ACRA AFFIRMS LT ВВВ+ TO THE REPUBLIC OF KAZAKHSTAN, OUTLOOK STABLE

ACRA has affirmed the following ratings to the Republic of Kazakhstan (hereinafter, Kazakhstan, or the country) under the international scale:

• Long-term foreign currency credit rating at ВВВ+ and local currency credit rating at ВВВ+;

• Short-term foreign currency rating at S2 and local currency credit rating at S2.

The outlook on the long-term foreign currency credit rating is Stable and local currency credit rating is Stable. The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

Positive rating assessment factors

• Consistently high economic growth.

• Consistent significant inflow of foreign direct investment (FDI) into the national economy.

• Low level of public debt.

• Stable external position backed up by significant national reserves, including a sovereign fund.

• High volume of contingent liabilities of quasi-public companies and the risk of their materialization.

• Low export diversification.

• Relatively poor quality of public institutions.

Credit rating rationale

Kazakhstan’s credit rating is based on a relatively high level of economic wealth, low public debt, a significant amount of liquid assets in the National Fund of the Republic of Kazakhstan (NFRK), and a sufficient amount of international reserves. The rating is constrained by a low level of export diversification, the risk of contingent liabilities materializing, and the relatively poor quality of government institutions. 

After GDP declined by 2.5% in 2020, ACRA expects Kazakhstan’s economic growth to recover to 3.9% in 2021. This recovery should be driven by higher oil prices, a steady easing of the quarantine regime, and also due to the low base effect. The risks in this scenario are potential further waves of the coronavirus pandemic and a slow rate of vaccination of the population.

The continued dependence of the industrial sector, exports, and the country’s economy on mining sector reduces Kazakhstan’s economic resilience to external shocks, given this sector’s significant focus on exports and dependency on external prices. However, the Kazakh economy’s growth potential remains high and, according to ACRA’s calculations, stands at 4–4.5% per year. Such high potential growth is supported by both a stable inflow of investments and positive demographic factors.

Despite inflation accelerating to 7.3% y-o-y in H1 2021, ACRA expects it to return to the target corridor of 4–6% set by the National Bank of Kazakhstan (NBK) in 2022. This will be possible thanks to the recent well-timed tightening of monetary policy, the effect of pro-inflationary factors that is gradually exhausting itself in 2021, and reduced pressure on the national currency due to the rise in oil prices. The NBK’s policy employed in 2020 allowed the country to avoid an acceleration of inflation and helped minimize the volatility of the tenge exchange rate.

In 2021, ACRA expects the state budget to record a deficit of 3.5% of GDP due to the economic policy’s continued focus on the outstripping growth of social spending. The deficit expected in 2021 will be comparable to the one recorded last year (4%) due to the implementation of the government’s extensive anti-crisis package in 2020 and the reduction of budget revenues unrelated to transfers from the NFRK.

ACRA views the increase in government debt to 25% of GDP by the end of 2020 (excluding NBK debt) as moderate and expects government debt to increase only slightly in 2021 as the economy recovers, which gives the country room for countercyclical fiscal policy in the future. In 2021, a new fiscal rule is to be introduced in Kazakhstan that limits the expenditure side of the budget by the size of the non-oil deficit covered by a transfer from the NFRK. The rule is planned to be applied to the republic’s budget starting from 2023.

Transfers from the NFRK play an important role in balancing the budget, which reduced the need for debt financing of the budget in 2020. As of the end of 2020, NFRK assets amounted to 34% of GDP and covered 138% of public debt. This provides a reliable safety cushion sufficient to balance the budget without debt financing for about four years.

The Kazakh government’s contingent liabilities (the debt of state-owned companies in both financial and non-financial sectors) are rather significant, with the debt of quasi-public companies amounting to 19% of 2020 GDP by mid-2020. It is worth noting that a considerable portion of this debt is denominated in foreign currency. Although the majority of state-owned companies are financially stable and capable of servicing their debt liabilities, ACRA believes potential external shocks may create conditions in which state support is essential, especially if precedents are taken into account.

A significant amount of NFRK assets and international reserves ensure the stability of Kazakhstan’s external position. At the end of 2020, these assets and reserves collectively exceeded the country’s total external debt (excluding intra-company debt) by 1.5x and the public sector external debt by 7x. In 2020, the import coverage ratio reached almost 12 months due to a drop in import volumes. ACRA expects imports to grow in 2021 and, consequently, the import coverage ratio of international reserves to decline to a certain extent.

Kazakhstan’s current account deficit is covered by a consistently high net inflow of FDI, which amounted to 4% of GDP in 2020. As for the exchange rate, the tenge depreciated by only 8% in 2020, compared with 53% depreciation in 2016. ACRA believes that in the future the volatility of the tenge exchange rate will decrease compared to previous periods due to the transition to inflation targeting.

The weakness of public institutions, low efficiency of government institutions and relatively low quality of public governance have a negative impact on Kazakhstan’s business climate. However, ACRA notes that both public and government institutions have recently undergone a number of positive changes. ACRA notes the importance of the separation of the Agency for Regulation and Development of the Financial Market of the Republic of Kazakhstan from the NBK, which should help strengthen the independence of both regulatory bodies. In addition, ACRA underlines the importance of creation of the Supreme Council for Reforms, the Agency for Strategic Planning and Reforms (which now includes the national statistics office) and the Agency for Protection and Development of Competition. In ACRA's opinion, these measures demonstrate Kazakhstan’s commitment to reforming its system of public governance.

Improvement of human capital is an additional positive long-term factor. According to the latest assessments of the World Bank and the UN, Kazakhstan’s Human Capital Index was higher than the average for Central Asia and one of the highest among comparable countries (in terms of rating category).

¹ At the beginning of 2021, excluding the debt of the NBK, taking into account the debt of the quasi-public sector in mid-2020.

Sovereign model application results

Kazakhstan has been assigned a BBB Indicative credit rating in accordance with the core part of ACRA’s sovereign model. A number of modifiers in the modifiers part of the model allow the Indicative credit rating to be increased. These include the following, which are determined by the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale:

• Potential economic growth;

• Sovereign funds;

• Exchange rate regime stability;

• External debt sustainability.

A negative adjustment has been made for the following modifier:

• Contingent liabilities and the risk of their implementation.

In view of the abovementioned modifiers, Kazakhstan’s Indicative credit rating has been raised. A Final credit rating of BBB+ has been assigned. There are no analytical adjustments and limitations that could result in an adjustment of the Final rating.  In connection with this, the long-term foreign currency credit rating remains at BBB+.

Potential outlook or rating change factors

• Decrease in the size of contingent liabilities.

• Diversification of exported goods.

• Increased quality and effectiveness of government bodies.

• Weak economic recovery.

• Prolonged and significant increase in public debt.

• Sharp decrease in the size of NFRK assets and international reserves relative to the country’s external debt and imports.

Regulatory disclosure

The sovereign credit ratings have been assigned to the Republic of Kazakhstan under the international scale based on the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The sovereign credit ratings of the Republic of Kazakhstan were published by ACRA for the first time on September 24, 2019. The sovereign credit ratings and their outlooks are expected to be revised within 182 days following the publication date of this press release as per the Calendar of sovereign credit rating revisions and publications.

The sovereign credit ratings are based on information from publicly available sources and ACRA’s own databases. The sovereign credit ratings are unsolicited. The Government of the Republic of Kazakhstan participated in the sovereign credit rating assignment.

In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.

ACRA provided no additional services to the Government of the Republic of Kazakhstan. No conflicts of interest were discovered in the course of the sovereign credit rating assignment.