BAKU, Azerbaijan, Apr.30
By Nargiz Sadikhova - Trend:
Greater exchange rate flexibility in Kazakhstan will ease the impact of this year's plunge in oil prices on the external balance sheet however, it will not prevent the sovereign's strong fiscal metrics from weakening, Trend reports with reference to the Fitch Ratings report.
The report said that Kazakhstan's sovereign credit profile is exposed to the coronavirus pandemic chiefly through the effect of lower oil prices and its external position has consequently proved more resilient to the current shock.
Sovereign external assets, including National Bank of Kazakhstan (NBK) reserves and the state oil fund (NFRK) fell by $3.1 billion (or 2.8%) in March 2020 from February. However, $1.58 billion spent on interventions so far this year is significantly less than the net sales of $35.1 billion in 2014-2015.
“Lower prices for oil and other minerals and OPEC+ production curbs will widen the current account deficit even as tenge depreciation constrains consumption. We forecast the current account deficit (CAD) to widen to 5.5 percent of GDP in 2020 before narrowing to 3.6 percent in 2021. However, external assets held in the NFRK will remain large (at a projected 32 percent of GDP) and provide a key support to the rating,” the report said.
Fitch said that tenge depreciation and investment of NFRK assets abroad should partly insulate the public finances from lower oil prices.
“However, economic contraction due to coronavirus containment measures and fiscal support measures will magnify the impact of falling oil receipts. We forecast the fiscal deficit to widen to 5.6 percent of GDP in 2020 from just 0.4 percent last year, before narrowing slightly to 3.2 percent in 2021,” the Fitch said.
The report said that Kazakhstan’s fiscal policy was not well anchored prior to the coronavirus and oil shocks, with frequent breaches of and changes to nascent fiscal rules and the use of quasi-fiscal spending.
“Measures such as household debt forgiveness and subsidies will have softened the initial impact of the shocks, but highlight a policy emphasis on social stability, meaning post-crisis fiscal consolidation will probably be gradual,” the report said.
Fitch reminded that Kazakh banks entered the current crisis in better shape than the 2014 oil price shock due to stronger pre-impairment performance, larger capital and liquidity buffers, and smaller legacy problem assets.
“This year's asset quality review (AQR) identified a remaining capital gap of just 250 billion tenge ($582.1 million) based on 1Q2019 data, concentrated in just four banks. Dollarisation has fallen but is still high, and tenge depreciation plus economic contraction will dent asset quality, although the government's indication that it might support large businesses could ease this,” the Fitch Ratings's report said.
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