FITCH AFFIRMS RATING OF REPUBLIC OF KAZAKHSTAN, OUTLOOK STABLE
/Fitch Ratings, London, 22.03.19, heading by KASE/ – Fitch Ratings has affirmed
Kazakhstan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB'
with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Kazakhstan's 'BBB' IDRs balance strong public and external balance sheets,
underpinned by large government savings and a substantial sovereign net
foreign asset position, against high commodity dependence, a weak banking
sector, weak World Bank governance indicators and higher inflation than 'BBB'
Higher average oil prices and increased production from the Kashagan oil field
contributed to strong economic growth in 2018 at 4.1%, versus a five-year
average of 2.9%, and a current peer median of 3.5%. A small decline in oil
production, due to maintenance work in the largest of the country's oil fields
will slow growth in 2019 to 3.4%, but increase in wages, rising consumer
credit, and substantial investments in the energy and mining sectors will
support domestic demand. Expansion of the Tengiz oil field will provide some
strong impetus to growth in the medium term.
The current account balance improved substantially in 2018, due to higher oil
exports and supportive terms of trade and turned into a small surplus at an
estimated 0.5% of GDP, versus a 1.3% deficit for the current 'BBB' median. We
forecast the current account will turn back into deficit in 2019-2020, as rising
consumer spending and large investments boost imports, but will be financed by
sustained net FDI inflows. Net external debt is more than twice that of the
current 'BBB' median but decreased to 16.6% of GDP (23.6% in 2017), due to
large deleveraging in the private sector, and 64% of gross external debt is
composed of intra-company loans.
Kazakhstan's sovereign external balance sheet remains a key rating strength
with sovereign net foreign assets at 43.8% of GDP at end-2018, versus 2.6% for
the 'BBB' median. Assets of the National Fund of Kazakhstan (NFRK) decreased
to 33% of GDP in 2018 (USD57.7 billion), from 37% in 2017 (USD58.3 billion),
mostly reflecting negative revaluation of equity portfolio. We forecast NFRK's
assets will recover to USD58 billion (34% of GDP) in 2019, as it records
continued surpluses, although planned increased withdrawals in the budget will
prevent faster recovery of assets. Gross international reserves of the National
Bank of Kazakhstan (NBK) decreased to USD30.2 billion in 2018, partly due to
FX sales, but will recover to about USD32 billion in 2019-2020 (12.7 months of
import cover). USD530 million of NFRK assets remain frozen pending further
litigation in UK courts regarding the validity of an arbitration award.
Fiscal consolidation remained on track in 2018, with the consolidated general
government deficit narrowing to an estimated 0.6% of GDP (2.8% of GDP
estimated surplus by the government), compared with 1.8% for the current 'BBB'
median, supported by high oil prices and tax revenues, and contained
expenditure growth. General government debt decreased to an estimated 19.4%
of GDP in 2018 (19.9% in 2019), half that of the current 'BBB' median.
Fitch expects the fiscal deficit to widen to 1.8% of GDP in 2019 and 1.9% in
2020, as the government adopts a looser fiscal stance. The non-oil fiscal
deficit will reach a forecast 7.4% of GDP, compared with an initial government
target of 5.8%. Following a reshuffling of the government in February, the
former president, Nursultan Nazarbayev, announced a new social programme of
KZT1.3 trillion over three years, including an increase in minimum wages by
50%, a cut in private income tax (PIT) for low income earners and creation of a
new "direct investment fund" to support non-oil sectors. The medium-term goal
provided by the fiscal rule aims at capping transfers from the National Oil
Fund to KZT2 trillion by 2020, but the 2019 revised budget includes an increase
in transfers to KZT3 trillion from KZT2.6 trillion in 2018, compared with an
initial projected decline.
Progress in implementing the structural reform agenda, including the
privatisation of state-owned enterprises and diversifying the economy is
ongoing, although we expect diversification will remain very gradual. Oil and
metals still accounts for 40% of GDP, and oil revenues represent 43% and 63% of
fiscal and good export receipts. Progress has been made under the second
privatisation programme and 15% of Kazatomprom shares were sold in 2018, but
the timing of the planned IPOs of seven state companies owned by the sovereign
fund Samruk- Kazyna, including Kazakhtelecom, Air Astana and Samruk-Energy,
scheduled for 2019, remain uncertain.
