Standard&Poor’s Global Ratings has confirmed its ‘BBB-/A-3’ long- and short-term foreign and local currency sovereign ratings on the Republic of Kazakhstan (outlook is stable) as well as its ‘kzAA’ national scale rating. One, however, should pay attention at how the experts report was phrased.

Looking at the text of the official S&P report, one can immediately see the challenges the experts faced when explaining their positions and phrasing their opinions on the real state of affairs in the Kazakhstan economy. They tried to fight these challenges with the use of some literary finessing. Therefore, we think it advisable to present our reader with a “translation” of the main conclusions of the S&P’s report (citations taken from the Nomad website publication).

S&P: “The stable outlook reflects our expectation that, over the next two years, there will be no further significant financial implications arising out of the dispute between the Kazakhstan authorities and external investors”.

Translation: the agency admits the possibility that the new significant demands within the dispute between the Kazakhstan authorities and foreign investors may arise.

S&P: “We could raise the ratings if, contrary to our expectations, recent political reforms materially strengthen Kazakhstan’s institutions”.

Translation: the agency does not believe that the recent political reforms in Kazakhstan will lead to a significant strengthening of the social institutions.

S&P: “We could also lower the ratings if previously destabilizing factors re-emerge, say if resident deposit dollarization were substantially increased or if our estimate of Kazakhstan’s trend growth rate (weighted average of real per capita GDP) were to fall much below the average growth rate for those sovereigns in the same GDP per capita category”.

Translation:  the agency admits the possibility of a substantial increase of the deposit dollarization level in the banking sector of the country.

S&P: “Despite the deterioration in Kazakhstan’s fiscal and external balance sheets following the freezing of $22.6 billion (13% of 2018 GDP) in the NFRK’s accounts, we expect Kazakhstan to remain in relatively strong net general government debt stock and net external asset positions on average through to 2021”.

Translation: the agency believes that Kazakhstan’s fiscal and external balance sheets have deteriorated after the freezing of $22.6 bln in the NFRK’s accounts.

S&P: “The ratings remain constrained by our view that future policy responses may be difficult to predict given the highly centralized political environment; Kazakhstan’s moderate level of economic wealth; and remaining challenges to monetary policy credibility, such as our perception that central bank independence is limited”.

Translation: the agency notes that there is a low-level predictability of the future political decisions in Kazakhstan due to the highly centralized political environment; problems affecting the trust to the monetary policy remain while the central bank’s independence stays limited.

 S&P: “At present, we continue to view the government’s relatively strong balance sheet as a key factor supporting our ratings. We estimate general government liquid assets at 21% of GDP in 2018; including the frozen assets, the ratio would rise to 33%”.

Translation: the agency registers that the low state debt and the existence of the NFRK assets are the crucial positive rating factors, therefore, it is they and not the successes of the economic and social reforms that are responsible for the current rating of Kazakhstan.

 S&P: “The Kazakhstan authorities recapitalized the banking system in the second half of 2017. In our fiscal projections, we have taken into account what we believe are the material fiscal costs associated with the recapitalization. The government’s 2017 budget included an increase in spending in relation to a recapitalization of the distressed asset fund, the Stability Fund of Kazakhstan (SFK), amounting to 4% of GDP, to allow the fund to purchase a nonperforming loan (NPL) that Kazkommertsbank (KKB) had provided to BTA Bank. The removal of this loan from the bank’s balance sheet reduces our estimate of problem loans to about 25%-30% of the banking sector’s loan portfolio. We do not expect the authorities’ recapitalization program to be sufficient to significantly improve banks’ ability to act as credit intermediaries”.

Translation: the agency believes that, after paying the nonperforming loan provided to BTA Bank by Kazkommertsbank and removing it from the balance sheet, the volume of the nonperforming loans in the republic’s banking system is twice higher than the one officially declared. The agency also does not expect that the already implemented recapitalization program of another five banks will allow to significantly increase the economy financing.

S&P: “We expect a new tax code to increase revenues by about 3% of GDP over the period to 2021, indicating a higher level of fiscal flexibility than many of Kazakhstan’s peers. The tax code update presents an opportunity to reduce distortions and raise revenues by rationalizing exemptions and preferential treatments, thus broadening tax bases and supporting fiscal consolidation. Changes include increases in excise taxes, expansion of the value-added tax system, and amendments to natural resource taxation”.

Translation: the agency expects the effective tax burden to increase due to the improvement of the tax agencies’ performance and the decrease of the number of the tax payers who are freed from taxes or have a preferential tax treatment.

S&P: “In our view, the NBK’s switch to a more freely floating exchange rate and inflation targeting in 2015 has resulted in subsequent exchange rate adjustment and has eased accumulated external pressure. However, our assessment of monetary flexibility remains constrained by the still relatively short track record of the float. We note that the NBK’s exchange rate policy allows for interventions to prevent dramatic fluctuations of the tenge exchange rate and to ensure financial stability. …Challenges to monetary policy credibility remain, in our view, including excess tenge liquidity in the context of moderate bank lending growth”.

Translation: the agency and the market continue to distrust the policy and the actions of the National Bank.

S&P: “Nevertheless, we note that inflation has fallen from double-digit rates in 2016 to within the NBK’s 6%-8% target band for annual inflation. In our view, the NBK could be subject to political influence, as seen in some of its activities in recent years that we believe fall outside the usual remit of a central bank. These have included becoming a shareholder of KazMunayGas, the state-owned oil and gas company, and compensating tenge-denominated depositors after the 2015 currency depreciation”.

Translation: the agency registers the National Bank’s political dependency on Akorda.

 S&P: “Constitutional changes are paving the way for the possible strengthening of Kazakhstan’s institutions following the eventual transition after President Nazarbayev’s rule”.

“Our ratings on Kazakhstan remain constrained by its highly centralized decision-making, which can reduce policy predictability. There have been no transfers of power since Nursultan Nazarbayev became president following Kazakhstan’s independence in 1991. As a result of President Nazarbayev’s hold on power, Kazakhstan has benefited from having one of the most stable political environments in the region since the breakup of the Soviet Union. President Nazarbayev has stated that he expects to serve his full term to 2020. Uncertainty surrounds the eventual presidential succession.  

In early March 2017, Kazakhstan’s parliament passed constitutional changes, announced by President Nazarbayev, to increase the role of the cabinet and parliament at the expense of the president.

We view these as an effort to prepare Kazakhstan’s institutions for the eventual transition after President Nazarbayev retires, but we do not expect the constitutional changes to have any practical implications until that time”.

Translation: the agency predicts that the current Kazakhstan political system and practices will remain the same in the nearest years.