MOODY'S AFFIRMS KAZAKHSTAN'S RATINGS AT ВАА3, OUTLOOK CHANGED FROM "STABLE" TO "POSITIVE"
/Moody's Investors Service, Singapore, 22.08.19, heading by KASE/ – Moody's
Investors Service ("Moody's") has today affirmed the Government of
Kazakhstan's local and foreign currency long-term issuer rating at Baa3 and
changed the outlook to positive from stable. The foreign currency senior
unsecured debt and MTN ratings were also affirmed at Baa3 and (P)Baa3,
The change in the outlook to positive is driven by Moody's assessment that
economic resilience in Kazakhstan is increasing, supported by robust growth
prospects in both hydrocarbon and non- hydrocarbon sectors, and rising
incomes. Prospects for further economic reforms, combined with prudent and
effective management of fiscal buffers, indicate that Kazakhstan's credit
metrics may strengthen further to be consistent with a higher rating.
The affirmation of Kazakhstan's Baa3 rating reflects the government's strong
balance sheet, supported by a low debt burden and sizeable financial buffers,
and robust economic growth prospects, balanced against continued exposure
to oil markets, still low - although gradually increasing - institutional
strength, ongoing banking sector fragilities, and longer-term political
Kazakhstan's long-term local currency bond and deposit ceilings remain
unchanged at Baa1. The Baa2 long-term foreign currency bond ceiling and
Baa3 long-term foreign currency deposit ceiling are also unchanged. The short-
term foreign currency bond and deposit ceilings remain unchanged at P-2 and
P-3, respectively. These ceilings typically act as a cap on the ratings that can
be assigned to the obligations of other entities domiciled in the country.
RATIONALE FOR THE POSITIVE OUTLOOK
IMPROVING ECONOMIC STRENGTH, FURTHER REFORM PROSPECTS
AND PRUDENT AND EFFECTIVE MANAGEMENT OF FISCAL BUFFERS
Moody's expects real GDP growth in Kazakhstan to remain robust at around
4% over the next two to three years, with rising contributions from the non-
hydrocarbon sector. Stable oil production with ongoing investment into
expanding production capacity, including at the Tengiz and Kashagan oil fields,
will continue to support the sector's global competitiveness and drive oil
While the hydrocarbon sector will remain the dominant sector in the economy
over the foreseeable future, Moody's expects a broadening of growth drivers
and rising incomes to support greater economic resilience. In particular, mining
and transport and logistics will likely continue to grow robustly. Further
developments in Kazakhstan's mining sector will raise the contribution to mining
exports beyond the 20% of total goods and services exports in 2018. The new
subsoil code, effective June 2018, will likely encourage further investment and
expand mining activity. Meanwhile, transport and logistics will continue to
benefit from increased freight transit between China and Europe, given the time
savings involved in shipments through Kazakhstan's rail network. The
government's Nurly Zhol programme, aimed at upgrading the country's physical
infrastructure, will further support the development of the sector.
Beyond the broadening of sources of growth, incomes have also continued to
rise. Per capita incomes measured on a purchasing power parity basis have
grown by 3% on average over the past 5 years, to slightly above $27,500 in
2018. Higher incomes, despite the large oil price shock and currency
depreciation over 2015-16, support Moody's assessment that economic
strength is increasingly derived from other drivers than hydrocarbon-related
revenue and profits.
Moody's expects the ongoing political stability, with a smooth and orderly
presidential succession that was completed in June, to sustain the efforts in
Prospects for further economic reforms, implemented or planned, may support
diversification away from hydrocarbons to a greater extent and yield higher
income growth than Moody's currently expects. The government continues to
focus on economic diversification, and is offering tax and non-tax incentives,
including subsidised lending and skills training, to targeted sectors. It has
also set up the Astana International Financial Centre (AIFC), which adopts
common English law for financial investments and transactions, in part aimed at
attracting foreign investments into the non-extractive sector. The AIFC Court is
staffed by British judges, while the International Arbitration Centre comprise
both foreign and local arbitrators.
The effectiveness of these measures in supporting robust growth, even during
periods of lower oil prices, will take time to materialise. It will partly
depend on a broader improvement in the strength of the country's institutions
that leads to a more effective allocation of resources in the economy. Combined
with ongoing, prudent and effective management of fiscal buffers, such trends
may point to credit metrics consistent with a higher rating.
