Standard and Poor's revised up its outlook for Kazakhstan from stable to positive yesterday, as the government builds up assets from oil exports. But the rating agency warned on high credit growth and external borrowing in the banking sector.
Kazakhstan is expected to grow by 8.5% this year and 8.3% next year. A fiscal surplus of 1.2% of GDP, and low debt at 8.4% of GDP and falling, are the backdrop for the improved outlook.
Risks to the budget have been minimised by the accumulation of reserves in a $10 billion National Fund; the government’s track record of prudent fiscal and monetary policy; and a “tremendous” expected increase in oil output, which will “balance any significant shortfall in oil prices” said Luc Marchand, credit analyst at Standard and Poor’s.
Kazakhstan is set to increase oil production from around 1.2 million to 3 million barrels per day by 2012. The expansion in output, together with a tenfold increase in the capacity of the Caspian pipeline, the extension of the Baku-Tbilisi-Ceyhan pipeline to the Kashagan oilfield, and the new Kazakhstan-China pipeline, place oil exports on a “good growth trend” that will allow the country to “resist” Standard and Poor’s worst-case scenario: oil at $30 a barrel.
The government’s net assets are set to grow much faster than future liabilities, and its strong external position “more than compensates accelerated leverage in the corporate and banking sector... even if they need to bail out banks in a liquidity crisis”, said Marchand.
Kazakhstan’s banks are on a lending binge, taking advantage of low global interest rates to borrow from abroad, and lending to consumers in local currency, the tenge. Mortgages and personal loans collateralized with property are growing at 30 to 40% a year. A sharp correction in property prices could lead to a banking crisis, although Kazkommertsbank, the country’s largest, is exposed mostly to the profitable oil and gas sector and is supported by the government.
Marchand said that it was too early to say whether the National Bank of Kazakhstan’s new reserve requirement for foreign liabilities, raised to 8% compared to 6% for domestic liabilities, would discourage short-term external borrowing. He is also watching rapid growth in bank lending to Kazakh corporations that are investing in the rest of central Asia and the Caucasus.
However, “the potential damage of a crisis is not much compared to the government’s assets. A small crisis in the banking sector would be affordable.”
Institutional and governance weaknesses are the key constraints on an upgrade, added Marchand. Consolidated supervision is difficult as it is often hard to determine exactly who owns banks, and regulations that impose a real cost to banks that borrow externally are lacking.
Standard and Poor’s affirmed Kazakhstan’s BBB- long-term and A-3 short-term foreign currency ratings, and BBB long-term and A-3 short-term local currency ratings on Kazakhstan.