S&P DOWNGRADES LONG-TERM SOVEREIGN CREDIT RATINGS OF REPUBLIC OF KAZAKHSTAN FROM "BBB" TO "BBB-"; OUTLOOK "NEGATIVE"
18.02.16 16:44
/Standard & Poor's, February 17, 16, heading by KASE/ – Standard & Poor's
Ratings Services lowered its long-term foreign and local currency sovereign
credit ratings on the Republic of Kazakhstan to 'BBB-' from 'BBB'. At the same
time, we lowered the short-term foreign and local currency ratings to 'A-3' from
'A-2' and the Kazakhstan national scale rating to 'kzAA' from 'kzAA+'. The
outlook on the long-term ratings is negative.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA
Regulation"), the ratings on Kazakhstan are subject to certain publication
restrictions set out in Art 8a of the EU CRA Regulation, including publication
in accordance with a pre-established calendar (see "Calendar Of 2016 EMEA
Sovereign, Regional, And Local Government Rating Publication Dates," published
Dec. 22, 2015, on RatingsDirect). Under the EU CRA Regulation, deviations from
the announced calendar are allowed only in limited circumstances and must be
accompanied by a detailed explanation of the reasons for the deviation. In this
case, the reason for the deviation is the recent revision of our global oil
price assumptions.
The next scheduled rating publication on the sovereign rating of Kazakhstan
will be on March 11, 2016.
RATIONALE
In mid-January 2016, Standard & Poor's materially lowered its oil price
assumptions for the period 2016-2019. Prices for crude oil in spot and futures
markets are about 70% below mid-2014 levels, when prices began to slide.
When we last reviewed Kazakhstan in September 2015, we expected Brent oil
prices to average US$65 per barrel (/bbl) in 2016 and US$75/bbl in 2017 and
beyond. We now assume an average Brent oil price of US$40/bbl in 2016 and
US$45/bbl in 2016-2019 (see "S&P Lowers Its Hydrocarbon Price Deck Assumptions
On Market Oversupply; Recovery Price Deck Assumptions Also Lowered," published
Jan. 12, 2016, on RatingsDirect). Consequently, we have also re
being in surplus in 2010-2014. However, we expect import reduction, supported
by the lower exchange rate, and a gradually recovering oil price will help the
current account recover and return to surplus eventually.
Current account deficits will lead Kazakhstan's net external liabilities to grow
to above 100% of CARs in the next two years. At the same time, we estimate that
liquid external assets will exceed external debt by 45%-50% of CARs. We
estimate that more than one-half of Kazakhstan's stock of external liabilities
related to foreign direct investment (FDI) is debt type; this share has been
growing over the last few years.
Despite the current account performance weakening, we expect reserves to stay
broadly stable in 2016-2017, as they will be supported by financial account
inflows, namely the expected repatriation of National Fund of the Republic of
Kazakhstan (NFRK) assets, as part of government stimulus spending, and the
growth of external borrowings (primarily from multilateral institutions [MLIs]
which have expressed willingness to extend their facilities to the government).
The latter would compensate for the expected fall in FDI to 2% of GDP in 2015-
2016 compared with 5% of GDP in the last five years.
We believe that the ability of the NBK to influence domestic monetary conditions
remains constrained by weak transmission mechanisms. Apart from shallow
capital markets, the banking system is extremely vulnerable and has become
increasingly dollarized. The share of foreign currency-denominated deposits in
total deposits increased to 67% in December 2015, from about 55% at year-end
2014 and below 40% in 2013. More importantly, the recent oil price drop and
further tenge depreciation will present the NBK with deepening challenges,
including maintaining financial stability, supporting credit and economic
growth, and keeping inflation within previously-stated targets. In this
context, we see increasing risks to the predictability and effectiveness of the
NBK's policies. We expect inflation to remain in double digits this year,
following the hike to 13.6% in 2015. We note, however, the NBK's progress in
introducing a set of new monetary policy tools within the inflation-targeting
policy regime.
The ratings on Kazakhstan continue to be supported by the government's strong
fiscal position, built on accumulated past budgetary surpluses. In particular,
we project the general government will remain in a net asset position over the
medium term, helped by the authorities' capacity and willingness to contain
spending. The ratings remain constrained by our view of Kazakhstan's limited
institutional and governance effectiveness, owing to the highly centralized
political environment, its moderate level of economic development, and limited
monetary policy flexibility.
