S&P affirms sovereign credit ratings of Kazakhstan, Outlook Negative
ALMATY. KAZINFORM Standard & Poor's Ratings Services affirmed its 'BBB-' long-term and 'A-3' short-term foreign and local currency sovereign credit ratings on the Republic of Kazakhstan. The outlook remains negative.
At the same time, we affirmed our 'kzAA' Kazakhstan national scale rating on the country.
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 thenext few years, helped by the authorities' capacity and willingness to contains pending. The ratings remain constrained by our view of Kazakhstan's limited institutional and governance effectiveness, owing to the highly centralized political environment, the country's moderate level of economic development, high dependence on the hydrocarbon sector, and limited monetary policy flexibility.
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. Due to suppressed global oil prices, we expect GDP growth will stagnate or contract modestly in 2016. This will likely stem from weaker exports and our forecast of roughly flat oil production during the same period (unless the large offshore Kashagan oil field comes fully on stream earlier than 2018), as well as reduced domestic consumption due to the recent tenge devaluation, high inflation, and weak consumer lending. We then expect a moderate economic recovery in 2017-2019, as consumption and investments gradually pick up. Longer-term growth prospects will rely on the pace of the oil price recovery, the Kashagan oilfield project, and progress in the government's ambitious program of institutional reforms announced recently.
We consider that the Kazakhstan tenge is now largely floating, based on its substantial depreciation since August 2015 and almost no intervention from the National Bank of Kazakhstan (NBK) in the past three months, even when the oil price fell below US$30 per barrel (/bbl) in January 2016. We expect the current account deficit will average 2% of GDP in 2015-2017, compared with a surplus in 2010-2014. However, we expect import reduction, supported by the lower tenge exchange rate, and a gradually recovering oil price will help the current account recover and return to surplus over time.
Current account deficits will lead Kazakhstan's net external liabilities to grow to above 100% of current account receipts (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, and this share has grown over the past few years.
Despite the current account performance weakening, we expect reserves will stay broadly stable in 2016-2017. This is because 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] that have expressed willingness to extend their facilities to the government). We anticipate that MLI borrowings will offset the expected fall in FDI inflows to 2% of GDP in 2015-2016, compared with5% of GDP in the past five years.
We believe that the NBK's ability to influence domestic monetary conditions remains constrained by weak transmission mechanisms. Apart from shallow capital markets, Kazakhstan's banking system is extremely vulnerable and has become increasingly dollarized. The share of foreign currency-denominated deposits to total deposits increased to 67% in December 2015, from about 55% at year-end 2014 and less than 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 will 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.
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 as a percentage of GDP will change 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 government has recently used the oil fund to support the local economy. This fiscal stimulus includes a US$5.5 billion program launched in 2014 and a US$9 billion program for infrastructure investments up to 2018, launched in 2015. In February, the government announced additional measures to stimulate the economy.
We think Kazakhstan's capacity and willingness to contain spending in the next few years, 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 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 tenge exchange rate could support revenues in 2016, whereas revenue-mobilization measures, particularly 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 asset 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 in fiscal performance, we think gross general government debt will continue to stay below a modest 25% of GDP over our
2016-2019 forecast period 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 exceeded 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 the tenge depreciation puts pressure on the banking system's capital. 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. Kazakhstan has been one of the most politically stable environments in the region in recent years. 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 presidential succession. President Nazarbayev, aged 75, has governed Kazakhstan since its independence in 1991.
The negative outlook reflects our view of risks to Kazakhstan's external and monetary profiles over the next 24 months, in the current weak and volatile global commodity environment.
We could lower our long-term ratings, for instance, if we believed the challenges of containing inflation, responding to exchange rate pressures, and maintaining banking system stability had reduced Kazakhstan's 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 addressed external imbalances and short- and medium-term challenges to monetary policy.