International Credit Rating on the Republic of Kazakhstan
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??? 2003. Long-term local and foreign currency ratings raised to ‘???-/??+’; short-term local currency rating raised to ‘?-3’; outlook stable.
June 2002. Outlook revised to positive from stable.
May 2001. Long-term local and foreign currency ratings raised to ‘??+/??’.
July 2000. Long-term local and foreign currency ratings raised to ‘??/??-’.
December 1999. Outlook revised to stable from negative.
September 1998. Long-term local and foreign currency ratings lowered to ‘??-/?+’.
November 1996. ‘??+/?’ local currency and ‘??-/?’ foreign currency ratings assigned; outlook stable.
Default History Since 1975
The ratings on the Republic of Kazakhstan remain constrained by:
• The highly centralized and opaque nature of governance, along with weak institutional and legal systems. This renders policy-making less predictable than in similarly rated countries. However, over the past few years, the Kazakh authorities have shown ? consistent commitment to market reforms and prudent fiscal and monetary policies.
• ? weak, albeit strengthening, economic structure characterized by low per capita income (estimated at $1,914 this year) and large regional development disparities, as well as slow enterprise restructuring outside the oil and gas sectors. Looking ahead, significant growth and exports in the oil and gas sectors will, however, ensure strong per capita income growth over the next few years.
The ratings on Kazakhstan are supported by:
• The persistence of prudent financial policies, which limit deficits and inflation, and are strengthening already robust economic prospects. The general government in 2003 is expected to record ? small surplus of about 1% of GDP before tax revenue transfers to the National Fund (? deficit of about 2% after the transfers). General government debt is projected at ? manageable 14.2% of GDP at year-end 2003, and will remain broadly stable over the next few years. Macroeconomic stabilization should continue, with price growth estimated at 6.4% and economic growth at about 8.6% in 2003.
• The decreasing vulnerability of the economy and budget to external shocks. On the back of continuous increases in investment, production, and export capacities in the oil and gas sectors, Kazakhstan is able to post high potential growth and low deficits even in the face of low oil prices. Even in the event of ? fall in oil prices to $12 per barrel for ? period of one year, trend growth would remain higher than 4% in real terms, and the general government deficit would not reach more than 2%-3% of GDP (after transfers from the National Fund).
• ? strong external position. On the back of reimbursements, continued economic growth, and ensuing resource-based tax revenues, public sector net external assets are expected to reach about 34.0% of current account receipts by 2004, compared with an estimated 28.4% this year. External liquidity remains high, on the back of low current account deficits, low net external debt, and very high net foreign direct investment (FDI) inflows. The current account deficit, at about 0.3% of GDP in 2003 compared with 2.5% in 2002, is expected to decrease further on the back of moderating import growth and strengthening exports, especially of oil and gas. Furthermore, these deficits continue to be comfortably financed by FDI inflows of about 6%-7% of GDP annually.
The stable outlook balances the expected strengthening of Kazakhstan’s external position and continued fiscal prudence, which should keep general government debt at ? moderate level, against sluggish institutional and structural reforms. Progress in political liberalization, improvements in the business environment, and an acceleration of structural reforms - including the development of nonresource-based sectors and the privatization of large-scale companies- would be positives for the country’ s credit standing.
• Kazakhstan’s very low net public external debt and its net general government asset position compare very favorably with ‘??’-rated peers.
• With regard to macroeconomic stability, Kazakhstan compares favorably with most ‘??’- rated peers and is now on ? par with other rated transition countries.
• Kazakhstan continues to compare poorly with peers in terms of political liberalization.
• Problems of enterprise restructuring, financial discipline, and low per capita income are still more pronounced in Kazakhstan than in higher-rated transition economies. However, high net FDI inflows should help to restructure the economy, as well as underpinning ? more robust external liquidity position than most ‘??’-rated peers.
Kazakhstan boasts much stronger external and fiscal indicators than peers.
