Fitch Ratings-London-08 January 2009: The impact of a weaker global macroeconomic outlook on commodity prices and intensified global financial market volatility have lowered the resilience of Kazakhstan's sovereign credit profile, according to a new Fitch Ratings report published today. The credit analysis report on Kazakhstan provides further background relating to the agency's 10 November 2008 downgrade of Kazakhstan's Long-term foreign currency Issuer Default Rating to 'BBB-' (BBB minus)/Negative Outlook from 'BBB'/Negative Outlook. "Kazakhstan's ratings remain supported by the sovereign's low public debt and net creditor status, reflecting previous prudent saving of energy sector revenues," said Andrew Colquhoun, Director in Fitch's Sovereigns Group. "However, these strengths are likely to be eroded by lower commodity prices and by deployment of sovereign resources to support the domestic economy and banking sector, which are going through a sharp slowdown, adding to downward pressure on Kazakhstan's ratings and warranting a Negative Outlook." Fitch estimates that Kazakhstan's GDP growth will be 2.5% in 2008 and 1% in 2009, down sharply from an annual average 9.6% between 2003-2007. The economic boom to 2007 was fuelled by strong credit expansion, as the bank credit/GDP ratio rose 37pp to 62% during 2003-2007. The credit boom was partly financed by heavy foreign borrowing. The onset of global financial market turmoil in the summer of 2007, however, left Kazakhstan's private sector struggling to service external debt that had reached 96% of GDP by June 2007, or a still-high 62% even excluding intercompany debt. Credit growth had slumped to 4% y-o-y by October 2008, down from a peak of 109% in June 2007. Kazakhstan's authorities responded to this shock by pegging the currency, the tenge, at around 120 to the US dollar to prop up confidence in the financial system. This strategy was supported by high energy prices through to mid-2008 which boosted sovereign energy revenues and reserves. Fitch's expectation of a global recession in 2009 implies that energy prices are likely to remain weaker over the forecast period, in turn implying slower growth of sovereign assets. Fitch expects oil prices to average USD60/barrel in 2009, down from USD97 in 2008. Intensified global capital market volatility since September 2008 is also likely to make it harder for private sector borrowers in Kazakhstan to refinance an estimated USD14bn debt falling due in 2009. Bank asset quality has deteriorated sharply as economic growth has slowed, with the non-performing loan ratio rising to 7.6% in October 2008 from 3% a year before on one official measure. The sovereign has already pledged USD10bn from the National Fund (oil savings fund), representing some 6.6% of projected 2008 GDP, to help recapitalise the country's banks and to support real activity. Nevertheless, the agency projects that the sovereign's net foreign asset position will equate to 25% of GDP at end-2008, well above the projected end-2008 'BBB' median of 2%. Fitch expects Kazakhstan to remain a net sovereign creditor over the forecast period, supporting its sovereign ratings. However, a harder landing for the economy than Fitch currently projects could lead to calls for more sovereign support, which could potentially cause a further erosion in rating support from strong public finances beyond the degree projected. The full report, entitled "Credit Analysis on Kazakhstan", is available on the agency's subscriber website, www.fitchresearch.com .