Kazakhstan 'BBB-/A-3' Ratings Affirmed; Outlook Stable

  • Kazakhstan's robust government and external balance sheets will help mitigate the effects on the country from the current oil price shock.
  • The flexible exchange rate will also help ease external pressures.
  • We are therefore affirming our 'BBB-/A-3' foreign and local currency sovereign credit ratings on Kazakhstan.
  • The outlook remains stable.

Rating Action

On March 26, 2020, S&P Global Ratings affirmed its 'BBB-/A-3' long- and short-term foreign and local currency sovereign credit ratings on Kazakhstan. The outlook on the long-term ratings is stable. We also affirmed our 'kzAAA' national scale rating on Kazakhstan. The transfer and convertibility assessment remains 'BBB'.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on the Republic of 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 2020 EMEA Sovereign, Regional, And Local Government Rating Publication Dates," published Dec. 20, 2019, 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 a sharp drop in hydrocarbon prices and our revised price assumptions for 2020 and 2021. The next scheduled rating publication on the sovereign rating on Kazakhstan will be on Sept. 4, 2020.

Outlook

The outlook is stable because we expect Kazakhstan's government and external balance sheets will remain strong over the next two years. We also expect continuity of policy-making under the new president.
Downside scenario
A prolonged and sharp fall in oil prices or production beyond our expectations could put the ratings under pressure over the next two years if it led Kazakhstan's external performance to deteriorate, for example, should gross external financing needs exceed 100% of current account receipts plus usable reserves. We could also consider a downgrade if destabilizing factors re-emerged, such as a spike in dollarization of resident deposits.
Upside scenario
We could raise the ratings over the next two years if we see significant and tangible devolution of power to the cabinet and parliament along the lines suggested by the March 2017 constitutional amendments, which could support an improvement in policy-making effectiveness, in our view.
A meaningful improvement in the health of the banking sector, for example, supported by further advances in regulatory oversight or reduced related party lending, could also improve our view on government and monetary policy effectiveness.

Rationale

On March 19, 2020, S&P Global Ratings materially lowered its oil price assumptions for 2020. This follows an earlier significant downward revision of its price assumptions on March 9. Prices for crude oil in spot and futures markets are more than 55% lower than levels observed during the summer of 2019 when prices increased due to rising geopolitical tensions. When we last reviewed Kazakhstan (see "Full analysis: Kazakhstan," published March 6, 2020), we expected Brent oil prices to average $60 per barrel (/bbl) in 2020 and to gradually decline to $55/bbl from 2021. We now assume an average Brent oil price of $30/bbl in 2020, $50/bbl in 2021, and $55/bbl from 2022 (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020).
Oil prices plummeted following OPEC's failure to agree on further production cuts during meetings on March 6. OPEC+ did not agree to a proposed reduction of 1.5 million barrels per day (mmbbl/d) to address an expected significant drop in global demand partly due to the spread of COVID-19. The proposed reduction was in addition to the current 2.1 mmbbl/d production decrease set to expire at the end of March. Shortly after the meetings, Saudi Arabia announced that it was immediately slashing its official selling price and would increase its production to over 12 mmbbl/d in April after the current production cut expires. These actions possibly signal that, despite a collapse in global demand and shrinking physical markets, Russia and OPEC have engaged in a price war to try to maintain market share and relevance. Oil markets are now heading into a period of a severe supply-demand imbalance in second-quarter 2020. In line with our economic outlook (see "Economic Research: COVID-19 Macroeconomic Update: The Global Recession Is Here And Now," published March 17, 2020), we anticipate a recovery in both GDP and oil demand through second-half 2020 and into 2021 as the most severe effects from the COVID-19 pandemic moderate.
Despite diversification efforts, oil remains the key sector in Kazakhstan, directly accounting for about 15% of GDP, over half of exports, and more than 40% of general government revenue. Although oil revenue supports the economy when prices are high, in our view, it also exposes Kazakhstan to terms-of-trade fluctuations and revenue volatility.
We expect that lower oil prices in 2020 will weigh on economic activity. We forecast real GDP growth of 2.9%, spurred primarily by nonoil growth, since we expect only a slight increase in oil production. Nonoil growth was the main spur of economic growth in 2019, when Kazakhstan's economy expanded 4.5%. Lower oil prices and weakness in key trading partners will cause growth to decelerate but ongoing and further expected stimulus from the government will provide support.
We estimate the consolidated general government balance will be in a deficit of 6.8% of GDP this year, following a deficit of 0.6% of GDP in 2019. Although nonoil revenue has increased recently because of the new tax code, revenue will remain dependent on oil over our forecast period. We expect government expenditure to increase in 2020, compared with the current budget, since the government plans further fiscal stimulus to support economic growth. The fiscal balance will likely remain in a modest deficit in 2021 and 2022, followed by a return to surplus, as oil prices increase and government stimulus packages wrap up.
The government is in a net asset position that we forecast will average about 9% of GDP over 2020-2023, despite the anticipated fiscal deficits. Government debt was 23% of GDP at year-end 2019, increasing to about 29% of GDP in 2020 because of increased funding needs and Kazakhstani tenge depreciation, given about 30% of debt is denominated in foreign currency. We expect the government's interest costs will remain just over 5% of revenue on average over the forecast period. We estimate general government liquid assets will average about 37% of GDP. Kazakhstan's assets consist mostly of those held by the National Fund of the Republic of Kazakhstan, which are predominantly invested abroad.
We forecast a current account deficit of 5% of GDP in 2020, up from 2.9% in 2019, because of lower oil prices. We expect the deficit will average 3.3% over 2020-2023 because of our assumption of increasing oil prices and import restraint. In response to the anticipated lower current account receipts from oil, we expect that income payments to foreign oil companies will reduce, providing some deficit relief. Despite this drop in oil prices, on a stock basis, Kazakhstan's external asset position is strong and gross external financing needs remain low.
In our view, the more freely floating exchange rate will help the economy adjust to external pressures arising from the oil price shock, for instance by naturally reducing import demand. The tenge has depreciated year-to-date by about 15% after oil prices collapsed. To reduce the emerging inflationary risks and protect tenge assets, the National Bank of Kazakhstan (NBK) raised the base rate 2.75% to 12% during an unscheduled meeting. In response to the depreciation, the NBK also began intervening on March 10 as a seller of dollars on the currency market. We expect the NBK will continue intervening to prevent sharp drops but will not attempt to support the pre-oil-price-collapse tenge level.
The sharp depreciation of the currency raises the risk that dollarization in the economy will increase, inhibiting monetary policy flexibility. Before the transition to a more freely floating exchange rate in September 2015, the share of foreign-currency deposits to total deposits increased as a potential hedge against falls in the tenge's value. Dollarization peaked at almost 70% of total deposits in January 2016. The deposit dollarization rate stood at 43% at year-end 2019, and we currently do not expect it to increase to 50% during 2020. This is given the increased base rate, which keeps tenge returns favorable, and the increasing oil price outlook over the next two years.

