Fitch Affirms Kazakhstan; off Rating Watch Negative; Assigns Negative Outlook
Fitch Ratings-London-5 June 2009: Fitch Ratings has today affirmed Kazakhstan’s Long-term foreign currency Issuer Default Rating (IDR) at ‘BBB-’ and its Long-term local currency IDR at ‘BBB’, and removed them from Rating Watch Negative (RWN). A Negative Outlook has been assigned to the Long-term IDRs. Fitch has simultaneously affirmed the Short-term foreign currency IDR at ‘F3’ and the Country Ceiling at ‘BBB’. “The risk of significant impairment of the sovereign’s finances in the near term arising from the failures of two large banks has receded, while depositor confidence has proved reasonably robust to the bank failures and February’s currency devaluation,” said Andrew Colquhoun, Director in Fitch’s Sovereigns Group. “However, downward pressures on the ratings in the medium term remain, as Kazakhstan’s crisis-affected banks and sharply-slowing economy may yet require further sovereign support beyond the substantial amounts already committed.” The ratings were placed on RWN on 19 February 2009 as the nationalisation of two large banks gave rise to a risk that the sovereign could be forced to assume the banks’ obligations to foreign creditors. In the event, the authorities have managed a default by the banks (BTA and Alliance, both ‘RD’) on their foreign borrowings without sparking sustained deposit outflow from the banking system domestically. Confidence has also survived a 25% devaluation of the tenge against the US dollar on 4 February 2009, with households’ tenge deposits rising marginally in the banking system in March. The outlook for the country’s external finances has improved since February 2009. Between end-March and end-May, reserves grew 5.5% to USD19.8bn. Around USD15bn in net capital inflows from investors mainly in China and Korea have been announced, although the timing and terms of the capital remain unclear. Moreover, firmer oil prices, if sustained, would be positive for Kazakhstan’s external and fiscal finances. Fitch projects Kazakhstan’s current account deficit at 2% for 2009, compared to a 5.3% surplus in 2008, on the agency’s annual average oil price forecast of USD40/barrel. But a consolidation of oil prices nearer the 2009 year-to-date average at USD55/barrel could take the current account to a surplus of about 4% of GDP. Nonetheless, Kazakhstan’s ratings remain under pressure over the medium term from the potential costs of supporting the economy and banking system through recession and an ongoing banking crisis. Real GDP contracted 2.2% y-o-y in Q109; Fitch projects a 3.5% contraction for 2009, against official forecasts of near-zero growth. Fitch expects about 6% of GDP extra government spending in 2009 from a support package totalling USD15bn (13% of projected 2009 GDP) so far announced for 2009-2010, including 2.8% of GDP in bank recapitalisation. Despite budget stimulus to the real economy, bank asset quality is likely to slide further; Fitch bank analysts believe loans with clear signs of impairment (either non-performing, restructured or to borrowers unlikely to be able to repay in full) probably already exceed 25% of the total in the system outside of the failed banks, BTA and Alliance (both ‘RD’) (and are considerably higher in the failed banks). The agency sees a significant probability that the banking system will require further capital support from the authorities, who will wish to maintain a functioning domestic financial system. On a USD40 oil price projection, the general government budget (consolidating oil fund flows) could move to a deficit of 8% of GDP in 2009, reflecting heavy support spending and slowing revenues. The ratings are likely to remain supported by public finances, including strong fiscal liquidity (maturities were just 1% of GDP in 2008, against a ‘BBB’ median of 6%). But on current trends this strength could be eroded; on a USD40/barrel oil price, Fitch projects sovereign net foreign assets to weaken to 24% of GDP by end-2010, from 34% at end-2008. Kazakhstan’s ratings rely on strong public and external finances to offset structural weaknesses, including relatively weak business environment and governance indicators by ‘BBB’ standards.