Fitch has worsened outlook of the rating of Mangistau oblast (Kazakhstan)

/REUTERS, London, November 27, 03/ - International rating agency Fitch has affirmed ratings of Kazakhstan Mangistau oblast and revised outlook to "stable" from "positive", informed Fitch. Legislation of centralized Kazakhstan prohibits regions to come to foreign debt markets by independently. The agency has included the oblast in the list of pretenders for upgrading of rating last year hoping for de-centralization of the country's budget system, however it did not wait until the legislation changed. Mangistau oblast is situated in the north-west of Kazakhstan and takes the second place in the country by the volume of oil and gas extraction. Long-term rating in foreign and domestic currencies is "BB-". Below is original text of Fitch. FITCH AFFIRMS REGION OF MANGISTAU RATINGS; OUTLOOK REVISED TO STABLE Fitch Ratings - London - November 27, 2003: Fitch has today affirmed its ratings for the Mangistau region of Kazakhstan at Long-term foreign currency and local currency 'BB-' (BB minus) and Short-term foreign currency rating at B', at the same time revising the rating Outlook to Stable from Positive. The ratings reflect Mangistau's steadily and rapidly growing economy and capacity for debt financing. They also take into account the region's narrow budget surpluses, exposed to the continuing volatility of a local economy that is highly dependent on commodity prices and uncertainties of institutional framework, in particular transfers from the region to the central state budget. The region was placed on Positive Outlook last year along with the upgrade of the sovereign. Fitch believed at that time that decentralisation of the budget system would take a faster pace. However, the Budget Code, which brings greater stability and predictability to tax-sharing system and transfers from the regions to the central government, remains in draft form. It is difficult to predict what will be its final wording after discussions with the national parliament. The revision of the Outlook back to Stable therefore reflects the continuing lack of clarity in changes to the institutional framework. Rapid growth of the local economy since 1999 has contributed to impressive revenue increases, interrupted in 2002 due to re-distribution of corporate income tax in favour of Kazakhstan's central government. Though other economic activities have potential for growth, especially the Aktau sea port, it is the export- oriented oil and gas industries (2002: 97% of the regional industrial output) that is the region's greatest exposure to volatile commodity prices. Mangistau is the second largest producer of oil and gas in the country. Yet such potential price reductions are mitigated by growth in oil production volumes owing to hydrocarbon reserves in-land and oil deposits on the Caspian Sea Shelf. Unlike the central state, the region has no cushion in times of commodity prices shortfall: an oil stabilization fund set up to provide a cushion for the budget system is not available to the subnationals. Fitch does note, however, that taxes assigned to the region - and in particular personal income and social taxes - are not overly vulnerable to commodity prices as those that feed the central state budget. Mangistau has succeeded in remaining nearly self-sufficient financially since 1997, with the exception of 1999 when it tapped domestic bond market, subsequently repaying its obligation in 2000. However, the region's budget surpluses are rather narrow by international standards. Like other subnationals in the country, Mangistau,is highly exposed to re-distribution of revenue in favour of the State through transfers to the central budget, which are arbitrarily defined by the State and fixed for a one year period. Revenue flexibility is limited by lack of tax setting authority, whereas expenditure flexibility is constrained by existence of said transfers to the centre, subject to annual changes, and a high proportion of mandatory expenditures. Room for manoeuvre exists due to self-financed capital expenditures. As Fitch has commented previously, the region's current zero debt level may have to rise as officials start to address the seriously inadequate infrastructure problems. Risk associated with non-consolidated entities is immaterial, as well as risk of indirect debt, as the subnationals are not allowed to issue guarantees. Mangistau is a wealthy region situated in the southwest of Kazakhstan, on the eastern shore of the Caspian Sea. It generates nearly 4.5% of national GDP, accounting only for some 2% of the country's population. CONTACT: Ilona Dmitrieva, Moscow Tel: +7 095 956 9901; Mauro Crisafulli, Milan +39 02 87 90 87 203 Media Relations: Alex Clelland +44 20 7417 4222, London [2003-11-27]