26.03.19, 14:37
/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' peers. 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 called earlier. 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 sector. 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. RATING SENSITIVITIES 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 price shocks. The main factors that could, individually or collectively, trigger negative rating action, are: - Policies that widen the fiscal deficit or undermine monetary policy credibility. - Materialisation of additional significant contingent liabilities from the banking sector on the public sector balance sheet. KEY ASSUMPTIONS Fitch assumes that Brent crude will average USD65 in 2019 and USD62.5 in 2020. 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 'BBB'. * The full press release is available on the website of Fitch Ratings. [2019-03-26]