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Moody's affirms Kazakhstan's rating at Baa2, changes outlook to stable from positive

Business Materials 1 April 2015 10:37 (UTC +04:00)
Moody's Investors Service (Moody's) affirmed the issuer and senior unsecured ratings of the Government of Kazakhstan at Baa2, as well as the provisional (P) Baa2 MTN program rating, and changed the outlook to stable from positive
Moody's affirms Kazakhstan's rating at Baa2, changes outlook to stable from positive

Baku, Azerbaijan, April 1
By Elena Kosolapova - Trend:

Moody's Investors Service affirmed the issuer and senior unsecured ratings of the Government of Kazakhstan at Baa2, as well as the provisional (P) Baa2 MTN program rating, and changed the outlook to stable from positive, the rating agency said.

"The affirmation of the Baa2 rating reflects Kazakhstan's very high fiscal strength, high economic strength, and substantial foreign exchange assets," Moody's said.

The following country ceilings for Kazakhstan are unchanged: an A3 local-currency country risk ceiling, an A3 local-currency deposit ceiling, a Baa1/P-2 foreign-currency bond ceiling, and a Baa3/P-3 foreign-currency deposit ceiling.

Even with fiscal stimulus in 2014 and an expansion of stimulus spending over the next three years from 2015 to 2017, the rating agency expects that Kazakhstan's growth rate will ratchet down considerably owing to the drop in the price of oil and weaker economic growth in Russia, China, and other important trading partners of Kazakhstan. Moody's forecasts that real GDP growth in Kazakhstan will likely be 1.5 percent in 2015, 2.2 percent in 2016, and 3.3 percent in 2017, down from around 6 percent on average during the five-year period through 2014.

A decline in confidence among residents in the tenge has resulted in a significant increase in banking system deposit dollarization to 57 percent of total deposits at the beginning of February from 40 percent one year earlier, the highest level since the 2009 devaluation, according to Moody's.

"We see this as impeding the ability of banks to lend in local currency, putting further strains on the balance sheet of banks in a system already burdened with a high level of non-performing loans. Also, currency mismatches on banks' balance sheets, as dollar assets have not risen as much as dollar liabilities, would pose further strains should there be a depreciation of the tenge. This also indicates that the risk that some banks could require capital support from the government has risen," the rating agency said.

In addition, the depreciation of the Russian ruble and other currencies in the CIS region, while the value of the Kazakh tenge has remained broadly unchanged against the dollar in the past year, has eroded competitiveness to a degree. This has made Kazakh non-hydrocarbon goods more expensive vis-à-vis similar goods from Russia and other CIS countries, which are important trading partners. Moody's believes a strong exchange rate will also weigh on Kazakhstan's macroeconomic performance.

Moreover, Kazakhstan's external payments position has come under increasing downward pressure since 2014, with the current account balance likely falling into a deficit of 3.9 percent in 2015 and 3.4 percent in 2016 and remaining in deficit through 2019, the rating agency said.

Although official foreign exchange reserves, excluding gold, stood at $21.5 billion in February ($29.1 billion including gold), these remain broadly unchanged since October 2014, from which time global oil prices weakened and political pressures rose between Russia and Ukraine. In addition, Moody's believes pressures have been building up on the external payments position, given the weakening in the balance of payments and the continued strength of the tenge in both nominal terms against the dollar and also in real effective terms against Kazakhstan's trade partners. However, because the National Bank of Kazakhstan (NBK) does not publish information on its foreign-exchange market interventions, it is difficult to gauge the extent to which the NBK has supported its de facto stabilized exchange rate since the second half of 2014, the rating agency said.

In addition, Moody's noted that fiscal pressures had led to a $5.1 billion withdrawal from the NFRK -- although as of February such foreign assets stood at the substantial level of $71.7 billion. Further drawdowns from the NFRK will be made, as the government has earmarked $9 billion for a second fiscal stimulus program over 2015 to 2017.

Upward pressure on the rating could develop if the country's institutional strength, e.g. the rule of law and the control of corruption, were to improve or if economic diversification were to broaden beyond commodities and consequently were to reduce economic vulnerability, the rating agency said. Moreover, greater clarity on the presidential succession would be positive for political event risk considerations.

Kazakhstan's government bond rating would come under downward pressure if growth performs below expectations for several years, due, for example, to continued low commodity prices. The rating would also come under pressure should there be a significant loss of NBK foreign exchange reserves or from a deterioration in the government's financial strength, since this would erode its main advantage over similarly rated governments that have more robust institutional strength. Furthermore, a political crisis (e.g., related to the presidential succession) could also put downward pressure on the rating.

Follow the author on Twitter: @E_Kosolapova

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