The ratings on Kazakhstan are mainly supported by its comparatively strong external and fiscal positions. Net public external debt has decreased sharply, with Kazakhstan expected to post ? net asset position of 28.4% of current account receipts (CARs) in 2003, compared with ? net debt position of 17.4% in 2000. This compares favorably with the ‘??’ median (net external debt of about 37.5% of CARs) and the ‘???’ median (net assets of 8% of CARs) for 2003 (see chart 1).
The Kazakh government’s borrowing requirements have been lower-than-average for its peer group, on the back of ? much stronger macroeconomic performance and more prudent fiscal policies than in many other ‘??’-rated countries. Kazakhstan’s general government debt decreased to 15.3% of GDP in 2002 and 14.2% in 2003, which is considerably lower than the ‘??’ median (55.5% and 49.6%, respectively). As ? result, the ratio of interest payments to general government revenues, at 4.1% in 2003, is lower than the ‘??’ median (11.7%). Moreover, Kazakhstan’s general government is expected to post ? surplus of 1.1% of GDP this year before tax revenue transfers to the National Fund (or ? 2.0% deficit after the transfers), which is better than both the ‘??’ median (2.7% deficit) and the ‘???’ median (2.8% deficit).
Kazakhstan’s successful macroeconomic stabilization stands out.
Overall, Kazakhstan’s stabilizing inflation; burgeoning production, export, and investment trends; and economic growth (expected at 8.6% in 2003) compare very favorably with its peers. The ‘??’ and ‘???’ medians for GDP growth are expected at 3.5% and 4.1%, respectively, in 2003 (see chart 2).
Average per capita GDP growth in Kazakhstan has been at least three times the ‘??’ median and at least twice the ‘???’ median for the past five years. This is not only due to higher oil prices, but also to higher oil and gas export volumes, fuelled by increased production and export capacities, mostly on the back of FDI.
Prudent financial and fiscal policies have made this growth more sustainable and underpinned ? much more successful macroeconomic stabilization than in some other rated transition economies, including the Russian Federation (foreign currency ??/Stable/?), the Republic of Romania (foreign currency ??-/Positive/?), and the Republic Bulgaria (foreign currency ??+/Stable/?). In particular, inflation in 2003 is expected to remain at ? much lower level in Kazakhstan (6.4%) than in Russia (12.5%) and Romania (17.5%). Inflation in Kazakhstan is comparable with that in Bulgaria (5.8% in 2002 and 3.2% in 2003), but with stronger GDP growth (5.0% in Bulgaria compared with 8.6% in Kazakhstan) (see chart 3).
Kazakhstan performs poorly on political factors.
Due to the still highly centralized nature of its political system, risks associated with leadership succession and transition weigh more heavily on Kazakhstan than on most of its peers - including the Republic of Costa Rica (foreign currency ??/Negative/?), the Kingdom of Morocco (foreign currency ??/Stable/?), and the People’ s Republic of China (???/Positive/?-3), where the most recent leadership succession proved smooth - although the higher-rated Republic of Tunisia (foreign currency ???/Stable/?-3) faces comparable risks. This renders policy-making less predictable than in similarly rated countries.
The succession issue is the main constraining factor affecting Kazakhstan’s credit standing, and, although it has not yet led to instability, it is likely to remain ? constraint at least until the end of the current presidential term in 2006. This factor is compounded by the fact that any succession would take place against the background of an economy with very low incomes and wide regional and sectoral disparities.
Nevertheless, some of the current institutions function well, such as the key economy and finance ministries, the Council of Foreign Investors, and the National Bank of Kazakhstan (NBK). In addition, for the time being, the opposition is relatively weak, while the elite in place is relatively stable. As ? result, the government’s ability to respond to domestic and external shocks is not expected to become impaired by political instability, in contrast to the Republic of Ukraine (?/Stable/?) and the Islamic Republic of Pakistan (foreign currency ?/Stable/?).
Structural weaknesses persist, but resources and FDI promise fast income growth.
