Fitch Ratings has affirmed Kazakhstan’s Long-Term Foreign and Local Currency Issuer Default Ratings at ‘BBB‘ with a Stable Outlook, reads the statement released by the rating agency on October 31.
The issue ratings on Kazakhstan’s senior unsecured foreign currency bonds are also affirmed at ‘BBB’. The Country Ceiling is affirmed at ‘BBB+’ and the Short-Term Foreign-Currency and Local-Currency IDRs is at ‘F2’.
While the economy is gradually adjusting to shock caused by lower oil prices and weaker demand in key trading partners, the banking sector is a significant weakness compared with peers, the agency warns. As growth resumes, “the erosion of the strong sovereign balance sheet, which underpins the ratings, is slowing”. Greater exchange rate flexibility is supporting the adjustment of the balance of payments, with official reserves rising USD3.5bn over the first nine months of 2016 to USD31.4bn, according to Fitch.
Kazakhstan’s current account deficit is projected to narrow to 2.3% of GDP in 2016, from 3.2% in 2015 and will be fully financed by net inflows of foreign direct investment. The current account is forecasted to return to a small surplus in 2017 following the rising oil and metals prices.
“Increasing sovereign net foreign assets and bank deleveraging will offset the rise in net external debt of the non-bank private sector caused by the financing of energy project,” the statements reads. That will reduce net external debt to a forecast 13.7% of GDP by the end of 2018 against forecasted 20% at end-2016.
Lower spending will reduce the IMF-defined general government deficit to 4.7% of GDP from 6.9% in 2015. Moreover, Fitch forecasts the general government deficit to narrow to 2.4% of GDP by 2018, based on its higher oil price assumptions. The deficit on the republican budget is also expected to narrow to 2% of GDP in 2016 from 2.2% in 2015.
According to Fitch, “general government debt is projected at 19.6% of GDP at end-2016, compared with a peer median of 40.3%,” and is expected to drop to 15.9% at end-2018 “due to high nominal GDP growth and exchange rate appreciation.”
The banking sector, however, is a credit weakness. Some of the asset-quality deterioration risks stem from foreign currency loans, which are currently classified as performing, but were mostly provided to unhedged borrowers. Government capital injections into the sector are possible, but are unlikely to be large relative to the sovereign’s capacity to support the sector, according to Fitch.
Kazakh economy is expected to grow by 1.9% on average in 2016-2018, well below the average of the 5.6% average of the previous decade and the 2.9% peer median.
According to Fitch, policy mismanagement or prolonged low oil prices could lead to a further weakening in the sovereign external balance sheet, triggering negative rating action. It also could be lowered due to “materialisation of significant contingent liabilities from the banking sector on the sovereign balance sheet.”
According to Fitch, it could consider a positive rating action, if steps are taken to reduce the vulnerability of the public finances to future oil price shocks, as well as a sustained recovery in external and fiscal buffers and substantial improvements in the business climate and governance could also lead to an upgrade.
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