ACRA affirms LT BBB+ to the Republic of Kazakhstan, outlook Negative

ACRA has affirmed the following ratings of the Republic of Kazakhstan (hereinafter, Kazakhstan, or the country) under the international scale:

  • Long-term foreign currency credit rating at ВВВ+ and local currency credit rating at ВВВ+;
  • Short-term foreign currency rating at S2 and local currency credit rating at S2.

The outlook on the long-term foreign currency credit rating is Negative and local currency credit rating is Negative.

The Negative outlook assumes the possibility of a negative rating action within the 12 to 18–month horizon.

ACRA has maintained its negative Outlook on the sovereign credit rating due to the negative impact of external and internal shocks on the country’s economy, which is expected to experience its first drop in GDP in 20 years in 2020 by -1.9%, according to ACRA. Risk factors for this scenario include the speed of recovery in oil prices and possibility of repeated quarantine measures in the case of a new wave of coronavirus. The reduction in GDP will serve as one of the factors for increasing the budget deficit to 3.7% of GDP, compared to the originally planned 2.1%. Another important factor is the large-scale anti-crisis program adopted by the government. At the same time, Kazakhstan’s rating is supported by a significant volume of liquid assets in the National Fund of the Republic of Kazakhstan (NFRK), which stood at 33% of GDP at the end of H1 2020. The accelerated use of these assets will reduce but not eliminate the need for borrowed funds in 2020. ACRA expects a moderate increase in government debt to 26.6% of GDP by the end of 2020. The current volume of international reserves, together with NFRK assets, ensure the stability of Kazakhstan’s external position.

Credit rating rationale

Kazakhstan’s BBB+ sovereign credit rating is based on low levels of public debt, relatively high levels of economic wealth, a significant amount of liquid assets in the NFRK, and a sufficient amount of international reserves. The ratings are constrained by the economy’s dependence on oil prices, low levels of export diversification, the risk of contingent liabilities materializing, and the poor quality of government institutions.

The low level of public debt gives Kazakhstan opportunities to apply a countercyclical fiscal policy in the future. This room to maneuver makes Kazakhstan’s economy more resilient to potential external shocks.

Transfers from the NFRK play an important role in ensuring budget balance. The non-oil budget deficit (excluding guaranteed and targeted transfers), amounted to 8.2% of GDP in 2019 and was mostly covered by NFRK funds. In 2020-2022, the government of the country intended to reduce the use of NFRK assets for budgetary purposes and reduce the non-oil deficit to 5.1% of GDP by increasing tax collection. However, internal supply and demand shocks in the economy and the negative price environment in commodity markets delayed the implementation of these plans. According to ACRA’s forecasts, the non-oil deficit may increase to 10.3% by the end of 2020. At the end of H1 2020, NFRK assets amounted to 33% of GDP and covered 151% of public debt. This provides a safety cushion sufficient to balance the budget without debt financing for about four years.

After a reduction in Kazakhstan’s GDP in 2020, ACRA expects economic growth to recover to 3.4−4.4% in 2021, assuming that the oil price environment improves. Until now, the country’s economy has been characterized by consistent growth, which did not stop even in the 2015-2016 crisis. This provided continuous growth in GDP per capita and, as a result, expanded the government’s tax base. Steady population growth, which amounts to approximately 1-2% annually, is an important factor that supports the growth of the country’s economy. According to ACRA, factors that can limit growth are the poor economic diversification, underdeveloped infrastructure, the high level of state participation in the economy, and the poor quality of state institutions.

The effective monetary policy of the National Bank of Kazakhstan (NBK) stabilized inflation after the devaluation shock of 2015-2016. Thus, after a sharp rise in inflation to 14% in 2016, consumer price growth slowed to 5.6% in January 2020. However, inflation then began to rise again as the national currency depreciated in March 2020. At the same time, a more serious depreciation of the tenge was avoided due to currency interventions by the NBK and an increase in the base interest rate by 2.75 p.p. to 12% (in July 2020, the rate was reduced to 9%). ACRA assesses the NBK’s monetary policy as adequate and notes the regulator’s ability to make quality decisions in times of high uncertainty. However, the ability of the country’s monetary authorities to continue to conduct a balanced policy within the established monetary regime will depend on how long oil prices remain low, the depth of their fall, and the coordination of monetary and fiscal policies.