Kazakhstan’s economic structure continues to suffer from weaknesses, especially when compared with higher-rated transition economies. The economy remains narrowly based and dependent on commodities, and, as such, it is vulnerable to external shocks, similar to Russia, Morocco, and Costa Rica, which export significant volumes of commodities sensitive to international price fluctuations. In addition, Kazakhstan remains ? poor country, with ? GDP per capita, estimated at $1,914 in 2003, that still compares unfavorably with the ‘??’ median ($2,245).
Nevertheless, due to its important natural resources and small population (about 15 million), Kazakhstan’s per capita income will rise quickly, provided resources are exploited effectively and new export routes are secured.
In turn, this depends crucially on FDI inflows. Despite controversial changes to investment legislation in 2002, FDI is expected to remain high. Inflows reached about 8.5% of GDP in 2002 and are expected to remain at 6.0%-7.0% of GDP at least in the coming years. In this respect, Kazakhstan’s track record is significantly stronger than that of all sovereigns in the ‘??’ and ‘???’ categories apart from the Republic of Trinidad & Tobago (foreign currency ???/Stable/?-2; 6.5% in 2002) and the Slovak Republic (foreign currency ???/Positive/?-3; 17.1%) (see chart 4).
In 2003, official reserves are expected to cover 96.2% of the country’ s external financing gap (see chart 5), compared with 62.4% in 2002 (209% compared with 116%, respectively, if net FDI is excluded). This coverage ratio is comparable with the ‘??’ median, and much stronger than the median if net FDI is excluded from the external financing gap.
• President Nursultan Nazarbayev maintains ? firm and virtually unchallenged hold on power, which promises policy continuity as long as he remains in power. However, the lack of transparency in policy-making remains key rating constraints.
• Policy remains based on limited political liberalization, but ? strong commitment to market reforms.
• Relations with international organizations are being strengthened, but accession to the World Trade Organization is still ? long way off. The government seeks to maintain good relations with the U.S., Russia, and other neighboring countries, through security agreements and/or support for the main oil-related investment projects.
The highly centralized nature of the Kazakh political system and risks associated with leadership succession and transition weigh heavily on Kazakhstan’s credit standing. This is somewhat balanced, however, by ? number of well-functioning institutions, cultural factors, and limited external security risks.
? highly centralized decision-making process.
The still highly centralized nature of the Kazakh political system, the lack of transparency in policy-making, and uncertainties over political succession and transition weigh heavily on Kazakhstan’s credit standing. The 1999 general election resulted in ? comfortable majority for both Mr. Nazarbayev - reelected for another seven-year term - and his supporters in the lower house of parliament. The president, currently in his early sixties, maintains ? firm and virtually unchallenged hold on power, which promises policy continuity as long as he remains in power.
? new opposition group, Democratic Choice of Kazakhstan, was created in November 2001, but is not expected to form ? strong opposition any time soon. No opposition group is expected to gain ? significant number of seats in the October 2004 elections to the lower house.
Stabilizing institutional and cultural factors.
Nevertheless, some of the current institutions function well, such as ? number of ministries (economy, finance), the Council of Foreign Investors (which has been able to manage the relationship between the president and foreign investors), and the NBK (with its long track record in establishing ? clean and stable financial system). As ? result, Standard & Poor’s does not expect the government’s ability to respond to domestic and external shocks to be impaired by political instability.
Specific aspects of Kazakh political culture also contribute to the current stability. Political fault- lines are determined less by economic policy programs than by the cross-cutting of different elite allegiances - to tribal groups (the three ‘Hordes’), linguistic communities (with ethnic Russians accounting for 30% of the population), and large business groupings with vested interests. The resulting mosaic of interlocking interests is broadly in balance.
Despite the succession risk after the next presidential election in 2006, the stability of the system should be preserved under reasonable stress scenarios. Even in the event of ? sudden leadership succession, the Kazakh elites are well trained and able to assume power.
Reforms are sustained, but their pace fluctuates.
