Fitch affirms sovereign ratings of Kazakhstan

Baku, Azerbaijan, March 26

By Fakhri Vakilov – Trend:

Fitch Ratings confirmed the long-term issuer default ratings (IDR) of Kazakhstan in national and foreign currencies at the BBB level, the outlook is “stable,” Trend reports with reference to the agency's statement.

“On one hand, IDR of Kazakhstan “BBB” reflects strong state and external balance sheets, which are supported by significant state savings and net foreign assets of the state, and, on the other hand, take into account high dependence on the commodity sector, weak banking sector and indicators The World Bank for the quality of management, as well as higher inflation in comparison with comparable issuers with BBB ratings,” the agency stated in a press release.

Higher average oil prices and increased production at the Kashagan oil field contributed to strong economic growth in 2018 at 4.1 percent compared to the five-year average of 2.9 percent.

“A slight decrease in oil production due to repairs at the country's largest oil field (Kashagan) will cause a slowdown in 2019 to 3.4 percent, but an increase in wages and growth in consumer lending, as well as substantial investments in the energy and mining sectors will support domestic demand. The expansion of activities at the Tengiz oil field to a certain extent will provide a strong stimulus for growth in the medium term,” Fitch analysts noted.

The agency's forecasts demonstrate that, in 2019-2020 the current account will become scarce due to increased imports against the background of growing consumer spending and significant investments, but it will be financed by continuing inflows of net foreign direct investment. Net external debt which more than doubled the current median for the BBB ratings, dropped to 16.6 percent of GDP (23.6 percent in 2017) due to a significant reduction in the private sector debt burden.

“Our forecasts show that the National Fund’s assets will recover to $58 billion in 2019 amid a positive balance with the fund, although the planned increase in the outflow of funds to the budget will impede a more rapid recovery of assets. Gross international reserves of the National Bank of Kazakhstan fell to $30.2 billion in 2018, partly due to the sale of currency, but they would recover to about $32 billion in 2019-2020,” the report says.

Fitch expects the budget deficit to increase to 1.8 percent of GDP in 2019 and 1.9 percent in 2020 as the government uses less tight fiscal policies. The non-oil budget deficit will reach a projected level of 7.4 percent of GDP, compared with the government’s initial target of 5.8 percent.

The agency stressed that further state support of the banking sector may be necessary, but would not have significant pressure on the sovereign balance sheet. Overall, the banking sector remains weak, as evidenced by the Fitch Banking System Indicator “b”.

Inflation became more moderate at 5.3 percent in December, but still was above the current median for countries with a BBB rating of 2.8 percent.

“The forecasts demonstrate that, inflation will average 4.8 percent in 2019-2020, which is at the level of the revised National Bank of Kazakhstan target range of 4-6 percent for 2019-2020. At the same time, inflation risks are high given the concerns about the new US sanctions against Russia and the possible volatility of the ruble, as well as increases in the minimum wage and lower income taxes for individuals, which may cause inflationary pressure, although partially offset by lower utility tariffs services by 10 percent from January 2019,” Fitch analysts underlined.

The recent unexpected political events marked the first shift of the leader since independence, but Fitch expects former President Nazarbayev to retain significant influence within his new posts as chairman of the Security Council and head of Nur Otan party. Any changes in economic policy are likely to be gradual, at least until the presidential and parliamentary elections scheduled for 2020, although they may be postponed to an earlier date.

The following factors may lead to a positive rating action: improvement of management quality indicators and strengthening of the policy pursued; sustainable improvement in the banking sector; improving the resilience of the economy and public finances to commodity shocks.

The following factors may lead to a negative rating action: a policy that would lead to an increase in the budget deficit or would have a negative effect on confidence in monetary policy; materialization of significant additional contingent liabilities for the balance of the public sector on the part of the banking system.

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Follow author on Twitter:@vakilovfaxri

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