A significant amount of NFRK assets and international reserves ensure the stability of Kazakhstan’s external position. At the end of 2019, these assets and reserves collectively exceeded the country’s total external debt (excluding intra-company debt) by 1.5x and the government’s external (foreign exchange) debt by more than 6x. All sectors of the economy currently have a sufficient liquidity cushion if the external financial situation deteriorates, even for a long period. In 2019, the import coverage ratio of international reserves was high at 9.2 months. In 2020, it may increase to 16 months due to a sharp drop in import volumes.

The continued dependence of the industrial sector, exports, and the country’s economy on mining firms reduces economic resilience to external shocks, given this sector’s significant focus on exports and dependency on external prices. This is evidenced by the situation that unfolded in global markets in the beginning of 2020. In 2019, the mining sector accounted for 9% of Kazakhstan’s economic growth and 52% of industrial growth. A considerable increase in economic diversification in the near future is unlikely as the lion’s share of investments are made in the oil and gas sector. From 2009 to 2019, this segment of the economy was the recipient almost one-third of all direct investments on average per year.

The Kazakh government’s contingent liabilities (the debt of state-owned companies and both the financial and non-financial sectors) are rather significant, with the debt of quasi-public companies amounting to 19% of GDP at the end of H1 2020. It is worth noting that a considerable portion of this debt is denominated in foreign currency. While the majority of state-owned companies are financially stable and capable of servicing their debt liabilities, ACRA believes external shocks may create conditions in which state support is essential, especially if precedents are taken into account.

The weakness of public institutions stemming from the low efficiency of government institutions and the low quality of public governance has a negative impact on Kazakhstan’s business climate. However, ACRA notes the importance of the separation between the NBK and the Agency for Regulation and Development of the Financial Market of the Republic of Kazakhstan, which should help strengthen the independence of both regulatory bodies. Improvement of human capital is an additional positive long-term factor. According to the World Bank, Kazakhstan’s Human Capital Index grew from 0.63 in 2012 to 0.75 in 2018, which is higher than the average for Central Asia. In addition, Kazakhstan’s Human Capital Index is one of the highest among comparable countries (in terms of rating category).

Sovereign model application results

Kazakhstan has been assigned a BBB+ Indicative credit rating in accordance with the core part of ACRA’s sovereign model. A number of modifiers in the modifiers part of the model allow the Indicative credit rating to be increased. These include the following, which are determined by the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale:

  • Potential economic growth;
  • Efficacy of structural, economic and monetary policies;
  • Access to markets and sources of funding;
  • Debt sustainability;
  • External debt sustainability.

Negative modifiers include the following:

  • Balance of payment vulnerabilities;
  • Contingent liabilities and the risk of their implementation;
  • Fiscal policy and budget flexibility;
  • Sustainability of economic growth.

In view of the abovementioned modifiers, Kazakhstan’s Indicative credit rating remains unchanged. A Final credit rating of BBB+ has been assigned. There are no extraordinary factors that could result in an adjustment of the Final rating.

Potential rating upgrade factors

  • Decrease in the size of contingent liabilities;
  • Diversification of exported goods;
  • Increased quality and effectiveness of government bodies.

Potential rating downgrade factors

  • Prolonged decrease in economic growth.
  • Increase in public debt.
  • Sharp decrease in the size of NFRK assets and international reserves relative to external debt and imports.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The sovereign credit ratings have been assigned to the Republic of Kazakhstan under the international scale based on the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The sovereign credit ratings were first published by ACRA on September 24, 2019. The sovereign credit ratings and their outlook are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The sovereign credit ratings are based on information from publicly available sources, as well as ACRA’s own databases. The sovereign credit ratings are unsolicited. The Government of the Republic of Kazakhstan participated in the sovereign credit rating assignment.

ACRA provided no additional services to the Government of the Republic of Kazakhstan. No conflicts of interest were discovered in the course of the sovereign credit rating assignment.

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