The government’s continued commitment to market-oriented reforms, as well as improved confidence in the banking sector and an increasing deposit base, should deepen the financial system and bolster economic growth. Nevertheless, willingness to accelerate reforms fades somewhat when oil windfalls rise. This has sometimes resulted in ? degree of economic nationalism, with the authorities pushing foreign companies to hire locals and source supplies from local companies (import substitution program), and the government recently deciding to renationalize Air Kazakhstan.
External security risks contained through cooperation with the West, the ClS, and China.
Kazakhstan’s relations with the U.S. have not been materially affected by the war in Iraq, with Kazakh diplomats keeping their distance vis-?-vis U.S. external policies while continuing to collaborate actively with U.S. diplomats, economic advisors, and businesses (notably the oil companies). External security risks arising from neighboring countries are considered low, and have been further pre-empted by the bolstering of Kazakhstan’s borders with the assistance of both Russia and the U.S. There are Islamist insurgents in Central Asia, but they operate mainly in Uzbekistan and Tajikistan, and do not pose ? material security threat to Kazakhstan. In addition, ? number of bilateral agreements has recently been signed with almost all littoral states regarding the division of the Caspian seabed. Finally, following the finalization of the border with China in 2002, cooperation with China has become very active, strengthened by ? number long-term projects.
• The economy will continue to grow by ? high 8.6% in 2003 and 6.3% in 2004, driven by ? solid revival in domestic demand and strong output across all sectors.
• Continued prudence in economic and financial management will help to keep inflation under control, lower real interest rates, and increase confidence and private investment.
• Despite improvements, the contribution to growth of non-resource-based industries remains weak, highlighting the need for restructuring and/or liquidations. ? small population and large FDI inflows will, over time, overcome some of the economy’s structural weaknesses.
Kazakhstan’s economy continues to be characterized by low per capita income (estimated at $1,914 in 2003) and large regional development disparities, as well as slow enterprise restructuring and low financial discipline outside the oil and gas sectors. Loss-making enterprises (mostly public), however, affect only ? limited number of economic sectors and regions, and are not expected to place ? significant burden on GDP growth. Moreover, ? number of key sectors (oil, gas, metals, construction, and finance) are experiencing an extremely rapid transformation, which, coupled with large and sustained FDI inflows, has the potential to reduce some of the economy’s structural weaknesses. In particular, significant growth and exports in the oil and gas sectors will ensure ? strong increase in per capita income over the next few years.
The continuation of prudent fiscal and monetary policies will be sufficient to ensure Kazakhstan’s macroeconomic stability in the next few years, but Standard & Poor’s considers that the significant problems in the corporate sector need to be addressed soon to ensure long-lasting growth and financial stability. Net enterprise arrears decreased by 40% from November 2001 to November 2002, and now only represent 1.6% of GDP (compared with 6.0% in December 2000). The new bankruptcy law introduced in J?nu??? 1999, however, remains relatively ineffective, and the protection of shareholders’ rights is still weak, although the number of companies in liquidation increased sharply in 2002. There also remain significant pitfalls in the business environment, such as the inefficiency of property rights, corruption, and ? lack of coordination between different levels of administration, resulting in high volumes of red tape.
Although oil prices are again expected to fall in the second part of 2003, rising oil production and export capacity (see table 2) will boost Kazakhstan’s nominal exports by about 14.3% in 2003. Domestic demand will also be boosted in 2003 by an expected increase in real monthly wages (9.0%), increased profits, and decreasing real interest rates in ? lower-inflation environment. Domestic demand is expected to rise by 10.4% in 2003 and about 7.6% in 2004, while GDP growth is expected to be more than 8.6% in 2003 and about 6.3% in 2004. As population growth is slow, per capita GDP is expected to increase by at least 4 % on average.
