18.02.2016, 13:34
S&P DOWNGRADES LONG-TERM SOVEREIGN CREDIT RATINGS OF REPUBLIC OF KAZAKHSTAN FROM "BBB" TO "BBB-"
OREANDA-NEWS. Standard & Poor's Ratings Services lowered its long-term foreign and local currency sovereign credit ratings on the Republic of Kazakhstan to 'BBB-' from 'BBB'. At the same time, we lowered the short-term foreign and local currency ratings to 'A-3' from 'A-2' and the Kazakhstan national scale rating to 'kzAA' from 'kzAA+'. The outlook on the long-term ratings is negative.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Kazakhstan are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Calendar Of 2016 EMEA Sovereign, Regional, And Local Government Rating Publication Dates," published Dec. 22, 2015, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is the recent revision of our global oil price assumptions.
The next scheduled rating publication on the sovereign rating of Kazakhstan will be on March 11, 2016.
RATIONALE
In mid-January 2016, Standard & Poor's materially lowered its oil price assumptions for the period 2016-2019. Prices for crude oil in spot and futures markets are about 70% below mid-2014 levels, when prices began to slide. When we last reviewed Kazakhstan in September 2015, we expected Brent oil prices to average US$65 per barrel (/bbl) in 2016 and US$75/bbl in 2017 and beyond. We now assume an average Brent oil price of US$40/bbl in 2016 and US$45/bbl in 2016-2019 (see "S&P Lowers Its Hydrocarbon Price Deck Assumptions On Market Oversupply; Recovery Price Deck Assumptions Also Lowered," published Jan. 12, 2016, on RatingsDirect). Consequently, we have also revised our forecasts for Kazakhstan’s economic growth, fiscal position, and external position.
We do not expect the Feb. 16, 2016, agreement between oil ministers from Qatar, Russia, Saudi Arabia, and Venezuela to freeze output at the levels reported in January to have a material impact on our oil price assumptions. We note that the first market reaction to this news was a further decline in oil prices. On the supply side, we note that the freeze would take place at already record high levels of output for Russia and Saudi Arabia. We note that the agreement is conditional on other producers also freezing production. On the demand side, we see China's economic slowdown and debt load as a continuing top global risk. Our long-term oil price assumptions will continue to be informed by our view of the marginal cost of oil production.
Since Kazakhstan's economy depends heavily on the oil sector--it accounts for an estimated 20% of GDP, 50% of fiscal revenues, and 60% of exports--we now expect GDP growth to stagnate or to contract modestly in 2016. This will likely stem from weaker exports and our forecast of roughly flat oil production (unless the large offshore Kashagan oil field comes fully on stream earlier than 2018), as well as reduced domestic consumption due to the tenge devaluation, high inflation, and weak consumer lending. We then expect a moderate economic recovery in 2017-2019, as consumption and investments somewhat pick up. Longer-term growth prospects will depend on the pace of the oil price recovery, the Kashagan project, and progress in the government's ambitious program of institutional reforms announced recently.
We believe the tenge is now largely floating, which has been evidenced by the substantial depreciation of the tenge since August 2015 and almost no intervention from the National Bank of Kazakhstan (NBK) in the last three months, even when the oil price fell below US$30/bbl in January. We expect the current account deficit will average 2% of GDP in 2015-2017, compared with being in surplus in 2010-2014. However, we expect import reduction, supported by the lower exchange rate, and a gradually recovering oil price will help the current account recover and return to surplus eventually.
Current account deficits will lead Kazakhstan's net external liabilities to grow to above 100% of CARs in the next two years. At the same time, we estimate that liquid external assets will exceed external debt by 45%-50% of CARs. We estimate that more than one-half of Kazakhstan's stock of external liabilities related to foreign direct investment (FDI) is debt type; this share has been growing over the last few years.
Despite the current account performance weakening, we expect reserves to stay broadly stable in 2016-2017, as they will be supported by financial account inflows, namely the expected repatriation of National Fund of the Republic of Kazakhstan (NFRK) assets, as part of government stimulus spending, and the growth of external borrowings (primarily from multilateral institutions [MLIs] which have expressed willingness to extend their facilities to the government). The latter would compensate for the expected fall in FDI to 2% of GDP in 2015-2016 compared with 5% of GDP in the last five years.
