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S&P talks Kazakhstan's mitigation of current oil price shock effects

en.trend.az/
27 March 2020

Kazakhstan' s robust government and external balance sheets will help mitigate the effects of current oil price shock on the country, Trend reports with reference to the S&P Global report.

S&P Global Ratings affirmed its "BBB-/A-3" long- and short-term foreign and local currency sovereign credit ratings on Kazakhstan. The outlook on the long-term ratings is stable. "We also affirmed our kzAAA' national scale rating on Kazakhstan. The transfer and convertibility assessment remains 'BBB'."

The report said that the Outlook is stable because the agency expects Kazakhstan' s government and external balance sheet to remain strong over the next two years.

"A prolonged and sharp fall in oil prices or production beyond our expectations could put the ratings under pressure over the next two years if it led Kazakhstan' s external performance to deteriorate, for example, should gross external financing needs exceed 100 percent of current account receipts plus usable reserves. We could also consider a downgrade if destabilizing factors re-emerged, such as a spike in dollarization of resident deposits," the S&P said.

The report said that the agency could raise the ratings over the next two years if significant and tangible devolution of power to the cabinet and parliament along the lines suggested by the March 2017 constitutional amendments is seen.

"A meaningful improvement in the health of the banking sector, for example, supported by further advances in regulatory oversight or reduced related party lending, could also improve our view on government and monetary policy effectiveness," the report said.

The agency noted that despite diversification efforts, oil remains the key sector in Kazakhstan, directly accounting for about 15 percent of GDP, over half of exports, and more than 40 percent of general government revenue.

"Although oil revenue supports the economy when prices are high, in our view, it also exposes Kazakhstan to terms-of-trade fluctuations and revenue volatility. The government is in a net asset position that we forecast will average about 9 percent of GDP over 2020-2023, despite the anticipated fiscal deficits. Government debt was 23 percent of GDP at year-end 2019, increasing to about 29 percent of GDP in 2020 because of increased funding needs and Kazakh tenge depreciation, given about 30 percent of debt is denominated in foreign currency," the report said.

The agency said that it expects the government's interest costs to remain just over 5 percent of revenue on average over the forecast period.

"We estimate general government liquid assets will average about 37 percent of GDP. We forecast a current account deficit of 5 percent of GDP in 2020, up from 2.9 percent in 2019, because of lower oil prices. We expect the deficit will average 3.3 percent over 2020-2023 because of our assumption of increasing oil prices and import restraint. In response to the anticipated lower current account receipts from oil, we expect that income payments to foreign oil companies will reduce, providing some deficit relief," the report said.

The agency noted that despite the drop in oil prices on a stock basis, Kazakhstan' s external asset position is strong and gross external financing needs remain low.

"In our view, the more freely floating exchange rate will help the economy adjust to external pressures arising from the oil price shock, for instance by naturally reducing import demand. The tenge has depreciated year-to-date by about 15 percent after oil prices collapsed," the report said.

The agency also reminded that to reduce the emerging inflationary risks and protect tenge assets Kazakhstan' s National Bank raised the base rate 2.75 percent to 12 percent and in response to the depreciation, the NBK also began intervening on March 10 as a seller of dollars on the currency market.

"We expect the NBK will continue intervening to prevent sharp drops but will not attempt to support the pre-oil-price-collapse tenge level. The sharp depreciation of the currency raises the risk that dollarization in the economy will increase, inhibiting monetary policy flexibility. Before the transition to a more freely floating exchange rate in September 2015, the share of foreign-currency deposits to total deposits increased as a potential hedge against falls in the tenge's value. Dollarization peaked at almost 70 percent of total deposits in January 2016. The deposit dollarization rate stood at 43 percent at year-end 2019, and we currently do not expect it to increase to 50 percent during 2020. This is given the increased base rate, which keeps tenge returns favorable, and the increasing oil price outlook over the next two years," the report said.