The credit rating of Kazakhstan

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Moody’s lowered the credit rating of Kazakhstan to Ba3 with a negative outlook

The Department of Summary Analysis of NCE RK "Atameken" provided a detailed justification for the downgrade

The main factors of reduction of rating are the following:

1. The recent drop in oil prices, which greatly weakened the fiscal and economic potential of the country;

2. Increased risk in the banking sector, together with the general decline of the economy and a decrease in the exchange rate of the national currency.

Negative outlook is justified by the continued pressure on the solvency of the banking sector, which limits growth prospects and creates financial and tax risks.

A more detailed explanation of the downgrade.

The first factor is weakening of fiscal and economic potential of the country.

Lowering of oil prices is the main cause of weakening the government's balance of payments and the economy as a whole, which also influenced the credit market. For two years (2013-2015 years), the state which was among the fastest growing countries, experiences budget deficit. The share of budget revenues to GDP decreased by 8.6%, and the balance of payments has decreased from a surplus of 5.2% in 2013 to a deficit of 3.2% in 2015. At the same time, the share the balance of payments of the Government to GDP decreased from surplus of 0.4% to deficit of 2.2% for the same period.

The transition to a floating regime of the national currency in August 2015 and its depreciation by about 45% against the US dollar (the period from August to December 2015), helped to keep the country's foreign exchange reserves, as well as to keep the impact of external shocks on state revenues. But the negative side of this measure was the increase in inflation and external debt.

Due to the devaluation of the cost of servicing the external debt increased. In the debt structure significantly increased the proportion of foreign currency debt - to 42.6% in 2015 against 23.2% in 2014. In 2016 this figure is projected at 46.8%, which is a signal for a further weakening of the national currency.

Despite the timely adoption of measures to adjust the budget, Moody 's expects that Kazakhstan will have a budget deficit in 2016 and 2017, leading to an increase in external debt.

In 2015, the ratio of the external debt to GDP increased to 21.8% versus 14.6% in 2014 and by the end of 2016 it will reach 22.9%. The debt of non-financial public sector to GDP also increased from 22.3% in 2014 to 28.5% by the end of 2015. Nevertheless, the National Fund of the Republic of Kazakhstan is a substantial fiscal buffer (in March 2016 64.3 billion. $), despite the marked decline in assets.

Given that Moody 's predicts low oil prices in the long term, the GDP growth forecast in 2016 will amount to 0%, and in 2017 - 1%.

In addition, the size of Kazakhstan's economy (nominal GDP in US dollars) also decreased due to the devaluation of tenge to 187 billion USD in 2015 and to 221 billion USD in 2014. The further decline to 128 billion USD is expected by the end of 2016. The decline of GDP in dollar terms will complicate repayment of the growing external debt in foreign currency.

Second factor is the increase of risks in the banking sector.

The downturn in the economy, the devaluation of the national currency, as well as a sharp increase in interest rates contributed to the deterioration in capital adequacy ratios and profitability of banks in Kazakhstan.

Many large local lenders continue to report a high proportion of restructured loans (including problem loans in US dollars), thus it is impossible to fully assess the expected credit losses. With a more conservative position (recognition of credit losses), some banks will reduce the capital adequacy ratio below the established norms.

Negative outlook

The negative outlook reflects the likelihood that the pressure on the banking system will continue to grow, with more negative consequences for the economic, fiscal and financial stability. The banking sector will aggravate and prolong the recession, leading to a decrease in government revenue or increase the pressure on costs, to increase of the deficit of state budget and increase external debt.