We believe that the ability of the NBK to influence domestic monetary conditions remains constrained by weak transmission mechanisms. Apart from shallow capital markets, the banking system is extremely vulnerable and has become increasingly dollarized. The share of foreign currency-denominated deposits in total deposits increased to 67% in December 2015, from about 55% at year-end 2014 and below 40% in 2013. More importantly, the recent oil price drop and further tenge depreciation will present the NBK with deepening challenges, including maintaining financial stability, supporting credit and economic growth, and keeping inflation within previously-stated targets. In this context, we see increasing risks to the predictability and effectiveness of the NBK's policies. We expect inflation to remain in double digits this year, following the hike to 13.6% in 2015. We note, however, the NBK's progress in introducing a set of new monetary policy tools within the inflation-targeting policy regime.
The ratings on Kazakhstan continue to be supported by the government's strong fiscal position, built on accumulated past budgetary surpluses. In particular, we project the general government will remain in a net asset position over the medium term, helped by the authorities' capacity and willingness to contain spending. The ratings remain constrained by our view of Kazakhstan's limited institutional and governance effectiveness, owing to the highly centralized political environment, its moderate level of economic development, and limited monetary policy flexibility.
Due to lower oil prices and the ongoing fiscal stimulus program, we expect the government will run fiscal deficits on a consolidated basis with the NFRK in 2016-2017, and we expect general government debt to change as a percentage of GDP as a result of both expected deficits and the impact of exchange rate movements. Apart from the regular annual transfer from the NFRK to the central government budget, the oil fund has recently been used to support the local economy. This fiscal stimulus includes a US$5.5 billion program that was launched in 2014 and a US$9 billion program for infrastructure investments up to 2018, launched in 2015.
We believe Kazakhstan’s capacity and willingness to contain spending in the medium term, after the ongoing stimulus has finished, remains strong, and that the general government will return to surplus from 2018. The government is considering different fiscal scenarios, including those with an oil price under US$25/bbl. Kazakhstan's material capital expenditures should support the government's spending flexibility, in our view.
The weaker exchange rate could support revenues in 2016, whereas revenue-mobilization measures, in particular related to more-focused collection of value- added tax, as well as recovering oil prices, will push up revenue growth in the longer term. So far, we do not factor in any sizable short-term revenues from assets sales. Despite the ambitious privatization program the government announced in 2015, we understand that the program's focus is on attracting strategic investors (which might turn out to be a long-term process) rather than on immediate revenue mobilization.
With the expected recovery of fiscal performance, we believe gross general government debt will continue to stay below a modest 25% of GDP and that the government will remain in a net asset position thanks to its liquid assets accumulated in the oil fund (above 50% of GDP). This figure excludes the debt of Kazakhstan's government-related entities, the statistics for which are not available (we estimate their debt to exceed 15% of GDP as of year-end 2015).
In 2016-2017, consolidated general government fiscal deficits will likely be primarily financed by domestic bonds and, if need be, borrowing from MLIs (such as the Asian Development Bank and the World Bank). We understand that the government could use some of the local issuance to inject capital into the banking system, if pressure on the banking system's capital is triggered by the tenge devaluation. We expect nonperforming loans (NPLs; loans more than 90 days overdue) to increase to about 12%-14% by year-end 2016 from a reported 9.5% as of Dec. 1, 2015 (see "Credit FAQ: How The Recent Devaluation Of The Tenge Affects Kazakh Banks' Creditworthiness," published Jan. 28, 2016, on RatingsDirect).
In April 2015, President Nursultan Nazarbayev won the early presidential election, which has supported political stability. Indeed, Kazakhstan has been one of the most politically stable environments in the region. Under his renewed mandate, the president has announced five institutional and economic reforms that could offset the sharp economic slowdown. That said, we regard future policy choices as relatively difficult to predict in the longer term because of uncertainty surrounding the eventual presidential succession; 75-year-old President Nazarbayev has governed Kazakhstan since its independence in 1991.
OUTLOOK
The negative outlook reflects our view of risks to Kazakhstan's external and monetary profiles under the current weak and volatile global commodity environment. We could lower the long-term rating, for instance, if we believed the challenges of containing inflation, responding to exchange rate pressures, and maintaining banking system stability had reduced monetary policy predictability and effectiveness, or if we saw external imbalances continuing to increase.
We could consider revising the outlook to stable if higher oil prices and the authorities' countercyclical policy response are successful in addressing external imbalances and short- and medium-term challenges to monetary policy.