Key Statistics

Table 1

Kazakhstan Selected Indicators
2014201520162017201820192020202120222023
Economic indicators (%)
Nominal GDP (bil. LC)39,67640,88446,97154,37961,82067,83170,84678,53485,83693,733
Nominal GDP (bil. $)221184137167179177172177192210
GDP per capita (000s $)12.910.47.79.29.79.59.19.39.910.7
Real GDP growth4.21.21.14.14.14.52.93.63.64.0
Real GDP per capita growth2.7(1.7)(0.3)2.72.83.21.62.32.32.7
Real investment growth4.44.23.04.55.45.03.55.04.03.0
Investment/GDP27.130.730.428.927.928.431.030.029.428.5
Savings/GDP29.927.424.525.827.725.626.026.726.726.1
Exports/GDP39.328.531.832.437.636.530.931.931.531.1
Real exports growth(2.5)(4.1)(4.5)8.09.61.50.54.03.55.0
Unemployment rate5.05.05.04.94.94.84.84.84.84.8
External indicators (%)
Current account balance/GDP2.8(3.3)(5.9)(3.1)(0.2)(2.9)(5.0)(3.3)(2.6)(2.4)
Current account balance/CARs6.7(10.9)(17.9)(8.7)(0.4)(7.4)(14.9)(9.6)(7.7)(7.3)
CARs/GDP41.129.933.235.040.538.933.534.533.933.5
Trade balance/GDP16.56.36.710.014.212.37.18.69.09.3
Net FDI/GDP2.11.810.02.32.73.53.43.43.43.4
Net portfolio equity inflow/GDP(0.3)0.6(0.9)(0.7)(0.8)(0.7)(0.7)(0.7)(0.7)(0.7)
Gross external financing needs/CARs plus usable reserves93.4109.9100.994.390.293.797.297.497.497.2
Narrow net external debt/CARs(35.2)(55.6)(64.4)1.7(37.1)(42.7)(43.8)(41.4)(41.8)(42.1)
Narrow net external debt/CAPs(37.7)(50.2)(54.6)1.6(37.0)(39.8)(38.1)(37.7)(38.8)(39.2)
Net external liabilities/CARs43.768.099.8135.483.893.8125.1127.3126.5124.4
Net external liabilities/CAPs46.961.384.7124.583.487.4108.9116.1117.5116.0
Short-term external debt by remaining maturity/CARs25.041.934.227.524.224.727.025.724.422.9
Usable reserves/CAPs (months)3.44.25.24.94.64.64.84.34.03.8
Usable reserves (mil. $)21,49623,08325,96527,68928,24326,52923,90523,24023,85624,306
Fiscal indicators (general government; %)
Balance/GDP(0.5)(8.5)(4.0)(4.0)(1.2)(0.5)(6.8)(1.4)(0.2)0.3
Change in net debt/GDP(5.0)(15.1)7.918.9(11.4)(0.9)2.51.2(0.2)(1.0)
Primary balance/GDP0.0(7.8)(2.9)(3.1)(0.2)0.5(5.7)(0.0)1.11.6
Revenue/GDP21.815.018.020.017.720.414.818.919.219.7
Expenditures/GDP22.423.522.023.918.820.921.620.319.419.4
Interest/revenues2.74.86.24.25.44.97.36.96.96.7
Debt/GDP14.019.419.220.122.822.729.128.927.826.3
Debt/revenues64.2129.6106.6100.5129.0111.5196.6152.5145.2133.5
Net debt/GDP(24.2)(38.6)(25.7)(3.3)(14.3)(14.0)(10.9)(8.6)(8.1)(8.4)
Liquid assets/GDP38.258.044.923.437.136.740.037.535.934.7
Monetary indicators (%)
CPI growth6.76.614.67.46.05.35.65.35.15.1
GDP deflator growth5.81.813.611.29.25.01.57.05.55.0
Exchange rate, year-end (LC/$)182.35340.01333.29332.33384.20382.59440.00445.00447.00447.00
Banks' claims on resident non-gov't sector growth5.418.8(0.6)(11.8)1.95.72.82.82.82.8
Banks' claims on resident non-gov't sector/GDP37.242.937.128.325.324.424.022.320.919.7
Foreign currency share of claims by banks on residents20.319.017.714.912.78.913.313.313.313.3
Foreign currency share of residents' bank deposits55.568.854.547.748.443.145.043.042.040.0
Real effective exchange rate growth(6.6)5.0(25.7)7.3(2.1)(3.9)0.00.00.00.0
Sources: Ministry of National Economy of the Republic of Kazakhstan Statistics Committee (economic indicators); National Bank of Kazakhstan and IMF (monetary indicators); Ministry of Finance of the Republic of Kazakhstan (fiscal and debt indicators); National Bank of Kazakhstan (external indicators).
