Dagong Upgrades the Credit Rating Outlook of the Republic of Kazakhstan to Stable
Dagong Global Credit Rating Co., Ltd.
November 15, 2017
Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) has decided to upgrade the credit rating outlook of the Republic of Kazakhstan (hereinafter referred to as “Kazakhstan”) to stable while maintaining its local currency sovereign credit rating at BBB and its foreign currency sovereign credit rating at BBB-. Its economic stimulus plan and structural reform have both aided Kazakhstan in developing its economy. The expansionary fiscal policy is weakening; fiscal deficit in the medium and long term is decreasing; the government’s debt structure is rational; and foreign exchange reserves are relatively sufficient. Therefore, government solvency in local and foreign currency is stable.
The key reasons for upgrading the sovereign credit rating outlook of Kazakhstan are as follows:
1. The debt repayment environment is stable across the board. For a long time, president Nazarbayev and his party “Nur Otan” have enjoyed a solid ruling position. The stable political situation at home can guarantee the continuity of government policy to promote infrastructure construction, enhance privatization and improve people’s livelihood, and many others. De-dollarization in the financial system has yielded remarkable achievement, while the proportion of foreign-currency-denominated savings declined from 69.0% at the beginning of 2016 to 50.0% in September of 2017, thus demonstrating greater independence of the central bank’s monetary policy.
2. Improvements in domestic and external demand have increased the country’s wealth creation abilities. In the short term, the Nurly Zhol program will boost infrastructure investment, while prices of global crude oil and metal will stabilize and the Kashagan oil field’s increase in production will expand export. It is expected that in 2017 and 2018, Kazakhstan’s economic growth rate will amount to 3.3% and 2.8%, respectively. In the medium and long term, abundant energy and mineral resources give certain potential for the country’s economic growth. The Eurasian Economic Union and the Belt and Road Initiative will expand international market space for Kazakhstan and promote the development of non-oil sectors, such as logistics. Kazakhstan’s economic growth will average 3.5% in the medium and long term.
3. Fiscal deficit is within the controllable range and debt repayment resources are more stable. In the short term, the government bailout program for banks causes the general government fiscal deficit to rise by 2.4 percentage points to 6.5% in 2017. However, the government delaying spending and controlling non-oil deficit will cause the fiscal deficit in 2018 fall to 2.0%. The Sovereign Wealth Fund and multiple sources of external assistance will provide essential support to debt repayment resources.
4. In the medium term, the government debt burden will see a slow decline with stable solvency. In 2017, a widening deficit will cause the general government debt burden to rise by 3.3 percentage points to 24.3%. However, benefitting from steady economic growth and narrowing fiscal deficit, government debt will enter into the downward channel in 2018. It is expected that 2018 will witness the general government debt burden fall to 24.2%. This, combined with the fact that most of the debt is long-term liabilities and debt repayment sources are sufficient, renders solvency in local currency stable. The second quarter of 2017 saw Kazakhstan’s total external debt stand at 125.6%. In the short term, the current account deficit will narrow, foreign currency financing needs will decline, and foreign exchange reserves will be sufficient to cover principal and interest payment as well as current account deficit, which renders government solvency in foreign currency stable.
The reasons accounting for maintaining Kazakhstan’s local currency and foreign currency sovereign credit ratings are as follows: firstly, although the country’s political situation is stable, Kazakhstan is threatened by terrorism and geopolitical risks. Secondly, under the expansionary monetary policy, banks’ non-performing loans ratio continues to be at a high level, thus asset quality is yet to improve. Thirdly, its singular industrial structure and underdeveloped private sectors are not favorable to the country’s economic development in the long term. With all discussed above, Dagong will continue following any changes in Kazakhstan’s rating factors and risks, and thereof make corresponding adjustments if necessary.