Full rating report of Kazakhstan

ACRA revised the ratings of the Government of the Republic of Kazakhstan (hereinafter, Kazakhstan) under the international scale in August 2021. As of the publication of this report, the issuer had the following ratings:

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

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

• The outlooks on the long-term foreign currency credit rating and the local currency credit rating are Stable.

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.

Negative rating assessment factors

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

• Low export diversification.

• Poor quality of public institutions.

Sovereign model results

key assessment factors

The BBB+ long-term sovereign rating of Kazakhstan is based on the final scores of the following analytical blocks: Macroeconomic Position — a-, Public Finance — aa-, External Position — bb, and Institutional Framework — bb+. Analytical adjustments and limitations did not impact the rating.

MACROECONOMIC POSITION

The final score of the Macroeconomic Position analytical block is a-, which is higher than the core score assigned to the block (bbb+). The latter reflects the level of welfare, size of the economy and comparative growth rates¹, which in general correspond to the bbb category.

¹ Compared to growth in developed and developing countries at a ratio of 45:55.

Core score factors. Inflation in Kazakhstan over the five-year period, which includes both historical data and projections, is considerably better than in countries with the same rating category. Despite inflation accelerating to 6.8% in 2020, and its expected further growth to 7.9% in 2021, in 2022 and 2023, ACRA expects it to return to the level recorded in 2019 (5.3%), which is within the target corridor of 4–6% set by the National Bank of Kazakhstan (NBK). 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 sort of volatility of the tenge exchange rate that was observed in 2015–2016.

Modifiers. The bbb+ core score of the block was adjusted by modifiers to a- because compared to the previous period, including 2020, during which a decline in GDP was recorded for the first time in 20 years, ACRA expects GDP growth to accelerate to its long-term potential, which the Agency estimates at 4–4.5%. This will be supported by both a stable inflow of investments, mainly FDI (expected net commitment ranges from USD 7–9 bln per annum), and positive demographic factors — stable population growth and accompanying growth of the labor market by up to 2% a year.

The continued dependence of the industrial sector, exports, and the country’s economy on the mining sector reduces Kazakhstan’s economic resilience to external shocks, given this sector’s significant focus on exports and dependency on external prices. This dependence on commodity export-focused sectors impacts the exchange rate, and consequently, inflation, affecting the non-trade sectors of the economy, and hence the economy as a whole.

The share of the oil and gas sector and mining, the export prices of which are quite strongly correlated, accounts for 74% of exported goods, or 10% of GDP. ACRA does not expect any significant change to the structure of GDP in the near future, despite the government’s efforts to increase diversification and the desire to decrease the economy’s dependence on external factors. This is due to the fact that the main areas of investment in the economy continue to be the raw materials industries — the extraction of raw materials, related infrastructure and trade.

PUBLIC FINANCE

The final score of the Public Finance analytical block is aa-, which is higher than the core score (a+). The core score is based on the low level of public debt, which is more significant for the assessment of debt burden than the share of expenses for servicing debt, as well as the very low share of external public debt in Kazakhstan’s public debt and expectations that the state budget deficit will be maintained at the 2020 level in forthcoming years.

Core score factors. 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 National Fund of the Republic of Kazakhstan (NFRK).

As the economy recovers, ACRA expects public debt to increase only slightly by the end of 2021 compared to 25% of GDP as of the end of 2020 (excluding NBK debt). In 2021–2022, debt servicing should amount to 4.6–4.7% of expenses in the aforementioned period according to the Agency’s expectations, which is practically the same as in 2020 (4.6% of total budget expenses).

Modifiers. The core score of the Public Finance block was improved due to the considerable liquidity surplus in the NFRK. As of the end of 2020, NFRK assets amounted to 32.7% of GDP and covered 130% of public debt. This provides a reliable safety cushion sufficient to balance the budget without debt financing for about four to five years (even excluding potential growth of the fund’s assets due to contributions to it, investment income, and exchange rate revaluation). The annual transfer from the NFRK to the republic’s budget helps reduce the budget’s need for debt financing, which was especially important in the crisis year of 2020 amid volatility in financial markets.

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.

ACRA notes the risk of the Kazakh government’s contingent liabilities related to debt of state-owned companies in the non-financial sectors. As of March 2021 (the date of the latest available data), the debt of two major quasi-public holdings amounted to 13% of 2020 GDP², a considerable portion of which 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. The country’s total public debt and quasi-public debt stands at 44%³, which is below the established ceiling for this type of total debt.

² In March 2021, KazAgro National Management Holding JSC was merged with Baiterek National Management Holding JSC.
³ At the beginning of 2021, excluding the debt of the NBK, taking into account the debt of the quasi-public sector in mid-2020.

EXTERNAL POSITION

The final score of the External Position analytical block is bb, which is three notches higher than the core score of b. The core score is based on low export diversification, a moderately negative international investment position (excluding the public sector), negative current account calculated based on historical data and projections, and high historical volatility of the national currency, weighted by the country’s main trade partners. These factors are partially offset by the high level of coverage of imports of goods and services by the country’s international reserves.

Core score factors. The country’s current account is recovering amid a favorable external situation after significant deficits recorded in 2019 and 2020. A minor deficit is possible in 2021–2022, however, from 2023 onward the country is more likely to record surpluses as the trade balance surplus grows amid a relatively stable primary income deficit.

