Moody's Investors Service has downgraded the issuer and senior unsecured ratings of the government of Kazakhstan to 'Baa3' from 'Baa2'. The outlook on the rating is negative. At the same time, the provisional medium-term note programme rating was downgraded to '(P)Baa3' from '(P)Baa2'. This rating action follows the review that was initiated on 4 March when Moody's placed the ratings on review for downgrade.
The agency’s explained that the action stems from the “deterioration of Kazakhstan's fiscal and economic strength” because of the recent structural decline in oil prices. This factor is “weakening Kazakhstan's government balance sheet and its economy, and therefore also its credit profile”. The other factor is the increase of risk in the banking sector “due to the general slowdown in the economy and the currency depreciation, weakening many banks' solvency metrics, particularly those with a higher exposure to legacy problem loans and foreign currency loans”.
The negative outlook is explained by the “ongoing pressure on the banking sector's solvency, which also constrains the growth outlook and poses financial and fiscal risks”.
Moody’s believes that the adoption of a floating exchange rate regime in August 2015 and a roughly 45% depreciation of the tenge against the dollar preserved foreign exchange reserves and to some extent contained the impact of the oil price shock on the government's revenues, but “at the cost of increasing inflation and weakening Kazakhstan's debt metrics”. The depreciation also led to an increase in debt servicing costs raising Kazakhstan's risk from a further deprecation of its currency.
Moreover, “despite the timely policy response to adjust the budget to lower oil prices, Moody's forecasts that Kazakhstan will run small deficits in 2016 and 2017, which will increase debt levels”. This will weaken the country's fiscal strength. Still, the agency notes that “foreign currency assets in Kazakhstan's [Samruk-Kazyna] sovereign wealth fund of $64.3bn in March 2016 (although lower than $73.2bn in December 2014) still represent a substantial fiscal buffer, in comparison to total general government debt of $26.5bn at end 2015”.
Low oil prices prompts Moody's to forecast “Kazakhstan's economy to grow at 0% in 2016 and 1% in 2017”. Over the medium-term, growth is expected at average 3.5%, down from an average of 6.5% between 2010 and 2013.
Explaining the reasons of an increase in risks in the banking sector the agency notes that “the slowdown in the economy, currency depreciation, and sharp increase in interest rates have also contributed to a sharp deterioration in capital adequacy ratios and profitability at Kazakhstan's banks”. The agency also notes that “many large local lenders continue to report a high share of restructured loans (including problematic legacy loans denominated in US dollars) as not overdue and might not fully recognise expected credit losses”. This approach would “lower some banks' capital adequacy ratios below the regulatory minimums”.
The agency also believes that there is a “likelihood that pressures on the banking system will escalate, with broader negative implications for economic, fiscal, and financial stability”.
Downward pressure on the rating will show up when “economic and fiscal metrics were to deteriorate substantially, whether due directly to the need to finance a large recapitalization of the banking sector, or less directly to the broader economic or fiscal implications of weakness in the sector”. The other factors are an increase in domestic political risks, a rise in the foreign currency composition of government debt and further decline of growth levels.
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