USD/KZT 443.16 
EUR/KZT 480.39 
 KAZAKHSTAN №5, 2014


Kazakhstan’s sovereign rating and situation in the banking system becomes once again the central topic of the Conference as of September 10, organized in Almaty by the Standard and Poor’s International Rating Agency. During the sessions, it became clear that S&P experts do not exclude that in the next two years, the Kazakhstan’s country rating may be degraded.


Senior Director of S&P’s Sovereign Ratings, Christian Esters declared about the possible revision of the rating. According to him, this is demonstrated by the forecast, which the Agency's analysts revised from "stable" to "negative" in June of this year. "This is an indicator that the rating can decrease in the next period- up to two years".

At the same time, the speaker explained that revising the country rating of Kazakhstan in a negative way doesn't mean that  it will drop in any case. "This decline can occur under certain conditions. We believe that the probability is about 30%. "

The expert mentioned few "trigger mechanisms" for the negative situation development. They are, firstly, the continued slowdown in economic growth, and secondly, the "limited effectiveness" of monetary policy. It is explained by the reduced confidence in the National Bank after the completed devaluation. "After that, we observe a temporary increase in the  inflation rate. We believe that, from this viewpoint, the monetary flexibility is more limited, compared with the other countries".

In addition, the restricting factors, retaining the Kazakhstan's sovereign rating are the weak institutions, risk of political instability and a high proportion of the commodity sector.  At the same time, the resumption of the operation in Kashagan field in 2016 could be a positive event for Kazakhstan, improving the functioning of capital markets and liquidity conditions, as well as reducing the economy’s dependence on the export of raw materials.

We remind that in June of current year, when S&P revised the Kazakhstan’s forecast, reconfirming ii as BBB +; the experts are quite sceptical about the prospects of the internal capital market, due to merger of the pension funds. At the same time, they focused on deterioration of the predictability of monetary policy and the monetary transmission mechanism effectiveness". Moreover, the analysts expressed some doubts about the capabilities of Kazakhstan to maintain GDP growth per capital at a level, higher than the performance of the countries with similar income levels (approximately $12 000 per year per person).

It is noteworthy that, according to the Agency, the Kazakhstan in 2 times ahead of China, but lags behind the developed economies and many oil-exporting countries in the Middle East. For example, GDP is approximately $60,000 in Kuwait and Saudi Arabia and their sovereign ratings are estimated as AA and AA-. 


What Supports Our Rating?                                      

Talking about the factors, supporting Kazakhstan’s sovereign rating, Mr.Esters specially mentions the significant reserves of natural resources. It remains the primary cause of “a strong fiscal position"of our Republic and the Government as a net creditor. According to S&P, the State budget will remain in surplus, even if the oil prices will go down to $ 65 per barrel. This is not the case for a number of other producing countries. For example, Bahrain’s budget is a deficit-free only at the price level of $ 130 per barrel.

The expert gave an interesting comparison, matching the level of our sovereign credit rating by S& P with the cost of Kazakhstani debt, measured by the markets with use of the tools like CDS. It turned out that the markets are more conservative than the Agency in assessing the debt as BBB and BBB-, i.e. one or two points below the S&P rating.

It is possible that such a noticeable difference is due to the fact that S&P is far more optimistic in assessing the positive factors and less pessimistic- when it comes to the negative factors, while the markets adopted a different approach. In particular, it is evidenced by the fact that following the deterioration of the country’s sovereign rating, the Agency did not degrade the ratings of Kazakhstani banks. Moreover, the ratings of Halyk Bank of Kazakhstan and Tsesnabank are even increased. Meanwhile, in the case of Russia, after decreasing its sovereign rating, S&P also downgraded the Russia's STB credit ratings. 

Like at the last year's Conference, the Agency's experts provided the estimates on Kazakhstan's main macroeconomic indicators- GDP and inflation. For example, they expect the slowdown in economic growth this year and the next one up to 4.5 %, with its further increase in 2016-up to 5% and up 6% in 2017.

Decline in GDP growth this year will be mainly due to lower oil production, relatively stable oil prices, as well as the overall situation in the region, including a slowdown in the Russian economy.

However, the Agency expects that in average, the real GDP growth in the next four years will amount to 5%, which is below the earlier forecast level. With regard to inflation, S&P forecasts it to be at the level of 10% in 2014 and 6%- in 2015-2017, respectively.


Banks are Trying to Catch Up

In the second part of the Conference, the Agency's analysts gave a detailed assessment of the situation in the banking area. The first thing they noticed was one interesting detail: while the ratings of national companies do not differ greatly from the sovereign ratings, the second-tier banks are quite retarded. S&P explains this fact that the probability of State support for the banks is lower than for the quasi- state companies.

