ACRA affirms LT BBB+ to the Republic of Kazakhstan, changes outlook to Stable

ACRA has affirmed the following ratings to the Republic of Kazakhstan (hereinafter, Kazakhstan, or the country) under the international scale:

  • Long-term foreign currency credit rating at ВВВ+ and local currency credit rating at ВВВ+;
  • Short-term foreign currency rating at S2 and local currency credit rating at S2.

The outlook on the long-term foreign currency credit rating is Stable and local currency credit rating is Stable.

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

ACRA has changed its outlook on Kazakhstan’s sovereign credit rating from Negative to Stable due to the weakening of credit risks related to the external and internal shocks of 2020. Kazakhstan emerged from the year of crisis with a moderate increase in public debt compared to many developed and emerging economies, an achievement made possible by its substantial buffer in the form of assets accumulated by the National Fund of the Republic of Kazakhstan (NFRK). In 2020, the policy of the National Bank of Kazakhstan (NBK) helped maintain lending to the economy and allowed the country to avoid a speed-up in inflation.

Credit rating rationale

Kazakhstan’s credit rating is based on a relatively high level of economic wealth, moderate public debt, a reduced but still significant amount of liquid assets in the NFRK, and a sufficient amount of international reserves. The rating is constrained by the economy’s dependence on oil prices, a low level of export diversification, the risk of contingent liabilities materializing, and the poor quality of government institutions.

After GDP declined by 2.6% in 2020 (according to the Kazakh government’s preliminary data), ACRA expects Kazakhstan’s economic growth to recover to 3.8% in 2021. This recovery should be driven by higher oil prices, oil production gradually returning to its pre-crisis level, and a steady easing of the quarantine regime. The risks in this scenario are potential further waves of the coronavirus and a slow rate of vaccination of the population.

The continued dependence of the industrial sector, exports, and the country’s economy on mining firms reduces Kazakhstan’s economic resilience to external shocks, given this sector’s significant focus on exports and dependency on external prices. A considerable increase in economic diversification in the near future is unlikely as the lion’s share of investments are made in the oil and gas sector. From 2009 to 2020, this sector of the economy was the recipient of 36% of all direct investments on average per year.

ACRA expects inflation to return to the NBK’s target corridor of 4–6% in 2021. This will happen due to reduced pressure on the national currency as a result of higher oil prices and the exhaustion of the effect of the 2020 inflationary shock. Last year, the tenge depreciated by 8% on average against the US dollar, which was considerably lower than in the previous crisis (54% in 2016). A serious depreciation of the tenge was avoided in 2020 due to the NBK’s floating exchange rate policy, which it introduced in 2015, and also thanks to currency interventions by the NBK and an increase in the base interest rate by 2.75 percentage points to 12% in March 2020 and its subsequent reduction to 9% in July. ACRA assesses the NBK’s monetary policy measures as adequate in times of high uncertainty.

In 2021, ACRA expects Kazakhstan’s consolidated budget deficit, which includes central and local government budgets, to amount to 1.5% of GDP, which is more optimistic than the country’s government (3.4%). The Agency’s more positive forecast is related to ACRA’s higher oil price expectations for 2021. The reduction in GDP served as one of the factors for increasing the budget deficit to 3.5% of GDP in 2020, compared to the originally planned 2.1%. Another important factor was the large-scale anti-crisis program adopted by the government.

ACRA views the increase in government debt to 24.5% of GDP by the end of 2020 (excluding NBK debt) as moderate and expects government debt to increase only slightly in 2021 as the economy recovers and the budget deficit falls. The moderate level of public debt gives Kazakhstan room for countercyclical fiscal policy in the future. A new fiscal rule was introduced to the Budget Code last year to strengthen countercyclicality in terms of determining the size of the guaranteed transfer. According to the rule, the size of the guaranteed transfer must not exceed the projected revenues to be transferred to the NFRK at the cut-off price. The new fiscal rule is planned to be applied when creating the republic’s budget for 2023. This room to maneuver increases the resilience of Kazakhstan’s economy to potential external shocks.

