ACRA has affirmed the following ratings to the Republic of Kazakhstan (hereinafter, Kazakhstan, or the country) under the international scale:
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Long-term foreign currency credit rating at ВВВ+ and local currency credit rating at ВВВ+;
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Short-term foreign currency credit 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.
CREDIT RATING RATIONALE
Kazakhstan’s BBB+ sovereign credit rating is supported by the following fundamental factors: 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 continues to be constrained by a low level of export diversification, the risk of contingent liabilities materializing, and the relatively poor quality of government institutions.
The Stable outlook on the sovereign’s long-term credit rating has been maintained due to the stabilization of the situation in the country after unrest in Almaty and other Kazakh cities in early January 2022 that resulted in the resignation of the government, deployment of Collective Security Treaty Organization (CSTO) peacekeeping forces, as well as the decision to declare a nationwide state of emergency, which lasted until January 19 and restricted the operation of banks and the stock exchange. As of the publication of this press release, CSTO forces had withdrawn from Kazakhstan and the stock exchange and financial institutions had resumed operating.
Based on current information, the conclusion can be drawn that the January events will most likely have a moderate impact on the country’s GDP in Q1 2022. Kazakh President Kassym-Jomart Tokayev recently assessed direct economic damage caused by the unrest at USD 2–3 bln1, which is no more than 1% of the country’s 2021 GDP. Indirect damage associated with the temporary interruption of production linkages may be higher. However, it should be noted that the oil and gas sector, which is the country’s economic backbone, was practically untouched by recent events, while the services sector bore the brunt of damages and may quickly make up for losses due to pent-up demand.
1 https://www.vedomosti.ru/politics/news/2022/01/10/904147-tokaev-otsenil-uscherb.
The Kazakh government does not plan to repay any bonds this year (neither in foreign nor local currency), and the next repayment (of ruble-denominated bonds) is scheduled for 2023. The events of early January had not impacted the cost of Kazakhstan’s sovereign debt as of the publication of this press release. ACRA considers potential operational risks stemming from the change of government to be limited as the key figures overseeing economic policy retained their positions. In addition, the Kazakh government does not depend on the capital market to repay debt as it possesses a significant liquidity cushion in the form of international reserves and NFRK assets amounting to half of annual 2021 GDP.
As of the publication of this press release, there was no risk of a mass withdrawal of cash from deposits and accounts had been avoided, which was confirmed after the resumption of banking and stock exchange activities. In ACRA’s opinion, in the future this risk will largely depend on the stabilization of the situation in the country and the timeliness of steps taken by the National Bank of Kazakhstan (NBK) to provide banks with liquidity if necessary.
ACRA notes that the risk of a deterioration of the credit portfolio of banks may grow in the future, especially in the segment of loans provided to services sector companies due to losses incurred during the disorder and difficulties receiving payments from related companies. This risk is somewhat mitigated by the banking sector’s healthy financial metrics — as of December 2021 (latest available data), the volume of outstanding loans stood at 3.9% of the portfolio, return on equity was 25.43%, Tier 1 capital adequacy amounted to 20%, and the sector’s assets accounted for 49% of the country’s GDP. ACRA will keep a close eye on how the situation develops in the banking sector.
A significant weakening of Kazakhstan’s national currency has not taken place and the USD/KZT exchange rate is currently within the previously established corridor of 330–340 tenge to the dollar.
In his address to the nation on January 11, President Tokayev announced a number of reforms. It will be possible to assess how they impact the sovereign’s credit rating when information becomes available about their quality and implementation. The reforms include the introduction of a new investment policy concept, development of a program to increase the population’s income, a review of the approach to the quasi-state sector, comprehensive reform of public governance and inter-budgetary relationships, fine tuning of the state-owned asset privatization program, and strengthening of import substitution in a number of industrial sectors. The reforms also seek to address the issues of commodity security, macroprudential regulation and support for agriculture, and the adoption of the Social Code.
ACRA will carefully monitor how the situation develops in Kazakhstan and assess its potential impact on the sovereign’s credit rating as information becomes available regarding the decisions of the government and the NBK in the areas of economic, financial, and fiscal policy.
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:
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Potential economic growth;
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Sovereign funds;
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Exchange rate regime stability;
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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
A positive rating action may be prompted by:
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Political reforms that have a significant positive impact on the efficiency of public governance and the stability of government bodies in the long term.
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The adoption of systemic social and economic decisions that considerably improve the long-term stability of public finances and/or potential for economic growth.
A negative rating action may be prompted by:
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Material and sharp deterioration of the situation in the Kazakh banking sector.
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Significant underestimation of economic damage and the related negative impact on the country’s GDP.
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Sharp weakening of the national currency and increase of the cost of public debt.
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 sovereign 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.
