Fitch affirms Kazakhstan at 'BBB+'; outlook stable

Fitch affirms Kazakhstan at 'BBB+'; outlook stable

Baku, Azerbaijan, May 12
By Elena Kosolapova - Trend:

The International Rating Agency Fitch Ratings has affirmed Kazakhstan's Long-term foreign and local currency IDRs at 'BBB+' and 'A-', respectively, the agency reported on May 12. The Outlooks are Stable. The Country Ceiling has been affirmed at 'A-' and the Short-term foreign currency IDR at 'F2'.

"Kazakhstan has a strong sovereign balance sheet, with low debt and the third-highest net sovereign foreign assets in the 'BBB' category, estimated at 42 percent of GDP, underpinned by a sizeable commodity endowment," Fitch said.

Real GDP growth of 6 percent in 2013 was among the fastest of 'BBB' rated countries. Fitch expects some deceleration in 2014. Private consumption has been the biggest contributor to growth since 2012, while exports have stagnated. The blow to real household incomes from tenge devaluation and slower bank lending growth will lead to softer consumption.

The slowdown in the Russian economy will also have an impact on growth, Fitch said. Russia accounts for 3.8 percent of FDI (2009-2013 average) and 7 percent of exports. Russian ownership of banks and corporates in Kazakhstan is relatively limited.

"If wide-ranging trade or financial sanctions were imposed on Russia, this could have an effect on Kazakhstan, which is a member of the Russian-led Customs Union, soon to become the Eurasian Economic Union," the agency said.

The National Bank's surprise decision to devalue the tenge by 19 percent on 11 February has undermined confidence in the monetary policy framework, leading to a sharp rise in deposit dollarisation and an uptick in inflation. However, Fitch does not expect further exchange rate volatility. The National Bank should be able to hold the tenge within the narrow targeted range; it has recently intervened to prevent appreciation. The devaluation should also help rebalance the current account and restore exchange rate competitiveness relative to Russia, cited as a concern by the authorities.

The current account recorded a small deficit of 0.1 percent of GDP in 2013, driven by a deterioration in the trade balance. Imports of non-food consumer goods rose 16 percent. Following the devaluation, Fitch expects the current account balance to record a surplus of 3 percent of GDP in 2014.

The banking sector remains a weakness, although credit is growing despite the heavy burden of bad loans on some banks' balance sheets, the agency said. The government is disposing of its stakes in three banks rescued in 2009 and aims to speed up the clean-up of bank balance sheets by purchasing more bad loans and setting a ceiling on NPLs of 15 percent of total lending (Fitch currently estimates NPLs at 33 percent of total lending). In February, the National Bank placed regulatory limits on consumer lending, which grew by 27 percet in 2013, twice the rate of overall lending to the private sector.

Other structural factors factored into the rating include weak governance and relatively weak institutions compared to similarly rated sovereigns, according to the World Bank indicators, Fitch said.

Commodity dependence is high. Oil and gas account for 70 percent of goods exports. Including metals and ores, commodities account for at least 90 percent of exports.
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced.

Substantial strengthening of the sovereign balance sheet over the medium term, effective restructuring of bank balance sheets, entrenching low and stable inflation under a more flexible exchange rate regime and improvements in governance and institutional strength might lead to positive rating action.

A departure from prudent policy that leads to a sustained decline in sovereign assets, a severe, sustained commodity price shock that negatively affected the balance of payments and public finances, excessive lending growth and inadequate risk management in the banking sector and a political risk event might lead to negative rating action.

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