NUR-SULTAN

Fitch Ratings has affirmed Kazakhstan’s long-term foreign-currency Issuer Default Rating (IDR) at ‘BBB’ with a Stable outlook.

“Kazakhstan’s ‘BBB’ IDRs reflect strong fiscal and external balance sheets that have been resilient to the coronavirus and oil price shocks, and financing flexibility underpinned by accumulated oil revenue savings,” Fitch said in a report.

“Set against these strengths are its high dependence on commodities, higher inflation, lower but improving governance scores and underdeveloped economic policy framework relative to ‘BBB’ peers.”

Large sovereign external buffers in the form of the state oil fund’s (NFRK) and central bank’s (NBK) external assets are a key rating strength for Kazakhstan.

Fitch said that combined external assets at the NFRK and NBK had declined marginally to $92 billion  or 47 percent of Gross Domestic Product (GDP) at the end of the first half of 2021, down from $94 billion at the end of the last year, but have been resilient to the 2020 pandemic and oil price shocks, supported by the strong investment returns and gold prices.

Sovereign net foreign assets are significantly larger than the current ‘BBB’ median (-2.3 percent of GDP), forecast to be 40 percent of GDP at the end of 2021 and to moderate slightly to 33 percent by 2023 as NFRK savings are used to support the economic recovery and oil receipts recover only gradually.

Tenge flexibility allowed Kazakhstan to absorb oil price volatility in 2020 while preserving external reserves. The tenge has moved broadly in line with the Russian rouble, remaining weak relative to rallying oil prices in recent months due to a surge in imports as consumption demand rebounded with recovering economic activity. The authorities engaged in direct forex interventions during periods of heightened currency volatility in 2020, and the NBK is an active participant in the forex market in its management of the NFRK’s conversion of fprex assets for state budget financing transfers.

Stronger oil prices and easing of OPEC+ production caps are narrowing the current account deficit, which Fitch forecast s at 0.7 percent of GDP, down from 3.7 percent in 2020 and in line with the current ‘BBB’ median at 0.6 percent.

Preliminary figures put the deficit at $1.7 billion in the first half of 2021 compared to $0.8 billion surplus in the same period last year, owing predominantly to the strong growth in non-food consumer goods imports partially offsetting strong oil receipts.

Fitch said it had expected the current account to continue improving in the second half of 2021 as stronger oil prices feed through with a lag, and to turn a small surplus of 0.3 percent of GDP in 2023 as oil production recovers.

Inflation is higher and slightly more volatile than peers, with a five-year average consumer price inflation rate of 6.8 percent in 2021, partially reflecting oil price volatility and the flexible exchange rate regime.

Rising global food and energy prices, rebounding consumer demand and imported inflation from Russia pushed annual inflation to 8.4 percent in July 2021.

“In the near term, the government is using administrative controls and working at improving domestic food supply, and we believe monetary policy is unlikely to prevent inflation rising further from the NBK’s 4-6 percent target in 2021-22 due to a relatively weak transmission mechanism,” Fitch said.

“We forecast inflation to average 8.5 percent in 2021 and 8.3 percent in 2022, before falling to 6.5 percent in 2023.”