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Rating Action:

Moody's downgrades Kazakhstan's rating to Baa3 with negative outlook, concluding review for downgrade

22 Apr 2016

NOTE: On April 25, 2016, the press release was corrected as follows: In the last sentence of the first paragraph of the Ratings Rationale section, the level of the 2015 current account deficit was changed from 2.2% to 3.1%. Revised release follows.

New York, April 22, 2016 -- Moody's Investors Service has today downgraded the issuer and senior unsecured ratings of the Government of Kazakhstan to Baa3 from Baa2 and assigned a negative outlook. The provisional MTN program rating was also downgraded to (P)Baa3 from (P)Baa2.

The key drivers of the downgrade are:

1. Kazakhstan's fiscal and economic strength have deteriorated due to the recent structural shift in oil prices.

2. Banking sector risks have increased 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 reflects ongoing pressure on the banking sector's solvency, which also constrains the growth outlook and poses financial and fiscal risks.

This rating action closes the review initiated on 4 March when Moody's placed the ratings on review for downgrade.

In addition, Kazakhstan's local-currency bond and deposits country ceilings were lowered to Baa1 from A3. At the same time, the foreign-currency bond ceiling was lowered to Baa2/P-2 from Baa1/P-2 and the foreign-currency deposit ceiling remains unchanged at Baa3/P-3.

RATINGS RATIONALE

FIRST DRIVER - KAZAKHSTAN'S FISCAL AND ECONOMIC STRENGTH HAVE DETERIORATED DUE TO THE DROP IN OIL PRICES

The structural decline in oil prices is weakening Kazakhstan's government balance sheet and its economy, and therefore also its credit profile. Between 2013 and 2015, the country moved from fiscal and current account surpluses to twin deficits. Revenue as a percent of GDP declined by 8.6 percentage points and the fiscal balance declined from a surplus of 5.2% in 2013 to a deficit of 3.2% last year. During the same period, the country's current account balance relative to GDP moved from a surplus of 0.4% to a deficit of 3.1%.

The move to a floating exchange rate regime in August and the roughly 45% depreciation in the exchange rate of the tenge against the US dollar between mid-August and end-2015 has 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. Due mostly to the depreciation, debt servicing costs have increased and the foreign currency proportion of Kazakhstan's total government debt increased to 42.6% in 2015 from 23.2% in 2014. The share of foreign currency debt will rise to 46.8% in 2016, increasing Kazakhstan's risk from a further deprecation of its currency.

Likewise other debt metrics have deteriorated. 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. Already in 2015, debt-to-GDP increased to 21.8%, from 14.6% in 2014, and is forecast to increase slightly in 2016 to 22.9%. Non-financial public sector debt/GDP has also increased, from 22.3% at end-2014 to 28.5% at end-2015. A higher debt burden also weakens the country's fiscal strength. However, foreign currency assets in Kazakhstan's Sovereign Wealth Fund of USD64.3 in March 2016 (although lower than USD73.2 billion in December 2014) still represent a substantial fiscal buffer, in comparison to total general government debt of USD26.5 billion at end 2015.

Given the decline in oil prices and Moody's forecasts for lower-for-longer oil prices going forward, Moody's now expects Kazakhstan's economy to grow at 0% in 2016 and 1% in 2017. Furthermore, over the medium-term, Moody's now expects growth to average 3.5%, down from an average of 6.5% between 2010 and 2013.

In addition, Kazakhstan's economic size (proxied by its nominal GDP in dollars) has also declined due to the depreciation of the tenge, to USD187 billion in 2015, from USD221 billion in 2014, and is forecast to decline further to USD128 billion in 2016. Lower GDP in dollar terms makes it harder for Kazakhstan to service the rising share of foreign-currency debt.

SECOND DRIVER - BANKING SECTOR RISKS HAVE INCREASED

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. As the depreciation has inflated lenders' risk-weighted assets, this has led to a corresponding drop in the system's aggregate Tier 1 Ratio to 13.1% at end-2015 from 15.0% in mid-2015, with many banks reporting a decline in their CET 1 and Tier 1 ratios of more than 200 basis points.

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 recognize expected credit losses. A more conservative stance towards credit loss recognition would lower some banks' capital adequacy ratios below the regulatory minimums.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects the likelihood that pressures on the banking system will escalate, with broader negative implications for economic, fiscal, and financial stability. Banking sector weakness would exacerbate and prolong the growth downturn, the severity of the impact depending on the severity of the system's problems, which remain unclear. This, in turn, would weaken government revenues or raise spending pressures, increasing government deficits and debt.

More immediately, banking sector weakness could cause contingent liability risks to crystallise for the government from bank recapitalization needs. The system is weak and will probably need additional capital injections in any event, which the banks' private shareholders will unlikely be able to fully cover. Hence, unlike in the past, Moody's believes that the government is likely to be a main supplier of any additional capital needed, given the higher degree of domestic ownership of the banking system than in years past. Moreover, the potential capital shortfall is inevitably uncertain, and additional weakening in banking metrics would raise the likelihood that bank capital shortfalls could be larger than Moody's current estimate of between 3 to 5 billion dollars or 2.5% to 4.0% of GDP.

WHAT COULD MOVE THE RATING DOWN / UP

Downward pressure on the rating could develop if Kazakhstan's 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. An increase in domestic political risks or a rise in the foreign currency composition of government debt, as well as if growth levels were to decline further (due perhaps to a sustained decline in oil prices below an average of 30 dollars per barrel) could also put downward pressure on the rating.

Upward pressure on Kazakhstan's rating could develop if banking sector risks were to decline, particularly if banking sector capital requirements were lower than forecast and / or if recapitalization needs were met by non-government financing. Further progress on institutional, economic, and fiscal reforms or a decrease in the foreign currency composition of government debt would also be credit positive.

GDP per capita (PPP basis, US$): 24,108 (2014 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: 1.8% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 2.7% (2014 Actual) (also known as External Balance)

External debt/GDP: 71.3% (2014 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 19 April 2016, a rating committee was called to discuss the rating of the Kazakhstan, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings Methodologies 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 credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ernest Sergenti
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Anne Van Praagh
MD - Sovereign Risk
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Kazakhstan's rating to Baa3 with negative outlook, concluding review for downgrade
No Related Data.
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