.

Fitch informs that Kazakhstan’s IDRs balance strong public and external balance sheets, underpinned by large government savings and a substantial sovereign net foreign asset position, against high commodity dependence, a weak banking sector, weak governance indicators and volatile macroeconomic performance compared with ‘BBB’ peers.

The economy’s adjustment to the oil price shock of recent years continues, facilitated by exchange rate flexibility, monetary policy reforms, restructuring of the banking sector and fiscal stimulus, according to Fitch.

“The IMF-defined general government deficit is forecast to widen to 6.5% of GDP in 2017 from 4.1% in 2016, due to the one-off cost of the recapitalisation (at an estimated cost of 4.2% of GDP) of the country’s largest bank, Kazkommertsbank (BB-/Stable, KKB). The recapitalisation is also being part-financed by domestic debt issuance. A narrowing of the deficit, to 2.5% of GDP, is projected in 2018, given the absence of the transfer for the financial sector and the winding down of the Nurly Zhol stimulus programme. Planned progressive cuts to the guaranteed transfer from the National Fund of the Republic of Kazakhstan (NFRK) leading to reduced expenditure commitments at the state budget level and rising oil revenue will underpin a Fitch-forecast narrowing of the deficit to 1.4% of GDP by 2019,” the message reads.

Fitch stresses that the National Fund assets underpin a strong sovereign balance sheet. Although NFRK assets have fallen in 2017 to finance the larger deficit, they are forecast to end the year at 37% of GDP, supporting a net debt position of -14% of GDP, compared with a peer median of 32.1%.

Fitch expects the Fund’s assets to remain above 30% of GDP over the forecast period to end-2019.

Higher privatisation revenue presents an upside to the forecast of NFRK assets, as IPOs of minority stakes in Air Astana, Kazakhtelecom and Kazatomprom are planned for 2018, with the revenue to be transferred to the NFRK.

“The current account deficit is forecast to narrow to 3.3% of GDP in 2017 from 6.4% in 2016, due to higher oil and other commodity export revenue. A significant improvement in the trade surplus is being partially offset by a rise in net income outflows resulting from payments to the largely foreign consortium that developed and operates the Kashagan oilfield. Higher oil production and prices will lead to a further narrowing of the deficit to 2019, though high imports related to foreign direct investments (FDI) and income outflows will keep the current account in deficit over the forecast horizon. Fitch expects the deficit to be fully financed by FDI,” according to Fitch.

Given the low share of short-term external debt, Fitch’s liquidity ratio is also very comfortable, at a projected 303% at end-2017 compared with a peer median of 177%.

The message adds that monetary and exchange rate policy adjustment continues, but the framework remains weak relative to peers.

“The banking sector is very weak relative to peers, with a Fitch-defined Bank System Indicator of ‘b’, but is being cleaned. The acquisition of the dominant bank, KKB, by Halyk Bank (BB/Stable), has been completed, leaving a more financially sound main player,” the report reads.

Fitch informs that economic growth is recovering and the five-year growth rate is in line with the peer median despite the oil price shock and related fallout.

Growth is forecast to rise to 3.4% in 2017 due to the restart of production at the giant Kasahgan field, while mining and manufacturing exports are benefiting from a stronger external environment.

Fitch assumes that Brent crude will average $52.5/b in 2017 and 2018 and $55/b in 2019.