S&P cuts Kazakhstan to BBB on oil price fall

By bne IntelliNews February 11, 2015

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Standard & Poor’s Ratings Services has cut its long-term foreign and local currency sovereign credit ratings of Kazakhstan from BBB+ to BBB with a negative outlook. At the same time, the agency affirmed the country's short-term foreign and local currency sovereign credit ratings at A-2. In addition, the agency downgraded the country's national scale rating to kzAA+.

The main reason for the action is a sharp drop in oil prices - by more than 50% since June 2014 - which prompted the S&P to revise the oil price for 2015-2018. S&P believes that given the Kazakh economy's dependence on the oil sector, the decline in oil prices materially affects the outlook for the country’s economic growth as well as for external and fiscal balances. This led S&P to forecast real GDP growth at 1.5% in 2015 and 2% in 2016. S&P estimates that the oil sector accounts for an estimated 20-30% of GDP, over 50% of revenue, and 60% of exports.

S&P also expects that current account deficit to be 4% of GDP in 2015-2016. In 2017 the volume of external obligations of Kazakhstan will increase to more than 80% of current account receipts, compared with 24% in 2013, the report says.

The agency also projects that Kazakhstan's oil production will decrease slightly during 2015-2016. In 2015, output is seen at 80.5mn tonnes, down from 81.8mn tonnes previously expected. S&P also does not foresee any significant production gains from the offshore Kashagan oil field until 2018.

S&P says the National Bank of Kazakhstan will face many challenges in 2015. The bank is expected to try “to support financial stability in conjunction with the government's efforts to address legacy problem loans in the banking sector. On the other hand, it will want to facilitate an external adjustment through the exchange rate”. Thus S&P believes that the NBK will either allow a gradual depreciation of the Kazakh currency tenge or undertake another step devaluation this year, to accommodate lower oil prices and to ease the tenge's appreciation against the Russian ruble.

The agency hints that it may revise the outlook to 'stable' if the process of political decision-making and institutional system becomes more transparent and predictable. Other positives for the rating factors might be the successful implementation of structural reforms, strengthening measures to diversify the economy and increasing the flexibility of monetary policy. At the same time, the rating might be lowered if Kazakhstan's external and fiscal positions deteriorate beyond the agency’s current expectations, even assuming a recovery in oil prices over the forecast horizon. Pressure may also stem from deterioration in monetary policy effectiveness or in reserve levels of the NBK.

The NBK downplayed the rating cut. According to Zhaslan Madiyev, deputy head of the bank: “The rating is still investment grade, and this downgrade is not a signal for massive capital flight from the banking sector or from the country in general."

Despite the statement, the rating cut is clearly a setback for Kazakhstan, which is tightening its belt because of the economic challenges. The Kazakh authorities are expected to provide some guidance for the economic policy during an expanded governmental meeting on February 11.  

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