RATINGS LIST
Kazakhstan (Republic of)
To From
Sovereign Credit Rating
Foreign and Local Currency
BBB-/Negative/A-3 BBB/Negative/A-2
Rating on national scale
kzAA/--/-- kzAA+/--/--
Transfer & Convertibility Assessment
BBB- BBB
Senior Unsecured
Foreign and Local Currency
BBB- BBB
Short-Term Debt
Local Currency
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Kazakhstan are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Calendar Of 2016 EMEA Sovereign, Regional, And Local Government Rating Publication Dates," published Dec. 22, 2015, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is the recent revision of our global oil price assumptions.
The next scheduled rating publication on the sovereign rating of Kazakhstan will be on March 11, 2016.
RATIONALE
In mid-January 2016, Standard & Poor's materially lowered its oil price assumptions for the period 2016-2019. Prices for crude oil in spot and futures markets are about 70% below mid-2014 levels, when prices began to slide. When we last reviewed Kazakhstan in September 2015, we expected Brent oil prices to average US$65 per barrel (/bbl) in 2016 and US$75/bbl in 2017 and beyond. We now assume an average Brent oil price of US$40/bbl in 2016 and US$45/bbl in 2016-2019 (see "S&P Lowers Its Hydrocarbon Price Deck Assumptions On Market Oversupply; Recovery Price Deck Assumptions Also Lowered," published Jan. 12, 2016, on RatingsDirect). Consequently, we have also revised our forecasts for Kazakhstan’s economic growth, fiscal position, and external position.
We do not expect the Feb. 16, 2016, agreement between oil ministers from Qatar, Russia, Saudi Arabia, and Venezuela to freeze output at the levels reported in January to have a material impact on our oil price assumptions. We note that the first market reaction to this news was a further decline in oil prices. On the supply side, we note that the freeze would take place at already record high levels of output for Russia and Saudi Arabia. We note that the agreement is conditional on other producers also freezing production. On the demand side, we see China's economic slowdown and debt load as a continuing top global risk. Our long-term oil price assumptions will continue to be informed by our view of the marginal cost of oil production.
Since Kazakhstan's economy depends heavily on the oil sector--it accounts for an estimated 20% of GDP, 50% of fiscal revenues, and 60% of exports--we now expect GDP growth to stagnate or to contract modestly in 2016. This will likely stem from weaker exports and our forecast of roughly flat oil production (unless the large offshore Kashagan oil field comes fully on stream earlier than 2018), as well as reduced domestic consumption due to the tenge devaluation, high inflation, and weak consumer lending. We then expect a moderate economic recovery in 2017-2019, as consumption and investments somewhat pick up. Longer-term growth prospects will depend on the pace of the oil price recovery, the Kashagan project, and progress in the government's ambitious program of institutional reforms announced recently.
We believe the tenge is now largely floating, which has been evidenced by the substantial depreciation of the tenge since August 2015 and almost no intervention from the National Bank of Kazakhstan (NBK) in the last three months, even when the oil price fell below US$30/bbl in January. We expect the current account deficit will average 2% of GDP in 2015-2017, compared with being in surplus in 2010-2014. However, we expect import reduction, supported by the lower exchange rate, and a gradually recovering oil price will help the current account recover and return to surplus eventually.
Current account deficits will lead Kazakhstan's net external liabilities to grow to above 100% of CARs in the next two years. At the same time, we estimate that liquid external assets will exceed external debt by 45%-50% of CARs. We estimate that more than one-half of Kazakhstan's stock of external liabilities related to foreign direct investment (FDI) is debt type; this share has been growing over the last few years.
Despite the current account performance weakening, we expect reserves to stay broadly stable in 2016-2017, as they will be supported by financial account inflows, namely the expected repatriation of National Fund of the Republic of Kazakhstan (NFRK) assets, as part of government stimulus spending, and the growth of external borrowings (primarily from multilateral institutions [MLIs] which have expressed willingness to extend their facilities to the government). The latter would compensate for the expected fall in FDI to 2% of GDP in 2015-2016 compared with 5% of GDP in the last five years.
We believe that the ability of the NBK to influence domestic monetary conditions remains constrained by weak transmission mechanisms. Apart from shallow capital markets, the banking system is extremely vulnerable and has become increasingly dollarized. The share of foreign currency-denominated deposits in total deposits increased to 67% in December 2015, from about 55% at year-end 2014 and below 40% in 2013. More importantly, the recent oil price drop and further tenge depreciation will present the NBK with deepening challenges, including maintaining financial stability, supporting credit and economic growth, and keeping inflation within previously-stated targets. In this context, we see increasing risks to the predictability and effectiveness of the NBK's policies. We expect inflation to remain in double digits this year, following the hike to 13.6% in 2015. We note, however, the NBK's progress in introducing a set of new monetary policy tools within the inflation-targeting policy regime.
