Moody's changes outlook on Kazakhstan's Baa2 rating to positive
Azerbaijan, Baku, Aug 19 / Trend E. Kosolapova/
Moody's Investors Service changed the outlook on Kazakhstan's Baa2 government bond rating to positive from stable, the agency reported. At the same time, Moody's also affirmed the Baa2 rating.
The main factor underlying Moody's assignment of a positive rating outlook is the reduced risk to the sovereign balance sheet from contingent liabilities in the banking sector. This has led the rating agency to lower its assessment of "susceptibility to event risk" to "low" from "medium"; and change the rating range to "A3-Baa2" from "Baa2-Ba1" previously.
This removes a key constraint on Kazakhstan's Baa2 rating and as a consequence, positive developments in other rating factors such as the economic, institutional or fiscal sphere can now lead to upward pressure on the rating.
The reduced risk to the sovereign arises from the decline in the banking sector's recapitalization needs following the debt restructurings of a number of Kazakh banks, the sector's recapitalization and deleveraging since the start of the crisis in 2007. The rating agency now estimates recapitalization costs below 5 percent of GDP (even in an adverse shock scenario where the total capitalization of the banking system would be depleted), which implies only a low burden on the sovereign balance sheet given the fiscal buffer of 30 percent of 2013 GDP accumulated in the National Oil Fund as of July 2013. Moreover, the sovereign demonstrated during the crisis that it can effectively ring-fence its balance sheet from trouble in the banking sector by baling-in private creditors. While this had negative repercussions for the support uplift factored into Moody's ratings of the country's banks, it was credit positive for the sovereign.
The second driver for the outlook change is the country's improved external liquidity position, with the National Oil Fund more than doubling in recent years (to $64 billion in July 2013 from $30 billion at end 2010) and banking sector external liabilities declining to $8.8 billion in May 2013 from a peak of $45.5 billion in October 2007. Consequently, total external debt declined to 68% of GDP in 2012 from 97 percent in 2009.
"Hence, external liquidity has become less of a constraint for the government's financial strength, which is supported by Kazakhstan's very strong fiscal metrics, including sustained fiscal surpluses (4-5 percent of GDP expected in coming years), a very low debt-to-GDP ratio (2012: 12 percent) and very low debt-servicing costs," Moody's said.
The third driver for the outlook change is Kazakhstan's favorable economic growth prospects. Moody's expects annual GDP growth of around 5 percent in the next five years. A key driver supporting high growth rates in the medium term will be the Kashagan oil field, which is expected to come on stream later this year.
"According to the World Bank, production from this field will increase steadily, starting with around 75,000 barrels a day to a total of 1.5 million barrels a day in 2025. This compares with Kazakhstan's current total output of 1.7 million barrels a day in 2012," the agency said.
While Moody's has been cautious to factor in credit support to this new field, recent news reports quoting the oil minister suggest that production will begin this year following delays since 2005. Another positive on the economic front is that Kazakhstan has successfully improved its ranking in international surveys on competitiveness and the business climate in recent years.
According to Moody's, Kazakhstan's key credit challenges are a lack of economic diversification, which is partly related to the dominance of state-owned enterprises in the economy, and Kazakhstan's low institutional strength. Significant improvements in this regard would be credit positive. Furthermore, the weak global environment, which is also important to Kazakhstan's outlook, remains a risk factor.