Fitch: KZT Move Neutral for Sovereign; Mildly Negative for Banks

Tue Feb 11, 2014 12:13pm EST

LONDON, February 11 (Fitch) Today's surprise announcement by the National Bank of Kazakhstan (NBRK) of a 19% devaluation of the tenge to 185 per US dollar is neutral for Kazakhstan's sovereign credit profile but moderately negative for banks, although it is unlikely to change their ratings, Fitch Ratings says. Kazakhstan's 'BBB+' foreign-currency rating is underpinned by a strong and improving sovereign balance sheet and low debt of 13.7% of GDP, mostly in tenge. The devaluation therefore has little impact on the government's solvency ratio and will reduce pressure on NBRK's reserves. We highlighted the central bank's intervention to support the tenge in our most recent review in November 2013, with foreign exchange reserves falling 13.6% in 2013. NBRK pledged today to continue to manage the exchange rate in a corridor around its new level, although over the medium term the authorities want to adopt a more flexible exchange rate before shifting to full inflation targeting. We expect inflation to spike above the official 6%-8% target following the devaluation. The balance of payments weakened in 2013 but the NBRK estimates that the current account was close to balance. Export earnings fell 4%. The devaluation will help curb imports and improve competitiveness. As long as oil prices remain close to USD100/b, we believe Kazakhstan will not run a large current account deficit. The NBRK explained the devaluation move by reference to the recent depreciation of the Russian rouble against the dollar, capital outflows and depreciation of other emerging currencies, pressure on Kazakhstan's balance of payments, and the need to maintain competitiveness. The devaluation is moderately negative for banks' credit risks, liquidity and solvency, but is unlikely to lead to changes in bank ratings. Asset quality and capital ratios are likely to weaken due to a still large 41% of loans being denominated in foreign currency at end-3Q13. However, risks are mitigated by a significant portion of these loans being to companies with foreign-currency reserves, and others being already highly reserved. We believe the sector capital ratio could fall by around 1-1.5 percentage points as a result of risk-weighted asset growth. Foreign funding in the sector fell sharply to 11% of total liabilities at end-3Q13 from 28% at end-2010. Larger banks also generally have solid cushions of liquid assets, including in foreign currency, so refinancing risks are manageable. Banks are also unlikely to suffer significant direct FX losses as a result of the devaluation due to generally small open positions. Contact: Charles Seville Director Sovereigns +44 20 3530 1048 Fitch Ratings Limited 30 North Colonnade London E14 5GN Roman Kornev Associate Director Financial Institutions +495 956 70 16 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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