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Kazakhstan|business|April 1, 2015 / 10:46 AM
Moody's affirms Kazakhstan's rating at Baa2, changes outlook to stable from positive

AKIPRESS.COM - moody'sMoody's Investors Service (Moody's) has affirmed on March 31 the issuer and senior unsecured ratings of the Government of Kazakhstan at Baa2, as well as the provisional (P)Baa2 MTN program rating, and changed the outlook to stable from positive.

The key drivers of the outlook change to stable are:

1. Slower medium-term GDP growth, due to the fall in the price of oil and the economic slowdown in Russia and China.

2. The rise in dollarization in Kazakhstan's banking sector and a decline in confidence in the tenge.

3. Increased pressure on Kazakhstan's foreign exchange assets and on the National Fund of the Republic of Kazakhstan (NFRK) assets.

The affirmation of the Baa2 rating reflects Kazakhstan's very high fiscal strength, high economic strength, and substantial foreign exchange assets.

The following country ceilings for Kazakhstan are unchanged: an A3 local-currency country risk ceiling, an A3 local-currency deposit ceiling, a Baa1/P-2 foreign-currency bond ceiling, and a Baa3/P-3 foreign-currency deposit ceiling.

RATINGS RATIONALE

RATIONALE FOR OUTLOOK CHANGE TO STABLE FROM POSITIVE

FIRST DRIVER: OUTLOOK FOR SLOWER MEDIUM-TERM GDP GROWTH

Even with fiscal stimulus in 2014 and an expansion of stimulus spending over the next three years from 2015 to 2017, we expect that Kazakhstan's growth rate will ratchet down considerably owing to the drop in the price of oil and weaker economic growth in Russia, China, and other important trading partners of Kazakhstan. Moody's forecasts that real GDP growth in Kazakhstan will likely be 1.5% in 2015, 2.2% in 2016, and 3.3% in 2017, down from around 6% on average during the five-year period through 2014.

SECOND DRIVER: THE RISE IN DOLLARIZATION IN KAZAKHSTAN'S BANKING SECTOR AND A DECLINE IN CONFIDENCE IN THE TENGE.

A decline in confidence among residents in the tenge has resulted in a significant increase in banking system deposit dollarization to 57% of total deposits at the beginning of February from 40% one year earlier, the highest level since the 2009 devaluation. We see this as impeding the ability of banks to lend in local currency, putting further strains on the balance sheet of banks in a system already burdened with a high level of non-performing loans. Also, currency mismatches on banks' balance sheets, as dollar assets have not risen as much as dollar liabilities, would pose further strains should there be a depreciation of the tenge. This also indicates that the risk that some banks could require capital support from the government has risen.

In addition, the depreciation of the Russian ruble and other currencies in the CIS region, while the value of the Kazakh tenge has remained broadly unchanged against the dollar in the past year, has eroded competitiveness to a degree. This has made Kazakh non-hydrocarbon goods more expensive vis-à-vis similar goods from Russia and other CIS countries, which are important trading partners. We believe a strong exchange rate will also weigh on Kazakhstan's macroeconomic performance.

THIRD DRIVER: INCREASED PRESSURE ON FOREIGN EXCHANGE ASSETS

Kazakhstan's external payments position has come under increasing downward pressure since 2014, with the current account balance likely falling into a deficit of 3.9% in 2015 and 3.4% in 2016 and remaining in deficit through 2019.

Although official foreign exchange reserves, excluding gold, stood at USD21.5 billion in February (USD29.1 billion including gold), these remain broadly unchanged since October 2014, from which time global oil prices weakened and political pressures rose between Russia and Ukraine. In addition, we believe pressures have been building up on the external payments position, given the weakening in the balance of payments and the continued strength of the tenge in both nominal terms against the dollar and also in real effective terms against Kazakhstan's trade partners. However, because the National Bank of Kazakhstan (NBK) does not publish information on its foreign-exchange market interventions, it is difficult to gauge the extent to which the NBK has supported its de facto stabilized exchange rate since the second half of 2014.

In addition, fiscal pressures have led to a USD5.1 billion withdrawal from the NFRK -- although as of February such foreign assets stood at the substantial level of USD71.7 billion. Further drawdowns from the NFRK will be made, as the government has earmarked USD9 billion for a second fiscal stimulus program over 2015 to 2017.

RATIONALE FOR AFFIRMATION OF Baa2 RATING

Kazakhstan's Baa2 rating is supported by a number of credit strengths. First, even if total foreign exchange assets were to erode further, they are currently three times greater than all of Kazakhstan's general government debt in 2014. Second, Kazakhstan's fiscal strength is very high, with a debt to GDP burden of around 14% in 2014 (projected to increase slightly to 16% in 2016); very favorable debt affordability metrics; and a relatively low ratio of foreign currency debt to GDP of just 24% in 2014. Third, we assess Kazakhstan's economic strength as higher than rating peers, with a high forecasted average growth rate between 2009 and 2018 of around 4%, a moderately large sized economy, and relatively high per capita income.

WHAT COULD CHANGE THE RATING -- UP/DOWN

Upward pressure on the rating could develop if the country's institutional strength, e.g. the rule of law and the control of corruption, were to improve or if economic diversification were to broaden beyond commodities and consequently were to reduce economic vulnerability. Moreover, greater clarity on the presidential succession would be positive for political event risk considerations.

Kazakhstan's government bond rating would come under downward pressure if growth performs below expectations for several years, due, for example, to continued low commodity prices. The rating would also come under pressure should there be a significant loss of NBK foreign exchange reserves or from a deterioration in the government's financial strength, since this would erode its main advantage over similarly rated governments that have more robust institutional strength. Furthermore, a political crisis (e.g., related to the presidential succession) could also put downward pressure on the rating.

GDP per capita (PPP basis, US$): 23,038 (2013 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.3% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 7.4% (2014 Actual)

Gen. Gov. Financial Balance/GDP: 3% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 1.6% (2014 Actual) (also known as External Balance)

External debt/GDP: 67.0% (2013 Actual)

Level of economic development: Moderate level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 30 March 2015, a rating committee was called to discuss the rating of Kazakhstan, Government of. The main points raised during the discussion were: the lower medium-term average GDP growth outlook, due to the fall in the price of oil and economic slowdown in neighboring countries; the elevated real exchange rate; and the fall in Kazakhstan's foreign exchange reserves.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.

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