The private sector’s international investment position is usually characterized by obligations exceeding assets. ACRA does not expect the investment position to deteriorate relative to GDP in the forecast period because the balance of the banking sector will improve while the balance of the corporate sector will be maintained.

A significant amount of NFRK assets and international reserves provide additional stability to 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.

Modifiers. The core score of the block was improved for the following reasons.

Firstly, ACRA assumes that the volatility of the local currency’s exchange rate calculated on the basis of historical data distorts the outlook on its future performance. In the future, the exchange rate volatility of the tenge will decline compared to previous periods thanks to the transition (since mid-2015) to inflation targeting and, at the same time, to a floating exchange rate regime for the local currency. This mechanism allows the tenge to quickly adjust to fluctuations in the currencies of trade partners, which rules out potential distortions in the formation of the exchange rate. As a result, in 2020, the annual average weakening of the tenge only amounted to 8%, compared to the 53% depreciation recorded in 2016 when the floating exchange rate transition was in progress. At the same time, ACRA believes that as the ten-year window used to calculate the volatility indicator moves away from 2015 and 2016, the influence of this factor on the base score of the block will weaken, and in the future such a significant adjustment as the one applied in 2021 will not be required.

Secondly, the negative international investment position of the private sector is partly due to the large share of intra-company debt included in the calculation of non-financial sector liabilities, which in a sense overestimates the liabilities of this sector relative to their assets. The specificity of intra-company debt is that it is a relationship within one company, and the likelihood that the government, under certain circumstances, will have to take responsibility for this debt is practically zero. The share of this sort of debt was 61% of Kazakhstan’s total external debt as of the end of 2020 due to the signing of production sharing agreements for the development of large projects in the raw materials sector by Kazakhstan and a number of mining companies. If we exclude the share of public debt, including the NBK, and intra-company debt from the total amount of external debt, then the share of external debt that falls on the private financial and corporate sectors amounted to 28.8% at the end of 2020. This is a relatively small amount.

Lastly, the volatility of the current account is caused by an excessively high share of raw materials in the formation of the current account of the balance of payments of Kazakhstan, which accounted for 60% of exports of goods and services in 2020. A mitigating circumstance is the fact that Kazakhstan’s current account deficit is covered by a consistently high net inflow of FDI, which amounted to 4% of GDP in 2020. ACRA expects that the high dependence of the current account on the commodity sector will remain due to the fact that the latter not only forms two-thirds of exports of goods, but also significantly influences the formation of the balance of primary income — the most significant factor offsetting the positive net export of Kazakhstan in the current account balance. At the same time, the high inflow of FDI will continue because the national economy remains an attractive object of investment in terms of a number of sectors, especially in the extractive industries and agriculture.

INSTITUTIONAL POSITION

The final score of the Institutional Position analytical block (bb+) is equal to the core score, with regard to which modifiers were not applied.

Core score factors. The block’s assessment stems from low indicators calculated by the World Bank, which provide a comparative portrait of institutions in the country in terms of political stability and freedom of speech, as well as corruption, property rights, quality of public services and the ability to promote private sector development. These estimates are mitigated by a fairly high level of quality of human capital, the driving force behind long-term economic growth.

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). For the Political Stability World Governance Indicator (WGI), Kazakhstan received a below-average score, ranking below the sovereign governments of CIS+ countries such as Kyrgyzstan, Moldova, Armenia, Georgia, and the majority of Eastern European countries. In terms of Government Effectiveness (part of the WGI), Kazakhstan is slightly below the average within its peer group, and is second only to Armenia, Georgia and Turkey out of the nearest countries.

However, ACRA notes that both public and government institutions have recently undergone a number of positive changes, as well as changes that seek to develop and strengthen democracy. The President of the country Kassym-Jomart Tokayev and the Government of Kazakhstan have proposed three packages of institutional reforms. The reforms are aimed at increasing the authority of Kazakhstan’s parliament, reducing the barriers to registering political parties, institutionalization of a “parliamentary opposition”, strengthening transparency and accountability of government bodies and quasi-public companies, and lowering the threshold for parties to enter to the Mazhilis (the lower house of the Kazakh parliament). In addition, the Concept for the Development of Local Self-Government was developed and adopted. In the summer of 2021, elections to the akimats (local executive bodies) of rural districts were held.

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.

key macroeconomic indicators

KEY ASSUMPTIONS

• In 2021–2023: annual average Brent oil price rebounding to USD 58–63/bbl, oil production volume within 85–99 mln t, and increasing in 2023;

• Relatively high vaccination rate by late 2021, which implies a low risk of total/partial lockdown with corresponding losses for economic sectors. In 2022, ACRA does not expect new quarantine measures which would restrict economic activity.

POTENTIAL OUTLOOK OR RATING CHANGE FACTORS

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

• Decrease in the size of contingent liabilities.

• Diversification of exported goods.

• Increased quality and effectiveness of government bodies.

A negative rating action may be prompted by:

• 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 the press release on the sovereign credit rating revision as per the Calendar of sovereign credit rating revisions and publications.

The sovereign credit ratings were assigned 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.