Singapore, August 11, 2021 -- Moody's Investors Service ("Moody's") has today
upgraded the Government of Kazakhstan's local and foreign currency
long-term issuer rating to Baa2 from Baa3 and changed the outlook
to stable from positive. Concurrently, the foreign currency
senior unsecured debt and MTN programme ratings have also been upgraded
to Baa2 from Baa3 and (P)Baa2 from (P)Baa3, respectively.
The decision to upgrade the ratings is driven by Moody's assessment
that Kazakhstan's sovereign balance sheet and credit profile demonstrates
resilience that is consistent with peers at the Baa2 rating level.
This resilience is underpinned by the size and effective use of the country's
sovereign wealth assets, which Moody's expects will grow and
continue to exceed the level of government debt for the foreseeable future,
as well as the lengthening and ongoing track record of credible enhancements
to the macroeconomic policy framework that promotes external stability.
The stable outlook reflects balanced risks. On the upside,
ongoing institutional and economic reforms may strengthen Kazakhstan's
governance framework and raise the country's attractiveness as an
investment destination with the potential to accelerate the process of
economic diversification, although Moody's expects tangible
benefits to take time to materialise. On the downside, any
renewed weakness in oil prices, protracted cuts to oil production
and/or significant slowdown in the domestic economic recovery due to still
high coronavirus infections in the country may weigh on government finances
and Kazakhstan's credit metrics. If persistent, this
has the potential to materially reduce the government's fiscal buffers.
Kazakhstan's local and foreign currency country ceilings have been
raised to A2 and A3 from A3 and Baa1, respectively. The three-notch
gap between the local currency ceiling and the sovereign rating balances
the country's stable external position given its net creditor status
and somewhat predictable and transparent policies, against the exposure
of the economy to a key revenue source and the still relatively large
domestic footprint of the government through its holding companies.
The one-notch gap between the foreign currency ceiling and local
currency ceiling takes into consideration the authorities' commitment
to flexible exchange rates and open capital accounts, supported
by the large pool of foreign assets that reduces the risk of transfer
and convertibility restrictions.
RATINGS RATIONALE
RATIONALE FOR RATING UPGRADE TO Baa2
SIZEABLE FISCAL BUFFERS AND LENGTHENING TRACK RECORD OF CREDIBLE MACROECONOMIC
POLICIES UNDERPIN CREDIT RESILIENCE
Kazakhstan's sovereign balance sheet and credit profile reflect
the size and effective use of the country's sovereign wealth assets,
as well as the lengthening track record of credible macroeconomic policy
enhancements, which continue to demonstrate resilience over the
large coronavirus shock and that is consistent with peers at the Baa2
rating level.
Kazakhstan's sovereign wealth assets are substantial, amounting
to around 140% of general government debt at the end of last year,
which provide policy buffers that can counter economic shocks as just
observed during the pandemic. The government tapped the National
Fund of the Republic of Kazakhstan (NFRK, its sovereign wealth fund)
for additional transfers worth around 3% of GDP to counter the
effects of the coronavirus shock in 2020, and increased the amount
of transfers again by around 1.2% of GDP to provide further
fiscal support to the economy this year.
The use of fiscal buffers for countercyclical fiscal policy limited the
contraction of Kazakhstan's real GDP to around 2.5%
last year, and will help drive the economic rebound this year and
into 2022. Moody's expects Kazakhstan's economy to
grow by 3.5-4% this year and 4-4.5%
next year.
At the same time, the drawdown of fiscal buffers, particularly
last year, also kept the government's debt burden from sharply
increasing. In fact, despite higher spending, the government's
republican deficit widened modestly to 3.1% of GDP last
year from 1.9% in 2019, resulting in an increase in
general government debt by around 6 percentage points of GDP, compared
to the median increase of around 15 percentage points for Baa2 and Baa3
rated peers. Kazakhstan's general government debt stood just
above 25% of GDP as of the end of 2020, significantly lower
than the median debt burden of around 64% of GDP for Baa2 and Baa3
rated peers.
Moody's expects the government's track record of fiscal prudence
and its planned implementation of a new fiscal rule for 2023 to keep its
debt burden low for the foreseeable future and allow fiscal buffers to
grow. The new fiscal rule will set transfers based on a pre-specified
oil price to compel the government to accumulate assets in NFRK,
alongside caps on expenditure growth as well as countercyclical elements
to provide fiscal flexibility. The fiscal rule is complemented
by the government's ongoing commitment to keep its direct debt,
which amounted to 23.6% of GDP at the end of 2020,
below 25% of GDP.
Under Moody's baseline assumption of a continued economic recovery,
Kazakhstan's republican deficit is likely to average around 3%
of GDP over 2021-23, and general government debt is likely
to increase slightly to hover around 25-27% of GDP.
Given the recovery in oil prices and the increase in oil production with
the completion of expansion projects in the Tengiz and Kashagan oil fields
around 2022-23, Kazakhstan's sovereign wealth assets
and their coverage of general government debt are likely grow over the
next few years.
Meanwhile, the authorities' commitment to enhancements in
the macroeconomic policy framework in the aftermath of the 2014-16
oil price shock -- particularly the National Bank of Kazakhstan's
(NBK, the central bank) inflation targeting monetary policy and
flexible exchange rate regime -- supports Kazakhstan's macroeconomic
and external resilience.
