S&P upgrades Kazakhstan’s outlook to stable

ASTANA – S&P Global Ratings has revised its outlook on Kazakhstan from negative to stable. At the same time, the BBB- long-term and A-3 short-term sovereign ratings were affirmed, according to the agency’s press release.

“The stable outlook reflects our expectation that we have captured the fiscal costs of the authorities’ banking sector recapitalisation plans in our projections and that economic activity will remain relatively robust over the period to 2020,” reads the outlook published Sept. 8.

Kazakh Minister of National Economy Timur Suleimenov commented on the results.

“As you know, traditionally S&P is considered the most conservative of the three agencies, respectively; even with their conservative approaches and models, our economy and financial system have good prospects. Since the beginning of 2017 we have seen positive trends in the economy of Kazakhstan, which influenced the opinion of experts. Increasing the effectiveness of monetary policy, as well as maintaining Kazakhstan’s positions as a net lender with a low level of debt burden, also caused the rating revision to improve,” he wrote on his Facebook page on Sept. 9.

Suleimenov also mentioned the recent Moody’s outlook, which has improved, too.

“A good rating is important for Kazakhstan not only to attract investors who are guided by the opinions of international experts, but also to conduct its [country’s] economic policies more effectively and successfully, gaining access to financial resources outside of our country on more favourable terms,” he added.

S&P has assigned a stable outlook to reflect the agency’s assessment that Kazakhstan’s monetary policy flexibility has become less constrained due to the sharp decline in resident deposit. The share of foreign currency deposits to total deposits was 48.7 percent as of Aug. 1, 2017, having peaked at almost 70 percent in January 2016. S&P views balance-of-payments pressures as contained.

“Given the steady inflow of foreign direct investment (FDI) into the economy, largely into the oil and gas sector punctuated by a surge in 2016, we no longer view this sizable external liability as a potential capital flight risk,” reads the report.

The economic growth forecasts were also improved to show an expansion averaging 3 percent over 2017-2020, compared with the previous 2.5 percent. The agency says the growth will be supported by government investment spending and stronger exports as “the oil price outlook marginally improves and oil production from the Kashagan field accelerates,” it notes.

Inflation has fallen to 6-8 percent, which was the National Bank’s target band, noted experts.

“In our view, the National Bank could be subject to political influence, as exemplified by some activities in which it has participated in recent years that we believe fall outside the usual remit of a central bank. These have included becoming a shareholder of KazMunayGas, the state-owned oil and gas company, and compensating tenge-denominated depositors after the 2015 currency depreciation,” said the outlook.

S&P expects a new tax code, which is currently under development, to increase revenues by about 3 percent of GDP, “indicative of a greater level of fiscal flexibility than many of Kazakhstan’s peers,” it said. According to analysts, the tax code update presents an opportunity to reduce distortions and raise revenues by rationalising exemptions and preferential treatments, thus broadening tax bases and supporting fiscal consolidation. Changes include increases in excise taxes, expansion of the value-added tax system and amendments to natural resource taxation.

S&P expects Kazakhstan’s external position to improve gradually, partly due to the lagged effects of the sharp tenge depreciation in 2015.

“We expect the current account to strengthen, mostly supported by rising oil production. In our view, Kazakhstan’s strong narrow net external debt position and modest gross external financing needs to support the ratings. We note that the outstanding amount of inward FDI of a debt-like nature was about $91 billion at year-end 2016 (63 percent of the total stock of inbound FDI), which is close to 60 percent of GDP or 191 percent of current account receipts. They constitute a foreign liability of the economy and could exert balance of payments pressures in case of accelerated repatriation of profits and equity. However, we do not expect such an event to take place over the forecast horizon. This is supported by our observations that FDI tends to be much stickier than portfolio flows; this debt-type FDI is principally concentrated in the strategic oil and mining sectors of Kazakhstan. A large share of the income from the stock of FDI in Kazakhstan is re-invested in the sector, providing further evidence of the long-term commitment of investors to their projects,” reads the statement.

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