What Was Left Unsaid by Fitch Experts

On August 21, 2020, Fitch Ratings confirmed Kazakhstan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB', Outlook “Stable”. The report published on the agency’s website allows one to conclude that Kazakh and foreign investors have no cause for concern. Is that really so?

Here are some quotes from the document (text in bold by kz.expert).

Kazakhstan's 'BBB' IDRs balance strong fiscal and external balance sheets underpinned by accumulated oil fiscal revenues, against high commodity dependence and lower governance scores relative to 'BBB' peers. Public debt remains low and external and fiscal buffers robust despite the oil price and coronavirus shocks.

The tenge has acted as a shock absorber and its flexibility is a notable improvement in the economic policy framework since the last oil price shock in 2014/15. This should support the sovereign's balance sheet by protecting foreign exchange reserves during periods of downward currency pressures. The currency depreciated by 15% against the US dollar at the height of financial market volatility in March, and was accompanied by a hike in the National Bank of Kazakhstan's (NBK) base rate of 275bp to 12% on 10 March, instructions to state-owned enterprises (SOE) to supply 50% of FX revenues to the market, direct FX sales by the NBK in February-March and regular FX sales by the state oil fund (NFRK). However, net NBK FX sales of USD1.58 billion in 2020 to date compare favourably with the USD 35.1billion during the 2014-15 crisis.

Kazakhstan's large sovereign external buffers are a key rating strength with sovereign net foreign assets at 44% of GDP at end-2019 (current 'BBB' median: 1.7%). Sovereign external assets comprising NBK reserves and the NFRK fell by USD2.6 billion (3%) in March 2020 mainly as a result of the global equity market correction and intervention to support the exchange rate. NBK and NFRK external assets were a healthy USD93 billion at end-July 2020 (18.2 months of projected 2020 current external payments), following an increase since April associated with the recovery of oil prices and increase in the value of NBK's gold holdings. We forecast sovereign net foreign assets to fall to 41% of GDP by end-2020 on account of the fall in oil revenues and draw down of NFRK assets to finance the budget, but there is some upside risk to our forecasts owing to current gold prices trading above our gold price assumption for 2020”.

Nonetheless, according to Fitch Ratings, in 2020, “the current account deficit for 2020 to worsen to 4.5% of GDP in 2020 (2019: 3.6% of GDP) based on our average oil prices assumption of USD35/b and OPEC+ supply cuts that should lead to a fall in the goods trade surplus to 4.3% of GDP (2019: 10.9%)”.

Which, in its turn, will be compensated by the fact that “the primary income deficit to improve to 6.8% of GDP (2019: 12.7%) as profit remittances from foreign oil companies fall with oil prices” Also, Fitch forecasts that “the consolidated fiscal balance to worsen to a deficit of 6.1% of GDP in 2020 (2019: 0.2% of GDP surplus) as fiscal oil revenues almost halve due to the fall in oil prices”.

With all due respect to Fitch Ratings’ reputation and thoughts, we believe that its rating assessment does not fully address the political risks - both internal and external.

Yes, the agency noted that “Kazakhstan has a low WBGI ranking at 41 percentile, reflecting very poor voice and accountability, relatively uneven application of the rule of law and a weak score on the control of corruption compared with the 'BBB' median”. It also formulated “the main factors that could, individually or collectively, lead to rating downgrade”. With that, however, the analysts have neglected the two uber-important factors that have been occupying centre stage for the past several months:

first, willingly or not, Kazakhstan has ended up in the wrong geopolitical camp, in other words, siding with China and Russia against the USA and the EU;

second, the physical and political life of the First President of the Republic of Kazakhstan Nursultan Nazarbayev is coming to an end, and the country is to face cardinal changes after his passing.

We are very curious to see to what extent would Kazakhstan’s IDR be downgraded if, having won the next elections, US President Donald Trump imposed sanctions against Kazakhstan and (or) its high-ranked officials and major entrepreneurs and corporations while arresting all of their dollar assets in the US including the resources of the National Fund of the Republic of Kazakhstan.

Or what if Kazakhstan experience a coup d’etat or what if massive civil disturbances begin in some region turning into an armed struggle between the elite clans?

Some may accuse us of exaggerating the situation but who thought, a year ago, that the world oil prices could drop down to plus/minus US$ 20 per barrel, that the COVID-19 pandemic would force the countries to isolate themselves and that their economies and citizens would suffer the blows comparable to those of a WWIII.

Moreover, new “black swans” may appear as a result of the actions on the part of the Kazakh authorities both deliberate and inadvertent.

For instance, the current stability of the tenge exchange rate against the US dollar and the relative sustainability of Kazakh TTBs may collapse literally in a day.

For that to happen, it is enough that a certain number of Kazakhs rush to withdraw their money from their bank accounts and then try to convert them into foreign currency. Yes, the state may try keeping banks afloat for some time via imposing administrative limitations on cash withdrawals and supporting the official exchange rate. But then a foreign currency black market will invariably appear in the country; and it is this market that will form the real (market) exchange rate.

Apart from that, the state budget receives less than its due in terms of the gigantic amounts of taxes (for the eight months of the year 2020, the losses in the oil sector alone constituted 1.6 trillion tenge) while the KazMunaiGas national oil corporation has ceased being profitable. These facts alone may urge Akorda to conduct yet another onetime national currency devaluation as it has already done several times before.

By the way, the problems experienced by the National Fund of the Republic of Kazakhstan may also push Akorda towards devaluation if it turns out that the former has less resources than is officially claimed as a result of losses or embezzlement. Add to this the problems experienced by the US dollar itself that, today, is going through the numerous difficulties related to the FRS activities aimed to support the national economy and the necessity to indirectly finance the geopolitical wars started by the USA for the purpose of retaining its dominant position in the world.

Makes you think, doesn’t it?


Add comment

Your e-mail will not be published. Required fields are marked with *