OREANDA-NEWS. Standard & Poor's Ratings Service has placed Kazakhstan's BBB sovereign foreign currency rating on credit watch with negative implications, while saying that given the government's strong balance-sheet position, an adjustment in the long-term ratings is unlikely to exceed one notch.

According to Alfa-Bank analyst Rinat Gainoulline, S&P has had trouble deciding recently whether to downgrade the sovereign rating or not – not least because last week, the Central Bank made it clear that “Kazakh banks are able to meet their foreign obligations in
full” and that regulators see no need to tap the government’s foreign reserves to support banks.

However, the latest current account data released by the Central Bank at the end of last week confirmed the persistence of at least some negative trends:
1) the current account deficit continues to widen and will likely reach 5-6% of GDP by year-end; 2) private banks’ external liabilities at the end of 2H07 were as high as $45.9 bln, financing 50% of total banking assets, and 3) the share of the private sector net of intra-company loans in overall foreign debt grew to 66% from 56%. On top of that, yesterday’s data on consumer price growth for September indicate that inflation is accelerating and will likely reach 9.5% y-o-y by year-end vs. 8.4% in FY2006.

The expert believes believe that S&P’s concern is caused by the credit agency’s expectation that the liquidity squeeze on Western markets will continue and that "tighter liquidity conditions will contribute to an expected significant slowdown in credit growth, reducing the overall speed at which the Kazakh economy expands”.

S&P will make a final decision regarding Kazakhstan’s sovereign rating by October 9, when it receives more information from the regulators. However, the Alfa-Bank analyst reckons that, given S&P’s overall conservative approach, more likely than
not the sovereign rating will be downgraded one notch to BBB- from the current BBB. Based on the information given, the expert recommends taking a cautious approach to Kazakh banks’ equities in the short term.