22.08.19, 16:28
/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, respectively. 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 transition risks. 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. RATINGS RATIONALE 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 exports. 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 diversification. 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 Capita Income) 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 Balance) Current Account Balance/GDP: 0% (2018 Actual) (also known as External Balance) 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 since 1983. 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 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. REGULATORY DISCLOSURES For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity. Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. Please see for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on for additional regulatory disclosures for each credit rating. [2019-08-22]