Looking forward, growth prospects are improving further, on the back of pipeline upgrades, new pipelines, and production at new oil and gas fields. In 2005-2006, The Caspian Pipeline Consortium (CPC) pipeline will be nearing completion, with ? capacity of about 38 million tons per year, and the Kashagan offshore field will come on stream. An estimated 400,000 barrels per day are expected to be exported from the Kashagan field through the Baku-Tbilisi-Ceyhan pipeline by 2007. This should more than balance any negative effect on the trade balance from possible further falls in commodity prices. It should also enable Kazakhstan to reduce its dependence on CPC and Transneft pipelines, which all transit via Russia.
Overall, Standard & Poor’s estimates that, even in the event of ? fall in oil prices to $12 per barrel for ? period of one year, trend growth would remain higher than 4% in real terms. Persistently low oil prices (below $15 per barrel) would have ? negative impact on volumes produced and exported, but such ? scenario is considered extremely unlikely by Standard & Poor’s.
• The general government balance is expected to post ? surplus of 1.1% of GDP in 2003 (before transfers to the National Fund). The National Fund is expected to reach more than 2.9 billion dollars in 2003.
• Going forward, the government balance-partly insulated by automatic transfers from the National Fund in the event of lower-than-expected oil prices — should, at most, post small deficits under 2%-3% of GDP (after transfers from the National Fund).
• General government debt remains moderate, at about 14.2% of GDP in 2003, and the public sector as ? whole will be in ? net asset position of about 12.8% of GDP this year.
• Off-budget and contingent liabilities are limited, as nonperforming loans are decreasing and the large public enterprises are profitable.
Revenue, expenditure, and balance performance.
After ? surplus of 2.6% of GDP in 2002, the general government will again post ? surplus in 2003, albeit lower at an estimated 1.1% of GDP (? 2% deficit after transfers to the National Fund), with the government choosing to spend tax windfalls rather than continuing to accumulate assets.
In April 2003, the government announced new, much higher than initially targeted, oil price and GDP growth assumptions (GDP growth of 8.3% instead of 6.3%, and an oil price of at least $26.7 per barrel instead of the budgeted $21.2). The tax windfall expected in 2003 will be entirely balanced by ? significant upward revision in budgetary expenditures of about 65 billion Kazakhstan tenge (KZT) ($0.4 billion; 1.5% of GDP). Overall, despite the important increase in expenditures, the original target for the 2003 general government deficit 2.2% of GDP excluding privatization receipts and after transfers to the National Fund - will easily be achieved (see chart 6).
Despite oil price volatility and government plans to accelerate tax cuts in 2004, the budget deficit should remain moderate. The National Fund will also reduce revenue volatility by smoothing resource-based tax revenues. The fund accumulated net inflows in 2001-2002 and is expected to reach at least $2.9 billion in 2003 (about 10.3% of GDP). The effects of lower-than-budgeted oil prices would be automatically offset by transfers from the fund back to the budget, keeping the deficit under 2%-3% ?f GDP.
Nevertheless, latent upward pressure on government expenditures is still present. The program 2003-2005 focuses on rural areas and totals KZT150 billion. Standard & Poor’s expects these expenditures to be largely financed by projected revenues (see Economic Prospects) and, if necessary, transfers from the National Fund. The government also has ? contingency plan to reduce investment outlays if needed.
The privatization program 2003-2015 is likely to remain modest for large companies. For example, the sale of ? 30% government stake in Kazakhtelekom has again been postponed, although it is essential ahead of the complete liberalization of the sector expected in 2005. Several large companies were scheduled to be privatized in 2002, but without significant success. Finally the total receipts included the previously sold remaining stakes in Halyk Bank. Nevertheless, privatization revenues in 2003, projected at KZT26.5 billion ($165 million) or 0.6% of GD?, will be higher than in 2002 ($125 million; 0.5%), and should include ? 25% stake in oil joint venture CNPC-Aktobemunaigaz, as well as the privatization of Kazakhmys (copper producer).
Debt and interest burden.