Although last year's decline in oil prices was similar to the oil
price shock over 2014-16, volatility in the tenge was much
more contained, with the local currency depreciating by less than
15% peak-to-trough against the dollar compared to
more than 100% over 2014-16. In turn, inflation
and domestic interest rates have been much more anchored, allowing
credit -- with the help of government incentives -- to continue
to expand and support economic activity. These outcomes demonstrate
the increased credibility of macroeconomic policy.
Furthermore, the banking sector has remained relatively stable compared
to the previous oil price shock because of ongoing regulatory changes
as well as proactive supervisory policies that partially eased asset quality
pressures on banks, provided some relief to weaker segments of borrowers
such as the small and medium sized enterprises, and preemptively
raised capital levels ahead of the shock on the back of the Asset Quality
Review that concluded in 2020. Although some asset quality issues
persist in the banking sector, Moody's expects financial stability
and contingent liability risks to be relatively contained given the small
size of the sector and strong levels of capital adequacy in the largest,
systemically important banks, which supports the resilience of Kazakhstan's
credit profile.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects balanced risks to Kazakhstan's credit
profile.
On the upside, ongoing institutional and economic reforms have the
potential to strengthen Kazakhstan's governance framework beyond
Moody's current expectations. They may also raise the country's
attractiveness as an investment destination and its economic diversification
prospects beyond Moody's current expectations.
In particular, the newly established Supreme Council for Reforms
and Agency for Strategic Planning and Reforms, may accelerate the
pace of implementation if it effectively institutionalises and improves
the design and coordination of reforms. However, Moody's
expects tangible diversification away from the oil sector will take time
to materialise.
On the downside, uncertainty in the evolution of the pandemic globally
may place renewed pressure on oil prices and production, while any
significant tightening of movement and activity restrictions by the Kazakhstani
authorities in response to the spread of potentially more infectious variants
of the coronavirus may hinder or reverse the recovery in domestic economic
activity. Although the authorities are aiming to vaccinate most
of its population by the end of September, the vaccination rate
remains below 25% of the population as of early August, and
coronavirus infection rates remain high.
In turn, such developments may weigh on government finances and
the country's credit metrics. While the government's
fiscal buffers are substantial, persistently weak oil prices and
high levels of government spending to support the economy may materially
reduce these buffers over time.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Kazakhstan's ESG Credit Impact Score is moderately negative (CIS-3),
primarily reflecting its moderate exposure to environmental risk.
Its governance profile remains moderately weak, albeit gradually
strengthening amid ongoing reforms, while the exposure to social
risk is neutral to low.
The exposure to social risk is neutral to low (S-2 issuer profile
score). Government spending on public services including in healthcare,
education and housing continues to be a priority, with social welfare
programmes and social security expenditure amounting to between a fifth
to a quarter of the budget. Rising incomes at above-average
wealth levels compared to peers also mitigate social concerns, although
the lack of voice and accountability has been a political flashpoint domestically.
The exposure to social risk is neutral to low (S-2 issuer profile
score). Government spending on public services including in healthcare,
education and housing, continues to be a priority, with social
welfare programmes and social security expenditure amounting to between
a fifth to a quarter of the budget. Rising incomes at above-average
wealth levels compared to peers also mitigate social concerns, although
the lack of voice and accountability has been a political flashpoint domestically.
The influence of governance is moderately negative (G-3 issuer
profile score), reflecting still weak, although gradually
strengthening, institutions. Challenges remain in control
of corruption, rule of law, and corporate governance,
and the government is aiming to address these through judicial reforms,
including the introduction of a legal system based on the English law
for businesses based in the Astana International Financial Centre.
Policy credibility and effectiveness have also increased, albeit
from a relatively low base.
GDP per capita (PPP basis, US$): 26,565 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -2.6% (2020
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 7.5%
(2020 Actual)
Gen. Gov. Financial Balance/GDP: -3.7%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.7% (2020 Actual)
(also known as External Balance)
External debt/GDP: 95.5% (2020 Actual)
Economic resiliency: ba1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 05 August 2021, a rating committee was called to discuss the
ratings of the Kazakhstan, Government of. The main points
raised during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutions and governance strength, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed. The issuer
has become less susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings would likely be upgraded if ongoing and further reforms were
to strengthen the institutional framework, policy credibility and
effectiveness, and/or economic competitiveness beyond Moody's
current expectations. In particular, reforms that accelerated
the process of economic diversification, in turn expanding the breadth
of growth drivers materially and durably, would further enhance
the economy's resilience to potential shocks.
The ratings would likely be downgraded if prospects of a significant and
long-lasting deterioration in Kazakhstan's economic and fiscal
metrics became increasingly probable, possibly stemming from a large,
negative oil price shock that the government was unable to cushion.
The emergence of domestic political risks, with a negative impact
on the government's reform agenda and the business environment,
would also likely put downward pressure on the rating.
NATIONAL SCALE RATINGS
Moody's will shortly publish an update to its National Scale Rating (NSR)
map for Kazakhstan to reflect the upgrade of the government's long-term
issuer rating. Moody's NSRs are ordinal rankings of creditworthiness
relative to other credits within a given country, which offer enhanced
credit differentiation among local credits. NSRs are generated
from Global Scale Ratings (GSRs) through correspondences, or maps,
specific to each country. However, unlike GSRs, Moody's
NSRs are not intended to rank credits across multiple countries.
Instead, they provide a measure of relative creditworthiness within
a single country. The full maps can be accessed through the "Index
of Current and Superseded Compendia of National Scale Rating Maps by Country".
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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Christian Fang
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
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Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
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Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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