Transfers from the NFRK play an important role in balancing the budget. As of the end of 2020, NFRK assets amounted to 34% of GDP and covered 138% of public debt. This provides a reliable safety cushion sufficient to balance the budget without debt financing for about four years.

A significant amount of NFRK assets and international reserves ensure the stability of Kazakhstan’s external position. At the end of 2020, these assets and reserves collectively exceeded the country’s total external debt (excluding intra-company debt) by 1.6x and the country’s public external debt by 7x. In 2020, the import coverage ratio reached almost 12 months due to a drop in import volumes. ACRA expects imports to grow in 2021 and, consequently, the import coverage ratio of international reserves to decline to a certain extent.

The Kazakh government’s contingent liabilities (the debt of state-owned companies and both the financial and non-financial sectors) are rather significant, with the debt of quasi-public companies amounting to 19% of 2020 GDP by mid-2020. It is worth noting that a considerable portion of this debt is denominated in foreign currency. Although the majority of state-owned companies are financially stable and capable of servicing their debt liabilities, ACRA believes potential external shocks may create conditions in which state support is essential, especially if precedents are taken into account. The country’s total public debt and quasi-public debt stands at 52.6%, which is below the established ceiling for this type of total debt.

The weakness of public institutions, low efficiency of government institutions and relatively low quality of public governance have a negative impact on Kazakhstan’s business climate. However, ACRA notes that both public and government institutions have recently undergone a number of positive changes.

ACRA notes the importance of the separation of the Agency for Regulation and Development of the Financial Market of the Republic of Kazakhstan from the NBK, which should help strengthen the independence of both regulatory bodies. In addition, the creation of the Supreme Council for Reforms and the Agency for Strategic Planning and Reforms shows Kazakhstan’s commitment to reforming its system of public governance.

Improvement of human capital is an additional positive long-term factor. According to the World Bank, Kazakhstan’s Human Capital Index was higher than the average for Central Asia in 2020 and one of the highest among comparable countries (in terms of rating category).

Sovereign model application results

Kazakhstan has been assigned a BBB Indicative credit rating in accordance with the core part of ACRA’s sovereign model. A number of modifiers in the modifiers part of the model allow the Indicative credit rating to be increased. These include the following, which are determined by the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale:

  • Potential economic growth;
  • Efficacy of structural, economic and monetary policies;
  • Access to markets and sources of funding;
  • Debt sustainability;
  • External debt sustainability.

Negative modifiers include the following:

  • Balance of payment vulnerabilities;
  • Contingent liabilities and the risk of their implementation;
  • Sustainability of economic growth.

In view of the abovementioned modifiers, Kazakhstan’s Indicative credit rating has been raised by one notch. A Final credit rating of BBB+ has been assigned. There are no extraordinary factors that could result in an adjustment of the Final rating.  In connection with this, the Final credit rating remains at BBB+.

Potential rating upgrade factors

  • Decrease in the size of contingent liabilities;
  • Diversification of exported goods;
  • Increased quality and effectiveness of government bodies.

Potential rating downgrade factors

  • Prolonged decrease in economic growth.
  • Continuous increase in public debt.
  • Sharp decrease in the size of NFRK assets and international reserves relative to external debt and imports.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The sovereign credit ratings have been assigned to the Republic of Kazakhstan under the international scale based on the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The sovereign credit ratings were first published by ACRA on September 24, 2019. The sovereign credit ratings and their outlooks are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The sovereign credit ratings are based on information from publicly available sources, as well as ACRA’s own databases. The sovereign credit ratings are unsolicited. The Government of the Republic of Kazakhstan participated in the sovereign credit rating assignment.

ACRA provided no additional services to the Government of the Republic of Kazakhstan. No conflicts of interest were discovered in the course of the sovereign credit rating assignment.

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