Fitch considers that further state support for the banking sector may be needed,
but would not materially undermine the sovereign's balance sheet. In February
2019, the state-owned Problem Loan Fund (PLF) purchased an additional
KZT604 billion of distressed assets from Tsesnabank, using proceeds from
bonds subscribed by the NBK. This enabled the sale of Tsesnabank to state-run
brokerage First Heartland Securities (FHS) and followed a first KZT450 billion
(0.8% of GDP) acquisition of the bank's agricultural portfolio by PLF in 2018.
The banking sector clean-up has continued in 2019 and the regulatory framework
improved, with the NBK removing the license of three small banks for failing to
meet capital requirements in 2018. However, the overall health of the sector
remains weak, as reflected by a Fitch Banking System Indicator of 'b'. Although
the official NPL rate was 8% at end-2018, this likely understates the volume of
problem loans. The NBK estimates NPLs and restructured loans account for 17%
of total loans, while Fitch estimates Stage 3 and Stage 2 loans account for 30%
of gross loans for some of the larger banks. Credit contracted by 1.4% in 2018
and liquidity increased reflecting limited lending options. Dollarisation
remains high relative to 'BBB' rated peers and accounted for 48% of total
deposits at end- 2018 and 26% of loans.
Inflation moderated to 5.3% in December but remained higher than the current
'BBB' median of 2.8%. The NBK hiked its base rates by 25bp in October, in the
face of increased exchange rate volatility and higher fuel prices and sold
USD520 million in September to curb devaluation expectations, the first time
since October 2017. We forecast inflation to average 4.8% in 2019-2020 in line
with the NBK's revised target band of 4%-6% for 2019-2020. However, inflation
risks are high, given concern over new US sanctions on Russia and possible
volatility of the rouble and increases in minimum wages and a cut in PIT, which
could bring inflationary pressures, albeit partially offset by a 10% decrease in
utility tariffs from January 2019.
Monetary policy has supported the disinflation process, but greater
strengthening of the policy framework continues to be constrained by a weak
financial sector, relatively shallow domestic financial markets, still high
dollarisation and NBK's involvement in quasi-fiscal operations. These include
financing of the "7-20-25" mortgage programme, provision of a KZT650 billion
long-term subordinated loan to the banking sector in 2017, and financing of the
recent restructuring of Tsesnabank in February 2019.
Human and financial development indicators are broadly in line with 'BBB'
medians, but the World Bank's governance indicators, albeit improving, continue
to represent a rating weakness, partly reflecting the centralisation of powers
in the presidency. In February 2019, the then-president reshuffled the cabinet
and replaced the NBK chairman because of the inadequate pace of structural
reform implementation and urged the government and the central bank to boost
growth in 2019. Recent unexpected political developments have ushered in the
first leadership change since independence, but Fitch expects former president
Nazarbayev to retain considerable influence in his positions as chairman of the
Security Council and president of the Nur Otan party. Any changes to economic
policy are likely to be incremental, at least until the presidential and
parliamentary elections that are scheduled for 2020, although they could be
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Kazakhstan a score equivalent to a rating of
'BBB-' on the Long-Term Foreign Currency (LT FC) IDR scale.
Fitch's sovereign rating committee adjusted the output from the SRM to arrive at
the final LT FC IDR by applying its QO, relative to rated peers, as follows:
- Public Finances: +1 notch, to reflect government savings in the NFRK
- External Finances: +1 notch, to reflect sovereign external assets that are the
largest in the rating category
- Structural Features: -1 notch, to reflect the weak condition of the banking
Fitch's SRM is the agency's proprietary multiple regression rating model that
employs 18 variables based on three-year centred averages, including one year
of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a
forward-looking qualitative framework designed to allow for adjustment to the
SRM output to assign the final rating, reflecting factors within our criteria
that are not fully quantifiable and/or not fully reflected in the SRM.
The main factors that could, individually or collectively, trigger positive
rating action, are:
- Improved governance indicators and strengthening of the policy mix, to be
more closely aligned with 'BBB' rated peers.
- Sustainable improvement in the health of the banking sector.
- Improvement in the economy's and public finances' resilience to commodity
The main factors that could, individually or collectively, trigger negative
rating action, are:
- Policies that widen the fiscal deficit or undermine monetary policy
- Materialisation of additional significant contingent liabilities from the
banking sector on the public sector balance sheet.
Fitch assumes that Brent crude will average USD65 in 2019 and USD62.5 in
The full list of rating actions is as follows:
Long-Term Foreign-Currency IDR affirmed at 'BBB'; Outlook Stable
Long-Term Local-Currency IDR affirmed at 'BBB'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F2'
Short-Term Local-Currency IDR affirmed at 'F2'
Country Ceiling affirmed at 'BBB+'
Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at
* The full press release is available on the website of Fitch Ratings.