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Rating Action:

Moody's upgrades Kazakhstan's ratings to Baa2; changes outlook to stable from positive

11 Aug 2021

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 debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Christian Fang
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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