The government reduced its external debt by fully reimbursing ? $350 million Eurobond due at year-end 2002. The borrowing requirement in 2003 is expected to remain moderate, at only KZT63 billion (1.4% of GDP), and will mainly be financed through domestic issues.
Overall, general government debt is expected to decrease slightly in 2003-2004, to ? modest 14.2% of GDP (see chart 7). Although 79% of the total debt expected in 2003 is denominated in foreign currency, the bulk of it is medium- and long-term, with ? significant part held by residents (including more than 50% of the $650 million in outstanding Eurobonds held by pension funds). The ratio of interest payments to general government revenues should remain modest, at 4.1% in 2003 and 2004.
Including National Fund assets, the public sector was, for the third consecutive year, in ? net asset position in 2003 (12.8% of GDP). The public sector net asset position is expected to reach about 13.1% of GDP in 2004.
Off-budget and contingent liabilities.
The impact of the 1999 devaluation on the Kazakh banking system turned out to be limited, with banks taking advantage of the growing economy, ? continued increase in confidence among depositors, more sustainable credit growth, and growing oil and gas enterprise profits. Rapid economic growth has sharply increased demand for credit, but the system remains robust and will benefit from strict, improved supervision by the NBK (? new law authorizes the NBK to supervise banks on ? “consolidated basis”). Total nonperforming loans decreased to 28.7% of total credits in 2002, against 31.0% in 2001. In ? reasonable worst-??se scenario, Standard & Poor’s estimates gross problematic assets in the banking sector in the event of financial system stress at 35%-50% of domestic credit to the non-government sector. However, the resulting contingent liability is only 7%-10% of GDP.
• Tight monetary policy has stabilized inflation and preempted appreciation of the tenge, while maintaining high confidence in the currency. As ? result, external competitiveness, which improved after the 1999 devaluation, has been preserved.
• Large capital inflows increasingly present monetary policy with conflicting objectives-price stability, on one hand, and the maintenance of competitiveness and build-up of currency reserves, on the other. This recently led the NBK to accelerate the ongoing liberalization of the exchange rate in order to prevent significant real appreciation going forward.
Tight monetary and fiscal policies will further lower inflation and stabilize the tenge.
The NBK has successfully brought inflation below 6% (5.9% average in 2002) by containing monetary growth and using base money as its key intermediate target (see chart 8). The government is using the fledgling treasury bill market to ensure noninflationary financing of the budget deficit, while the NBK is developing open-market operations to control reserve money. The NBK’s intended introduction of inflation targeting is now credible, although it is still too early to implement this, as ? more stable relationship between monetary aggregates (base money) and prices is needed. The expected slight increase in inflation to an average of 6.4% in 2003 will maintain ? high refinancing rate, at an expected 7.0% by year-end 2003. The growth rates for base money and broad money are still high, but this is indicative of increased monetization rather than ? sign of accelerated inflation. ? slow decrease in inflation is expected in 2004-2006, especially on the back of the strong value of the tenge. However, high economic growth is expected to prevent ? more rapid decline in price growth.
Reserves to rise, currency to continue undergoing controlled depreciation, despite liberalization.
Lower inflation and NBK interventions permitted ? very slow depreciation of the currency in 2002. The real effective exchange rate followed the same trend, showing ? slight improvement of competitiveness in 2002. Net international reserves increased significantly, to about $2.5 billion at year-end 2002. The prospects for further increases in reserves are very favorable, due to increasing trade surpluses. In Standard & Poor’s view, if the government maintains its strong commitment to tight fiscal and monetary policies, the tenge should depreciate very slowly at about 1%-1.5% per year.
Exchange rate policy.
Although the exchange rate is supposed to be floating, in practice it is nominally anchored for the conduct of monetary policy. The NBK has shown only one-way flexibility: it has allowed the tenge to depreciate gradually, but not to appreciate (at least not significantly). In 2002, the NBK ensured ? nominal depreciation of the currency by purchasing dollars on the domestic market. Without such sterilization, the exchange rate would have appreciated, putting pressure on external competitiveness, especially with respect to the Russian ruble. The NBK’s interventions are consistent with the preservation of external competitiveness and ? build-up of reserves.