And yet, this is not the only reason. For example, Yerkaterina Marushkevich, S&P Analyst for the Financial Institutions, emphasised that by assigning the verified ratings, S&P evaluates a number of the factors that influence the banking sector assessment. "For example, we see that the Kazakhstani banks do not provide the loans to the oil industry, however, the situation in the industry affects the sovereign rating of Kazakhstan. At the same time, the second-tier banks (STB) focused on the debt financing for less creditworthy industries, and therefore, the credit risks of the banking sector is higher".

It should be noted that, in general, our banking system belongs to the eighth category of the risk level of ten, designated by the S&P.  One of the main reasons for this negative assessment is the insufficient " regulator’s activities". Annette Ess, S&P’s Leading Analyst, explained how it is shown: "Although before the crisis the regulator tried to limit the external borrowings, they continued growing. Besides, no attempt was made to limit the growth of bad loans, and the Stress Asset Foundation had no right to buy back the problem loans, related to land and real estate for some time. As a result, there were just few projects, implemented by the Fund."  


Troublesome Capital

The Agency's analysts provided the detailed comments regarding National Bank’s plans to gradually increase the minimum capital requirement for the STB, increasing the level up to 100 billion KZT by 2019. According to Ms. Marushkevich, such measures will not necessarily lead to development of a "healthier" banking sector. She provided an example of the bank consolidation in Nigeria, where the number of banks decreased from 28 to 10 due to stricter requirements regarding the minimum capital amount. However, the model of very risky credit has not changed. As a result, during the last crisis, the State had to nationalize several Nigerian banks. In this connection, if Kazakhstan increased the capital requirements, this measure can not replace the reinforced approaches to borrowers’ underwriting  and risk management.

Ms. Marushkevich also noted out that a minimum level of capital, demanded by the regulator to be secured by 2019 by the banks, shall be equal to approximately $ 560 million (at the current rate), which is much higher than in comparable banking systems. "This level is too high. We analysed the developing markets and we found that there is no such requirement in other CIS countries. For example, Russia limited the amount to approximately $8 million, while in Kazakhstan the minimum capital equals to $ 50 million". 

As the expert says, Kazakhstan’s five largest banks have the capital level, already exceeding 100 billion, and the following six banks would meet this requirement "quite easily". Therefore, the issues regarding the capital adequacy “will be faced by a considerable part of the remaining players”.

According to Ms.Marushkevich, these banks will have three scenarios for consolidation. In first case, this will occur if the regulator decides to leave all the rights under a banking license, with no restrictions. In second case, the consolidation is possible with simultaneous refusal of certain options, for example, if they are related to the people’s money. In third case, some banks will abandon the market, if they come to conclusion that it is economically inefficient to meet the new requirements for the minimum capital requirements.


From Sceptical to Optimistic Attitude

It is remarkable that the absolute level of capital is not a decisive factor in a rating assessment for the S&P. As explained by Annette Ess, far more important issue for the Agency is still the ratio between the capital and risks taken, as well as the ability to absorb losses. However, the regulator’s requirement to reduce the level of bad loans under 15% by 2015 and under 10% by 2016 is perceived quite positively at the rating evaluation.

Interestingly enough, if until recent time the Agency was sceptical about the regulator’s ability to reduce the level of non-performing loans, now its position is  diametrically opposite. Now S&P believes that in the next 24 months we should expect the significant positive changes in the dynamics of low-quality assets and losses of the second-tier banks. According to Ms. Ess, this forecast of the Agency is based on the results of the meetings with the banks, rated by S&P. As their representatives say, they either already reduced the level of problem loans below 15%, or will do so before the end of the year. The banking institutions, which completed restructuring of their obligations, "have all the chances” to meet the requirements of the regulator.

The S&P’s optimistic forecasts are related to the introduced tax easing, as well as the intention of the Government of Kazakhstan to provide 250 billion KZT for the Problem Load Fund to reduce the non-performing loans. If these control measures and tax incentives, declared by the regulator will be effective, the loss rate of domestic banks will start declining in the area of lending. It is possible that this step will be sufficient for the Agency to place Kazakhstan’s banking sector from the adjustment stage to a full expansion. By the way, presently, along with our STBs, their Nigerian and Hungarian peers also undergo the adjustment. 


Sergey Zelepukhin


Table of contents
Crude Oil into Polymers  Sergey Gakhov 
Oil, Gas and Politics  Sergey Gakhov 
Downtrending   Sergey Zelepukhin 
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