Due to lower oil prices and the ongoing fiscal stimulus program, we expect the
government will run fiscal deficits on a consolidated basis with the NFRK in
2016-2017, and we expect general government debt to change as a percentage
of GDP as a result of both expected deficits and the impact of exchange rate
movements. Apart from the regular annual transfer from the NFRK to the central
government budget, the oil fund has recently been used to support the local
economy. This fiscal stimulus includes a US$5.5 billion program that was
launched in 2014 and a US$9 billion program for infrastructure investments up
to 2018, launched in 2015.
We believe Kazakhstan’s capacity and willingness to contain spending in the
medium term, after the ongoing stimulus has finished, remains strong, and that
the general government will return to surplus from 2018. The government is
considering different fiscal scenarios, including those with an oil price under
US$25/bbl. Kazakhstan's material capital expenditures should support the
government's spending flexibility, in our view.
The weaker exchange rate could support revenues in 2016, whereas revenue-
mobilization measures, in particular related to more-focused collection of
value- added tax, as well as recovering oil prices, will push up revenue growth
in the longer term. So far, we do not factor in any sizable short-term revenues
from assets sales. Despite the ambitious privatization program the government
announced in 2015, we understand that the program's focus is on attracting
strategic investors (which might turn out to be a long-term process) rather than
on immediate revenue mobilization.
With the expected recovery of fiscal performance, we believe gross general
government debt will continue to stay below a modest 25% of GDP and that the
government will remain in a net asset position thanks to its liquid assets
accumulated in the oil fund (above 50% of GDP). This figure excludes the debt
of Kazakhstan's government-related entities, the statistics for which are not
available (we estimate their debt to exceed 15% of GDP as of year-end 2015).
In 2016-2017, consolidated general government fiscal deficits will likely be
primarily financed by domestic bonds and, if need be, borrowing from MLIs
(such as the Asian Development Bank and the World Bank). We understand
that the government could use some of the local issuance to inject capital into
the banking system, if pressure on the banking system's capital is triggered by
the tenge devaluation. We expect nonperforming loans (NPLs; loans more than
90 days overdue) to increase to about 12%-14% by year-end 2016 from a reported
9.5% as of Dec. 1, 2015 (see "Credit FAQ: How The Recent Devaluation Of The
Tenge Affects Kazakh Banks' Creditworthiness," published Jan. 28, 2016, on
RatingsDirect).
In April 2015, President Nursultan Nazarbayev won the early presidential
election, which has supported political stability. Indeed, Kazakhstan has been
one of the most politically stable environments in the region. Under his renewed
mandate, the president has announced five institutional and economic reforms
that could offset the sharp economic slowdown. That said, we regard future
policy choices as relatively difficult to predict in the longer term because of
uncertainty surrounding the eventual presidential succession; 75-year-old
President Nazarbayev has governed Kazakhstan since its independence in
1991.
OUTLOOK
The negative outlook reflects our view of risks to Kazakhstan's external and
monetary profiles under the current weak and volatile global commodity
environment. We could lower the long-term rating, for instance, if we believed
the challenges of containing inflation, responding to exchange rate pressures,
and maintaining banking system stability had reduced monetary policy
predictability and effectiveness, or if we saw external imbalances continuing to
increase.
We could consider revising the outlook to stable if higher oil prices and the
authorities' countercyclical policy response are successful in addressing
external imbalances and short- and medium-term challenges to monetary policy.
RATINGS LIST
Kazakhstan (Republic of)
To From
Sovereign Credit Rating
Foreign and Local Currency
BBB-/Negative/A-3 BBB/Negative/A-2
Rating on national scale
kzAA/--/-- kzAA+/--/--
Transfer & Convertibility Assessment
BBB- BBB
Senior Unsecured
Foreign and Local Currency
BBB- BBB
Short-Term Debt
Local Currency
A-3 A-2
Primary Credit Analyst:
Karen Vartapetov, Moscow (7) 495-783-40-18;
karen.vartapetov@standardandpoors.com
Secondary Credit Analyst:
Maxim Rybnikov, London (44) 20-7176 7125;
maxim.rybnikov@standardandpoors.com
Additional contact:
SovereignEurope;
SovereignEurope@standardandpoors.com
[2016-02-18]