S&P REVISED KAZAKHSTAN OUTLOOK TO NEGATIVE ON RISING RISK OF CONTINGENT LIABILITIES MATERIALIZING

/Standard & Poor's, London, April 29, 08/ - Standard & Poor's Ratings Services today said it had revised its outlook on the long-term sovereign credit ratings on the Republic of Kazakhstan to negative from stable. At the same time, the 'BBB-' long-term foreign currency, the 'BBB' long-term local currency, the 'A-3' short-term sovereign credit ratings, and the kzAAA national scale ratings were affirmed. The 'BBB' transfer and convertibility (T&C) assessment on Kazakhstan was also affirmed. "The outlook revision reflects the increasing risk that deteriorating bank asset quality in combination with funding challenges will weaken the country's fiscal and external balance sheets, and impair policy flexibility and growth prospects," Standard & Poor's credit analyst Ben Faulks said. The global credit squeeze is more severe, and likely to prove more prolonged, than anticipated in October 2007 when Kazakhstan's long-term foreign currency rating was lowered to 'BBB-' from 'BBB'. Kazakh banks' scheduled principal repayments on external debt amount to $14 billion this year, and much of this debt may not be rolled over because of higher borrowing costs and counter-party difficulties. This is likely to force a contraction in outstanding domestic credit, despite a government program to place temporary loans and deposits with banks to mitigate external funding difficulties. Consequently, economic growth is likely to fall sharply in 2008 to below 4%, putting pressure on banks' asset quality. Of particular concern is the sharp slowdown in real estate development and an accompanying slide in property prices. Kazakh banks are exposed to the real estate sector through substantial lending to developers and purchasers and loans that use real estate as collateral. We expect the current account to register a small surplus in 2008, following a deficit of 7% of GDP in 2007, as import demand softens markedly and exports surge once more because of exceptional oil prices. This should provide the flexibility necessary to offset a deterioration in the financial account. Should the external liquidity situation prove more difficult than we currently anticipate, any ensuing exchange rate volatility would prove an additional risk to banks given considerable foreign exchange lending to unhedged corporates and households. Offsetting our concerns are Kazakhstan's strong external and fiscal buffers. Having declined in the second half of 2007, net international reserves have resumed an upward trajectory, rising to $19.3 billion in March from $17.6 billion in December. The National Fund, a fiscal stabilization fund, rose to $23 billion in March from $14 billion at the start of 2007, allowing the sovereign considerable scope if it decides to support banks. Moreover, Kazakhstan is expected to register a general government surplus (before transfers to the National Fund) equivalent to 5.7% of GDP in 2008, while the general government net asset position strengthened to 13% of GDP in 2007. "The negative outlook indicates the likelihood of a downgrade if financial sector problems increasingly weigh on economic prospects or become a material fiscal burden," Mr. Faulks said. "The ratings would likely be lowered if a large portion of the National Fund were used for bank recapitalization. External liquidity difficulties would also bring downward pressure on the ratings. Conversely, the outlook will revert to stable if banking sector difficulties are contained in a manner that has limited impact on the economy and public finances. We expect the outlook to be resolved within 12 to 18 months." For detailed information please contact to: Ben Faulks, London, (44) 20-7176-7108 ben_faulks@standardandpoors.com Franklin Gill, London, (44) 20-7176-7129 frank_gill@standardandpoors.com [2008-04-30]