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18 November 2024

Fitch Keeps Kazakhstan's Rating at 'BBB' with Stable Outlook

Kazakhstan's 'BBB' IDRs are supported by a very large external buffer, with the third-strongest sovereign net foreign asset (SNFA) position in the 'BBB' rating category, also providing financing flexibility, underpinned by accumulated oil revenue savings.

Fitch Keeps Kazakhstan's Rating at 'BBB' with Stable Outlook

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Fitch Ratings has confirmed Kazakhstan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook, The Caspian Post reports.

Kazakhstan's 'BBB' IDRs are supported by a very large external buffer, with the third-strongest sovereign net foreign asset (SNFA) position in the 'BBB' rating category, also providing financing flexibility, underpinned by accumulated oil revenue savings. Set against these factors are its very high dependence on commodities, export concentration risk, high inflation, which partly reflects a less developed macroeconomic policy framework relative to 'BBB' peers, and weak governance indicators.

Very Strong External Buffer: Foreign-currency assets of the National Fund for Republic of Kazakhstan (NFRK) rose marginally to USD60.7 billion in October, from USD60 billion at end-2023, and official FX reserves to USD45.9 billion, from USD35.9 billion, together equivalent to 38% of GDP (with an SNFA position of 33% of GDP). NFRK performance was boosted by its 8.4% investment returns, offset by budget transfers, while higher gold prices lifted FX reserves. A narrowing current account deficit (CAD) also contributed, projected at 0.5% of GDP in 2024, from 3.4% in 2023, reflecting a fall in imports in 9M24.

Stable External Position Projected: Fitch forecasts the CAD to widen to 2.9% of GDP in 2026 on recovering import growth, and a lower oil price (averaging USD70/b in 2025 and USD65/b in 2026). We project oil production to fall by 2 million tons (mt) in 2024 to 88 mt, reflecting temporary shut-downs, rise to 99 mt in 2026 on expected completion of the Tengiz oil field expansion, and to slightly decline thereafter. Overall FX reserves (including NFRK's non-equity holdings) are projected at 9.4 months of current external payments at end-2026, from 10.2 at end-2024, well above the current peer group median of 5.5 months.

Wider Fiscal Deficits: Fitch projects the general government deficit widens 1.4pp in 2024 to 2.9% of GDP, reflecting revenue underperformance in 9M24. Our forecasts for deficits of 3.0% in 2025 (an upward revision of 1pp since our last review in May) and 2.7% in 2026 incorporate higher capex, partly financed by ongoing large budget transfers from NFRK. We assume planned tax code reform measures, which were again postponed, provide a moderate boost to revenue in 2026 through reduced tax exemptions and higher VAT.

Weak Fiscal Rule: The fiscal rule caps the "guaranteed" transfer from NFRK but not the discretionary "targeted" transfer, diluting its efficacy. We anticipate NFRK transfers in 2024 total near KZT5.6 trillion (4.2% of GDP), well above the budgeted KZT3.6 trillion, of which KZT2 trillion is the guaranteed component. The recent draft budget incorporates KZT3.25 trillion of targeted transfers in 2025, despite the government's initial plan to eliminate them. There has also been further use of unconventional operations that create fiscal space, with NFRK purchasing almost KZT0.5 trillion equity in state-owned Kazatomprom, supporting dividends to the budget.

Low but Rising Public Debt: Fitch forecasts general government debt/GDP rises 1.4pp in 2024 to 24.2%, and to 28% in 2026, still well below the current 'BBB' median of 55.8%. In October, the sovereign returned to the international debt markets for the first time since 2019, issuing a 10-year USD1.5 billion Eurobond at a yield of 4.7%. The government plans to meet the large majority of its financing needs through 2026 on the domestic market, helped by ample banking sector liquidity, relatively weak loan demand, and high return on equity (34% in 9M24), and by greater pension fund purchases.

Fairly High Inflation: Inflation has been close to 8.5% since May, and accelerated month on month to 0.9% in October, on utility tariff hikes, fiscal stimulus, and 11% currency depreciation against the US dollar since April, while household 12-month inflation expectations are relatively high at 12.5%. Fitch forecasts inflation falling to an average of 8.1% in 2025, and 6.8% in 2026, above the National Bank of Kazakhstan's (NBK) medium-term target of 5%, and the 'BBB' median of 2.8%. We assume the policy interest rate, which has been held at 14.25% since June, is cut to a level consistent with a real rate of near 4% in 2025.

Relatively Weak Monetary Policy Transmission: NBK has phased out most of its direct subsidised lending, and the bank deposit dollarisation ratio fell to 21.4% in September, from 31.6% at end-2022. Despite improving, monetary policy transmission is impaired by ongoing state subsidised lending, particularly mortgages, and by regulated prices. NBK estimates approximately one-third of long-term loans are subsidised, while state bank Otbasy accounted for around 58% of mortgage lending in 9M24. NBK is a dominant actor in the FX market, including through managing the pension fund, but greater disclosure of FX sales from NFRK has enhanced FX management transparency.

Expected Growth Pick-Up: We forecast GDP growth to accelerate from 3.9% in 2024 to an above-trend 4.6% in 2025 and 4.9% in 2026, on higher oil production, firming investment growth, and stronger real income growth, still below the target of 6%. Development of the middle-corridor transportation sector and renewable energy provides some economic diversification, but insufficient to markedly lift the share of non-oil GDP. Bereke Bank was recently privatised, and reduced utility tariffs support private-sector activity, but SOEs retain dominant positions in many sectors, and measures that could reinforce state involvement include pension fund purchases of local bank bonds to stimulate lending.

High Oil Dependence, Geopolitical Risk: Kazakhstan is set to remain very reliant on crude and oil condensates, which account for more than half of exports. In addition, nearly 80% of Kazakh crude oil is exported via Russia through the Caspian Pipeline Consortium (CPC), giving rise to geopolitical risk. The share is likely to remain high given its cost advantages, notwithstanding some recent diversification of routes. However, relations with Russia have continued to strengthen since a series of disruptions to CPC operations in 2022. Fitch views Kazakhstan as at relatively low risk of broad-based secondary Western sanctions given its banking sector compliance, and fall in re-exports to Russia this year.

ESG - Governance: Kazakhstan has an ESG Relevance Score (RS) of '5' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Kazakhstan has a medium WBGI ranking at the 42nd percentile, reflecting, a moderate level of rights for participation in the political process, moderate institutional capacity, moderately established rule of law and a moderate level of corruption.