Notation: Moody’s Baa3/ S&P BBB / Fitch BBB+1

Moodys Analysis:
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In April 2016, Moodys decided to downgrade Kazakhstan from Baa2 to Baa3, the key drivers of the downgrade are:

1. Kazakhstan's fiscal and economic strength have deteriorated due to the recent structural shift in oil prices.
  • The structural decline in oil prices is weakening Kazakhstan's government balance sheet and its economy, and therefore also its credit profile. Between 2013 and 2015, the country moved from fiscal and current account surpluses to twin deficits. Revenue as a percent of GDP declined by 8.6 percentage points and the fiscal balance declined from a surplus of 5.2% in 2013 to a deficit of 3.2% last year. During the same period, the country's current account balance relative to GDP moved from a surplus of 0.4% to a deficit of 3.1%.
  • Likewise other debt metrics have deteriorated. Despite the timely policy response to adjust the budget to lower oil prices, Moody's forecasts that Kazakhstan will run small deficits in 2016 and 2017, which will increase debt levels. Already in 2015, debt-to-GDP increased to 21.8%, from 14.6% in 2014, and is forecast to increase slightly in 2016 to 22.9%. Non-financial public sector debt/GDP has also increased, from 22.3% at end-2014 to 28.5% at end-2015. A higher debt burden also weakens the country's fiscal strength. However, foreign currency assets in Kazakhstan's Sovereign Wealth Fund of USD64.3 in March 2016 (although lower than USD73.2 billion in December 2014) still represent a substantial fiscal buffer, in comparison to total general government debt of USD26.5 billion at end 2015.

2. Banking sector risks have increased due to the general slowdown in the economy and the currency depreciation, weakening many banks' solvency metrics, particularly those with a higher exposure to legacy problem loans and foreign currency loans.The negative outlook reflects ongoing pressure on the banking sector's solvency, which also constrains the growth outlook and poses financial and fiscal risks:
  • The slowdown in the economy, currency depreciation, and sharp increase in interest rates have also contributed to a sharp deterioration in capital adequacy ratios and profitability at Kazakhstan's banks. As the depreciation has inflated lenders' risk-weighted assets, this has led to a corresponding drop in the system's aggregate Tier 1 Ratio to 13.1% at end-2015 from 15.0% in mid-2015, with many banks reporting a decline in their CET 1 and Tier 1 ratios of more than 200 basis points.
  • ​Many large local lenders continue to report a high share of restructured loans (including problematic legacy loans denominated in US dollars) as not overdue and might not fully recognize expected credit losses. A more conservative stance towards credit loss recognition would lower some banks' capital adequacy ratios below the regulatory minimums.


Kazakhstan Rating History

source: Lazard Emerging Markets
Public Debt Sustainability Assessment, 2005-2020. [1]
  • Based on macroeconomic and fiscal assumptions, the public debt to GDP ratio is expected to increase to 17.6% in 2015 and to 19.0% in 2016. It is projected to fall to 15.0% by 2018 and to 13.9% by 2020, driven by rebounding economic growth.1 A low debt ratio suggests that public debt is sustainable if government assumptions were to realize. The National Fund of the Republic of Kazakhstan supports the conclusion that the outlook is generally benign.
  • A historical scenario and bound tests were conducted to analyze alternative macroeconomic assumptions, and resilience of the key variables driving public debt dynamics to various shocks. The historical scenario suggests that the baseline assumptions are not overly optimistic. The results of all bound tests suggest that public debt is resilient to a broad range of shocks. Higher real interest rates, lower real GDP growth, or a fiscal negative shock all raise the public debt ratio above the baseline. The combined effect of these shocks raises the debt ratio to 24.6% of GDP by 2020.
  • The impact of the loan for countercyclical support on Kazakhstan’s public debt sustainability is assessed by a scenario that reflects an ADB $1 billion loan disbursement in 2015, jointly with two World Bank loans of $1 billion in 2015 and $1 billion in 2016. The joint effect initially raises the public debt ratio to 20.2% by 2016, compared to baseline 19.0%, to then converge to the baseline due to swift amortization and the predominantly benign debt dynamics incorporated in the projections.

[1] IFM Country report: Republic of Kazakhstan

IFM Datas