S&P Global Ratings has affirmed its 'BBB-/A-3' long- and short-term foreign and local currency sovereign credit ratings on Kazakhstan with a negative outlook,  the ratings agency said on September 9. Kazakhstan's national scale rating was also affirmed at 'kzAA'.

Kazakhstan’s commodity-dependent economy continues to face pressures in an environment of low and volatile oil prices, but the country’s creditworthiness remains supported by its still strong balance sheet underpinned by sizable sovereign wealth fund assets of about 50% of GDP, according to S&P. “The ratings remain constrained by Kazakhstan’s limited institutional effectiveness owing to the highly centralised political environment; the country’s moderate level of economic development characterized by high commodity dependence; and limited monetary policy flexibility,” S&P said.

The agency estimates that the oil sector accounted for approximately 15% of Kazakh GDP and for over half of exports by value in 2014. With oil prices expected to remain low, Kazakhstan will witness its weakest economic performance since 1998, with output stagnating in real terms, as oil production will be flat or slightly decline. Moreover, private consumption will shrink as consumer purchasing power is hurt by the tenge depreciation in August 2015.

Kazakhstan’s economy should return to growth next year, with GDP seen averaging 2% in 2017-2019, supported by rising investments, recovering private consumption and stronger exports as the oil price outlook improves and the giant Kashagan oil field starts production.

On the fiscal side, given a relatively low debt level of about 20% of GDP, the Kazakh government remains in a net creditor position of over 30% of GDP. However, under the agency’s revised budget calculation approach, the general government deficit deteriorated to 8.6% of GDP in 2015 from an average annual surplus of about 3.5% during the preceding five years. The agency forecasts deficits steadily declining over the next three years and reaching a slight surplus in 2019.

S&P expects the deficit will peak to 4% of GDP in 2016 from 3.2% in 2015, but gradually tighten thereafter as oil prices recover and the Kashagan oil field becomes operational. “In the short term, the current account will remain supported by the reduction of import volumes as private consumption declines in the wake of sizable tenge depreciation last year,”S&P says.

The agency also sees balance of payments risks from the country’s sizable stock of inward foreign direct investment (FDI) “of a debt-like nature”.

S&P will consider lowering Kazakhstan's long-term ratings if the country's fiscal, external, or
economic performances do not improve in line with the agency’s baseline expectations. That include further delays to Kashagan coming on-stream. The ratings could stabilise at the current levels if the “present balance of payments pressures abated or monetary policy flexibility improved”, which could occur if “resident deposit dollarisation reduced substantially, improving the ability of the central bank to influence domestic economic conditions”, S&P concluded.