RATIONALE FOR THE RATING AFFIRMATION
The affirmation of the Baa3 rating reflects credit strengths underscored by the
government's strong balance sheet with a low debt burden and sizeable
financial buffers, and, as explained above, robust economic strength; and
credit challenges stemming from continued exposure to oil markets, still low --
although gradually increasing -- institutional strength, ongoing banking sector
fragilities, and longer-term political transition risks.
Kazakhstan's general government debt as a share of GDP is among the lowest
compared with similarly rated peers and globally, while coverage of the debt by
assets at the National Fund of the Republic of Kazakhstan -- the country's
sovereign wealth fund -- is high at around 1.7 times. Moody's expectation for
the government's fiscal account to be broadly balanced over 2019-21, with an
average deficit of 0.7% of GDP, points to stable debt levels of around 20-22%
of GDP over the same period and stable financial buffers.
Although the government's reliance on hydrocarbon revenue is declining, and
notwithstanding some signs of economic diversification, Kazakhstan's
sovereign credit profile remains highly exposed to developments in the oil
market. The hydrocarbon sector, which is dominated by oil production,
accounts for around 60% of total goods and services exports, contributes to
more than 40% of consolidated government revenue, and is the primary source
of income and wealth that fuel large parts of the economy.
At the same time, despite increased policy flexibility, including flexible
exchange rates, that can buffer the impact of economic shocks, institutions
remain relatively weak, particularly in the control of corruption and
implementation of the rule of law.
Moreover, ongoing fragility in the banking system poses risks to ongoing,
stable growth and weighs on the sovereign's credit profile. Credit
intermediation by banks continues to be impaired, with loans to non-financial
corporates still contracting. Although nonperforming loans have declined and
bank capitalisation has increased, the amount of problem loans remains high, at
an estimated 20% of total loans across Moody's rated banks as of the end of
2018. Residual uncertainty over asset quality issues and the impact on bank
capital has prompted the central bank to launch an asset quality review (AQR)
for 14 banks comprising more than 85% of banking system assets, which will be
completed by the end of 2019. If credible and effective, the AQR and following
actions have the potential to restore confidence in the system and increase the
credit risk appetite of banks.
WHAT COULD CHANGE THE RATING UP
The rating would likely be upgraded if ongoing and further reforms were to
strengthen the institutional framework, policy credibility and effectiveness,
and economic competitiveness beyond Moody's current expectations. In
particular, reforms that materially advance economic diversification would
enhance the economy's resilience to potential shocks. Moreover, a material
reduction in banking sector risks, supported by prospects of a sustained
improvement in banking system health, more effective credit intermediation, and
enhancements to the sector's regulation and supervision would likely put upward
pressure on the rating.
WHAT COULD CHANGE THE RATING DOWN
The positive outlook signals that a rating downgrade is unlikely over the near
term. The outlook would likely be changed to stable if prospects of a
significant and long-lasting deterioration in Kazakhstan's economic and fiscal
metrics became increasingly probable, possibly stemming from a large, negative
oil price shock that the government were unable to cushion. Reemergence of
domestic political risks, with a negative impact on the government's reform
agenda and the business environment, would also likely put downward
pressure on the rating.
GDP per capita (PPP basis, US$): 27,550 (2018 Actual) (also known as Per
Real GDP growth (% change): 4.1% (2018 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.3% (2018 Actual)
Gen. Gov. Financial Balance/GDP: 2.7% (2018 Actual) (also known as Fiscal
Current Account Balance/GDP: 0% (2018 Actual) (also known as External
External debt/GDP: 91.8% (2018 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been recorded
On 19 August 2019, a rating committee was called to discuss the rating of the
Kazakhstan, Government of. The main points raised during the discussion
were: The issuer's economic fundamentals, including its economic strength,
have materially increased. The issuer's institutional strength/ framework, have
not materially changed. The issuer's governance and/or management, have not
materially changed. The issuer's fiscal or financial strength, including its
debt profile, has materially increased. The issuer's susceptibility to event
risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies page on
www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this
credit rating action, if applicable.
For ratings issued on a program, series, category/class of debt or security this
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