The ratings on Kazakhstan continue to be supported by the government's strong fiscal position, built on accumulated past budgetary surpluses. In particular, we project the general government will remain in a net asset position over the medium term, helped by the authorities' capacity and willingness to contain spending. The ratings remain constrained by our view of Kazakhstan's limited institutional and governance effectiveness, owing to the highly centralized political environment, its moderate level of economic development, and limited monetary policy flexibility.
Due to lower oil prices and the ongoing fiscal stimulus program, we expect the government will run fiscal deficits on a consolidated basis with the NFRK in 2016-2017, and we expect general government debt to change as a percentage of GDP as a result of both expected deficits and the impact of exchange rate movements. Apart from the regular annual transfer from the NFRK to the central government budget, the oil fund has recently been used to support the local economy. This fiscal stimulus includes a US$5.5 billion program that was launched in 2014 and a US$9 billion program for infrastructure investments up to 2018, launched in 2015.
We believe Kazakhstan’s capacity and willingness to contain spending in the medium term, after the ongoing stimulus has finished, remains strong, and that the general government will return to surplus from 2018. The government is considering different fiscal scenarios, including those with an oil price under US$25/bbl. Kazakhstan's material capital expenditures should support the government's spending flexibility, in our view.
The weaker exchange rate could support revenues in 2016, whereas revenue-mobilization measures, in particular related to more-focused collection of value- added tax, as well as recovering oil prices, will push up revenue growth in the longer term. So far, we do not factor in any sizable short-term revenues from assets sales. Despite the ambitious privatization program the government announced in 2015, we understand that the program's focus is on attracting strategic investors (which might turn out to be a long-term process) rather than on immediate revenue mobilization.
With the expected recovery of fiscal performance, we believe gross general government debt will continue to stay below a modest 25% of GDP and that the government will remain in a net asset position thanks to its liquid assets accumulated in the oil fund (above 50% of GDP). This figure excludes the debt of Kazakhstan's government-related entities, the statistics for which are not available (we estimate their debt to exceed 15% of GDP as of year-end 2015).
In 2016-2017, consolidated general government fiscal deficits will likely be primarily financed by domestic bonds and, if need be, borrowing from MLIs (such as the Asian Development Bank and the World Bank). We understand that the government could use some of the local issuance to inject capital into the banking system, if pressure on the banking system's capital is triggered by the tenge devaluation. We expect nonperforming loans (NPLs; loans more than 90 days overdue) to increase to about 12%-14% by year-end 2016 from a reported 9.5% as of Dec. 1, 2015 (see "Credit FAQ: How The Recent Devaluation Of The Tenge Affects Kazakh Banks' Creditworthiness," published Jan. 28, 2016, on RatingsDirect).
In April 2015, President Nursultan Nazarbayev won the early presidential election, which has supported political stability. Indeed, Kazakhstan has been one of the most politically stable environments in the region. Under his renewed mandate, the president has announced five institutional and economic reforms that could offset the sharp economic slowdown. That said, we regard future policy choices as relatively difficult to predict in the longer term because of uncertainty surrounding the eventual presidential succession; 75-year-old President Nazarbayev has governed Kazakhstan since its independence in 1991.
OUTLOOK
The negative outlook reflects our view of risks to Kazakhstan's external and monetary profiles under the current weak and volatile global commodity environment. We could lower the long-term rating, for instance, if we believed the challenges of containing inflation, responding to exchange rate pressures, and maintaining banking system stability had reduced monetary policy predictability and effectiveness, or if we saw external imbalances continuing to increase.
We could consider revising the outlook to stable if higher oil prices and the authorities' countercyclical policy response are successful in addressing external imbalances and short- and medium-term challenges to monetary policy.
RATINGS LIST
Kazakhstan (Republic of)
To From
Sovereign Credit Rating
Foreign and Local Currency
BBB-/Negative/A-3 BBB/Negative/A-2
Rating on national scale
kzAA/--/-- kzAA+/--/--
Transfer & Convertibility Assessment
BBB- BBB
Senior Unsecured
Foreign and Local Currency
BBB- BBB
Short-Term Debt
Local Currency
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