Adjustments: Usable reserves adjusted by subtracting the National Bank of Kazakhstan's year-end outstanding currency swaps with domestic banks and required bank reserves for resident foreign-currency deposits from reported international reserves. Our calculation of Kazakhstan's general government balance includes the central government, local governments, and National Fund for the Republic of Kazakhstan (NFRK) revenue and investment income. General government expenditure is adjusted by including the government's off-budget economic support programs. General government revenue is adjusted by excluding unrealized gains on NFRK's foreign-currency assets due to currency depreciation.
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2


Kazakhstan Ratings Score Snapshot
Key rating factorsScoreExplanation
Institutional assessment5Future policy decisions are hard to predict because the political environment is highly centralized and the succession process is uncertain. Relatively weak transparency in policy-making.
Economic assessment4Based on GDP per capita (US$) and growth trends as per Selected Indicators in Table 1.
External assessment2Based on narrow net external debt and gross external financing needs /(current account receipts + useable reserves) as per Selected Indicators in Table 1. The country is exposed to significant volatility in terms of trade, due to its dependence on hydrocarbons.
Fiscal assessment: flexibility and performance1Based on the change in net general government debt (% of GDP) as per Selected Indicators in Table 1. Based on liquid assets/GDP as per Selected Indicators in Table 1. Those assets are held predominately by the National Oil Fund. The sovereign has a volatile revenue base, since more than half of general government revenue is based on hydrocarbon production.
Fiscal assessment: debt burden2Based on net general government debt (% of GDP) and general government interest expenditures (% of general government revenue) as per Selected Indicators in Table 1.
Monetary assessment4The tenge is floating with a short track record. The independence of the National Bank of Kazakhstan is limited by perceived political interference, for instance, because of functions performed beyond its mandate, including becoming a shareholder in an oil field and participating in a housing construction program.
Indicative ratingbbb
Notches of supplemental adjustments and flexibility(1)Weakness in the banking sector weighs on economic growth potential, monetary policy effectiveness, and the fiscal burden of the government. This has a negative effect on creditworthiness and is not fully captured in the indicative rating. In addition, a downward revision of any score would lead to a multi-notch revision of the indicative rating level, as per Table 1 of the Sovereign Rating Methodology.
Final rating
Foreign currencyBBB-
Notches of uplift0Default risks do not apply differently to foreign- and local-currency debt.
Local currencyBBB-
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.
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