Moody's: Kazakhstan's Baa3 rating balances low debt burden against credit challenges

Kazakhstan's Baa3 rating with a negative outlook is supported by its relatively large economy, low public debt burden and substantial fiscal reserves, Moody's Investors Service said in a recently published report. Its main credit challenges include contingent liabilities that may arise from the restructuring of the banking sector, low, albeit improving, institutional strength and its relatively high proportion of foreign currency debt.

The annual update, "Government of Kazakhstan -- Baa3 Negative Annual Credit Analysis", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action. The report examines the sovereign in four categories: economic strength, which is assessed as "moderate"; institutional strength "low (+)"; fiscal strength "very high (-)"; and susceptibility to event risk "moderate".

"Kazakhstan's credit profile balances the strengths of its large economy, low public debt and high debt affordability, against challenges including sizeable contingent liabilities related to the banking sector, relatively high proportion of foreign currency debt and event risks related to the presidential succession," said William Foster, a Moody's Vice President -- Senior Credit Officer and co-author of the report.

Kazakhstan's very high fiscal strength is supported by its low debt burden, high debt affordability and favourable debt structure. Its prudent fiscal policies enabled it to build substantial fiscal reserves during surplus years in its sovereign wealth fund.

However, the drop in oil prices led to sizeable deficits in 2015 and 2016. Moody's expects a wider deficit of around 7.6% of GDP in 2017 due to one-off measures related to the recapitalization of the banking sector. The deficit is expected to shrink to around 1.8% of GDP in 2018 as expenditures fall and revenues rise.

The government debt burden has remained low, at around 21% of GDP in 2016, despite the rise of the value of foreign currency-denominated debt following the removal of the currency peg and the subsequent depreciation. Moody's expects the debt burden to stabilize at around 22% of GDP over the next two years, based on the government's fiscal consolidation plans, assuming that the currency and oil prices will be broadly stable.

Moody's expects Kazakhstan's GDP growth to pick up to 2.5% in 2017 and 3.0% in 2018 as the price of oil stabilizes at around $50 a barrel. Growth will also be supported by the recovery in the Russian economy, Kazakhstan's main trade partner, and the opening of the Kashagan oil field.

Kazakhstan has moderate susceptibility to event risk, driven by domestic political risks related to uncertainty over the presidential succession.

Risks from the banking sector also prevail, particularly as the 2015 depreciation of the tenge currency weakened asset quality and capital adequacy ratios. However, the relatively small size of the sector mitigates the potential fiscal costs of a crystallization of banking contingent liabilities.

Downward pressure on the rating could develop if Kazakhstan's economic and fiscal metrics were to deteriorate substantially due to challenges in the banking sector. Rising domestic political risk, an increase in the foreign currency composition of government debt or a significant decline in growth would also put pressure on the rating.

Moody's would consider stabilizing the rating if banking sector risks were to decline, particularly if banking sector capital requirements are lower than forecast and if additional recapitalization needs were to be met by non-government financing. Further progress on institutional, economic, and fiscal reforms, or a decrease in the foreign currency composition of government debt, would also be positive.