May 9, 2014 / 4:05 AM / 4 years ago

Fitch Affirms Kazakhstan at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 09 (Fitch) Fitch Ratings has affirmed Kazakhstan's Long-term foreign and local currency IDRs at 'BBB+' and 'A-', respectively. The Outlooks are Stable. The Country Ceiling has been affirmed at 'A-' and the Short-term foreign currency IDR at 'F2'. KEY RATING DRIVERS Kazakhstan has a strong sovereign balance sheet, with low debt and the third-highest net sovereign foreign assets in the 'BBB' category, estimated at 42% of GDP, underpinned by a sizeable commodity endowment. Real GDP growth of 6% in 2013 was among the fastest of 'BBB' rated countries. Fitch expects some deceleration in 2014. Private consumption has been the biggest contributor to growth since 2012, while exports have stagnated. The blow to real household incomes from tenge devaluation and slower bank lending growth will lead to softer consumption. The slowdown in the Russian economy will also have an impact on growth. Russia accounts for 3.8% of FDI (2009-2013 average) and 7% of exports. Russian ownership of banks and corporates in Kazakhstan is relatively limited. If wide-ranging trade or financial sanctions were imposed on Russia, this could have an effect on Kazakhstan, which is a member of the Russian-led Customs Union, soon to become the Eurasian Economic Union. The National Bank's (NBRK) surprise decision to devalue the tenge by 19% on 11 February has undermined confidence in the monetary policy framework, leading to a sharp rise in deposit dollarisation and an uptick in inflation. However, Fitch does not expect further exchange rate volatility. The NBRK should be able to hold the tenge within the narrow targeted range; it has recently intervened to prevent appreciation. The devaluation should also help rebalance the current account and restore exchange rate competitiveness relative to Russia, cited as a concern by the authorities. The current account recorded a small deficit of 0.1% of GDP in 2013, driven by a deterioration in the trade balance. Imports of non-food consumer goods rose 16%. Following the devaluation, Fitch expects the current account balance to record a surplus of 3% of GDP in 2014. The banking sector remains a weakness, although credit is growing despite the heavy burden of bad loans on some banks' balance sheets. The government is disposing of its stakes in three banks rescued in 2009 and aims to speed up the clean-up of bank balance sheets by purchasing more bad loans and setting a ceiling on NPLs of 15% of total lending (Fitch currently estimates NPLs at 33% of total lending). In February, the NBRK placed regulatory limits on consumer lending, which grew by 27% in 2013, twice the rate of overall lending to the private sector. Other structural factors factored into the rating include weak governance and relatively weak institutions compared to similarly rated sovereigns, according to the World Bank indicators. Prime Minister Serik Akhmetov resigned in April, to be replaced by Karim Massimov, who preceded him in the job. Commodity dependence is high. Oil and gas account for 70% of goods exports. Including metals and ores, commodities account for at least 90% of exports. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced. The main factors that individually or collectively might lead to rating action are as follows: Positive: - Substantial strengthening of the sovereign balance sheet over the medium term. - Effective restructuring of bank balance sheets. - Entrenching low and stable inflation under a more flexible exchange rate regime. - Improvements in governance and institutional strength. Negative: - A departure from prudent policy that leads to a sustained decline in sovereign assets. - A severe, sustained commodity price shock that negatively affected the balance of payments and public finances. - Excessive lending growth and inadequate risk management in the banking sector. - A political risk event. KEY ASSUMPTIONS - Fitch assumes average oil prices of USD105/b in 2014 and USD100/b in 2015 -President Nazarbayev is secure in power and largely unchallenged, and he may run for a fifth term in the December 2016 presidential election. Kazakhstan has not experienced a change of leadership since independence and the long-term issue of succession is not settled. While Kazakhstan's rating factors in below-average governance indicators, Fitch assumes that a transfer of power would be orderly. -Fitch assumes broad policy continuity in the long-term management of oil revenues. -Fitch's forecasts assume that the Kashagan oilfield, having briefly started production and shut down in Q4 2013, will not contribute significantly to oil production before 2016. -Fitch assumes that no wide-ranging trade and financial sanctions are applied to Russia, and that it avoids a severe recession or systemic economic and financial crisis. Contact: Primary Analyst Charles Seville Director +44 20 3530 1048 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Matteo Napolitano Director +44 20 3530 1623 Committee Chairperson Andrew Colquhoun Senior Director +852 2263 9938 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL 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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