In response to the growing tension between NBK objectives (inflation versus competitiveness), the authorities have decided to make the currency more convertible. Convertibility applies to all current account transactions (following IMF Article VIII definitions) and some capital transactions, notably capital repatriation by foreign investors and borrowing abroad by Kazakh companies. In March 2003, the lower house of parliament approved ? bill liberalizing the country’ s legislation on banking and on currency regulation and control. The adoption of the bill will significantly reduce administrative controls on foreign exchange operations, but liberalization of the capital account remains ? slow process.
• Kazakhstan’s external liquidity has increased over the past 12 months, and remains robust on the back of high foreign currency reserves ($3.7 billion expected in 2003).
• Due mainly to higher oil prices, and ? sustained increase in oil and gas export volumes, the current account is expected to post ? deficit of 0.3% of GDP in 2003, compared with 2.5% in 2002.
• As ? result, the ratio of net external debt to current account receipts is expected to fall to about 18% in 2003, and 11% in 2004.
The current account will post ? small deficit of 0.3% of GDP in 2003 (see chart 9). On the back of higher export prices and increased oil output and export capacities, merchandise exports will rise by about 14.3% in 2003 and 1.8% in 2004 in dollar terms. These trends are further supported by Kazakhstan’s trade reorientation toward non-CIS countries (which now account for 77% of exports), the improved economic prospects in the country’ s major CIS markets, and the maintenance of high external competitiveness since the 1999 devaluation of the tenge (see Monetary Policy).
The country continues to enjoy high external liquidity, due to low current account deficits, the accumulation of foreign exchange reserves, the government’s policy of repayment of its external debt, and ? decrease in the government’s net borrowing requirement. The ratio of official reserves to the external financing gap (current account deficit, long-term principal amortization, and short- term debt) increased to 62.4% at year-end 2002, from 57.0% in 2001. Subtracting net FDI inflows from the external financing gap, the ratio of reserves to the financing gap is estimated at 116% in 2002 and forecast at more than 209% in 2003.
Assuming ? fall in oil prices to about $22 per barrel and further export volume growth (see Economic Prospects), current account deficits are expected to decrease in the next few years. In ? reasonable worst-??s? scenario, assuming ? fall in oil prices to an average of $12 per barrel for ? period of one year, the current account could post ? deficit of about 3.5% of GDP. Even in this ??s?, such deficits are manageable at this stage of Kazakhstan’s development, given the country’ s moderate external debt burden and high FDI inflows. Finally, the capital account continued to show ? sizable surplus in 2002 (4.7% of GDP), on the back of substantial net FDI inflows ($2.1 billion).
Public sector external debt.
In 2003-2004, non-FDI external financing will continue to consist mostly of private sector borrowing, with the share of public financing decreasing gradually. Public sector borrowing will be dominated for some time by official loan disbursements, particularly from the World Bank, the European Bank for Reconstruction and Development, and the Asian Development Bank. Due to the repayment of an IMF credit in 2000-along with the full repayment of the $350 million Eurobond in 2002 without refinancing, and an expected increase in National Fund assets-the public sector will post ? net external asset position of about 28.4% of current account receipts (CARs) in 2003, from ? net external debt position of 1.2% in 2001.
Private sector external debt.
Kazakhstan’s gross external debt (excluding parent companies’ claims on subsidiaries) is expected to increase slowly to about $14.9 billion by year-end 2003, compared with $14.1 billion in 2002. This quasi-stability is mainly due to an expected decrease in the net external borrowing requirement. Total external debt remains limited and is estimated to account for about 17.5% of total external debt in 2003. Non-bank private sector net external debt remains limited to about 38% of CARs, and increasis in the debt are mostly due to inter-company loans. Financial sector net external debt remains limiyed to about 10.2% of CARs.
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