Fitch: Kazakhstan's externals improving, but banking risks rise

/Fitch Ratings, London, July 17, 08/ - Fitch has said in a special report published today that Kazakhstan's external finances have strengthened, but bank asset quality is deteriorating in a worsening macroeconomic climate. "Improvements in Kazakhstan's external finances so far in 2008 are easing a key risk identified by Fitch when Negative Outlooks were assigned to the ratings in December 2007. But the credit crunch is still working its way through the economy, and the worsening macroeconomic outlook and deteriorating bank asset quality are a growing source of concern," says Andrew Colquhoun, Director in Fitch's Sovereigns Group. Kazakhstan is rated Long-term foreign currency Issuer Default rating (IDR) 'BBB' with Negative Outlook, Long-term local currency IDR 'BBB+' with Negative Outlook, Short-term IDR 'F3' and Country Ceiling 'BBB+'. Kazakhstani borrowers ran up external debts worth USD92bn by end-June 2007 (88% of 2007 GDP), leading to the risk of a refinancing crisis when access to international capital markets tightened in H207 amid heightened global market volatility. The authorities opted to make foreign exchange available from central bank reserves to hold the KZT level against the USD, shoring up confidence in the heavily dollarised financial system at the cost of a 25% drop in reserves over July-December 2007. Kazakhstan's external finances have been strengthening so far in 2008, although risks have not entirely abated. Reserves are growing again, rising USD3.6bn in H108 to USD21.2bn (USD46.9bn including the Oil Fund). The current account deficit (CAD) reached a surplus of USD3.9bn in Q108, narrowing the four-quarter-rolling CAD to 2.6% of GDP from 6.8% in 2007, buoyed by soaring oil prices. Some Kazakhstani borrowers have been able to return to international markets, albeit at substantial spreads. However, the central bank's projection for external debt servicing in 2008 has gone up to USD19.5bn, from USD11.3bn in November 2007, blunting the improvement in Kazakhstan's external liquidity position. Fitch projects the external liquidity ratio at 152% for 2008, almost unchanged from 151% in 2007. More severe problems in accessing international markets or intensified commodity-price volatility could weaken Kazakhstan's external finances again, adding to downward pressure on the ratings. Faced with tighter funding conditions, the banks have effectively stopped growing credit since November 2007, contributing to the economy's slowdown. GDP grew 6% in Q108, down from 10.6% in Q107; Fitch projects 5% growth for 2008. Property prices in the bigger cities were down 30-45% from their peaks by June 2008 (with negative equity on some home loans made in H107). Bank asset quality is suffering in this environment. Non- performing loans jumped to 5.1% of total (individually-assessed) loans at May 2008 from 1.9% at June 2007. Further asset quality deterioration could erode banks' loss absorption capacity (although this remains significant), potentially leading to the need for sovereign support to the sector, which would be negative for the sovereign ratings. High and rising inflation (the CPI rose 20% in the year to June 2008) adds to the risks to the real economy, further weighing on the ratings. The report, entitled "Kazakhstan: Reserves Rising Again, But Bank Asset Quality Suffering", is available on Fitch's subscription website, www.fitchresearch.com. Contact: Andrew Colquhoun, London, Tel: +44 (0) 20 7417 4316; Ed Parker, +44 (0) 20 7417 6340 Media relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364; [2008-07-18]