What is Kazakhstan’s corporate sector’s lifeblood?

As part of the annual Fitch Ratings conference held in Almaty there was a roundtable called “Corporate sector of Kazakhstan”, where experts talked about what is happening in large companies of oil extraction and energy sectors.

The roundtable was facilitated (first report was Fitch: A little better than yesterday) by Joseph Pospisil, the managing director, head of the analytical group on energy and transport sector of Europe, Middle East and Africa of the agency Fitch Ratings.

First presenter was Konstantin Anglichanov, director and head of the analytical group on international regional finances of the Fitch Ratings agency. He spoke of the development of infrastructure in Kazakhstan.

“Kazakhstani economy is adapting to shocks that took place in 2014-2015 and were related to several factors – changing oil prices and situation with Kazakhstan’s key trade partners – Russia and China as well as devaluation.

What is happening in 2017? It is if tenge has adapted to new reality – oil prices, and largely correlates with the ruble. What does it mean for corporate issuers in Kazakhstan? For example, the opportunity to diversify its loans and participate in borrowings of ruble,” – said Konstantin Anglichanov.

In his opinion, ruble is as much of a soft currency as tenge is, with a high degree of correlation, i.e. Kazakhstan actively looks towards Russia, Russia looks towards Kazakhstan, some integrational processes of the EAEU take place like fixing of the customs regulations, etc. “At the same time, Kazakhstan had less of a downfall, there was no recession, thus economic growth had slowed down but is going to rise. Situation with dollarization is getting a little better; i.e. macroeconomic indicators had returned to the level of few years ago, but there is less of a shock”.

Speaker has noted that in Kazakhstan, Fitch Ratings analysts are observing a situation of actualization of priorities of development.

“We see the program Nurly Jol. I.e. government as the key player in infrastructural development puts priorities of infrastructure development really high. This was achieved in different periods by different methods, but today there is a need to actualize these priorities, look with the fresh eyes at which path the country is taking, maybe change something in the model of economic growth,” – said Konstantin Anglichanov, having noted that even though there is active discussion on the subject of decreasing government role in the economy, key players are still nationally-managed holdings. “It is Samruk-Kazina, Bayterek and others, that in essence remain government players, but are at the same time supposed to develop infrastructure that country needs.”

“In crisis, you are forced to change a lot of things, reevaluate decisions that were made earlier, realizing priorities. And today, in Kazakhstan an idea is voiced that the country no longer views itself as isolated and excluded from key transit chains, but rather tries to use its unique location, for example for minimizing the transit time of cargo from South-East Asia into Western Europe,” – Anglichanov explained.

Next speaker, Joseph Pospisil, as part of his presentation said that the forecast on energy companies for 2017 remains negative. This is related both to the decrease in country’s rating and to existing problems in that sphere.

For example, he noted that factors affecting the ratings are a decrease in government support, high currency risk, limited hedging, negative free cash flow, increase in leverage due to considerable needs for capital investments, upcoming Samruk-Energo debt repayment, as well as the fact that power demands don’t provide necessary support. This is why there is an decrease in ratings among all Kazakhstani energy companies.

Still, as mister Pospisil has noted, “most decreases in ratings of Kazakhstani companies in 2016 were due actions on sovereign rating”.

The expert also spoke of the key drivers, affecting energy companies. These are inflation, dynamics of GDP, consumption and production of electric energy. By these indicators, as Joseph Pospisil noted “Kazakhstan takes a moderate position”.

Regulatory environment, in mister Pospilov’s opinion, is “more favorable for electrical grids” in Kazakhstan.

“As we can see in case of KEGOC, this company continues to receive advantages through favorable long-term tariffs, including for transfer, dispatching and balancing, which grew on average by 12% in 2016 and are expected to grow on average by 7% in 2017-2020.”

Thus, a forecast on MREK (Mangistau distributional electrical grid company) ratings is negative due to an expected weakening of connection between the company and government. “Samruk Kazina” is planning to offer 20-25% of Samruk Energo for IPO and 10% minus 1 stock in AO National atomic company Kazatomprom.

“In the end ratings remain weak on an independent basis” – Joseph Pospisil thinks.

Also, liquidity risks remain. Thus, short-term repayments of euro-bonds of Samruk-Energo – $500 mln. at the end of 2017, as expected, will be covered mainly by available lines of credit and transfers from privatization. The pressure on profiles of liquidity may also be cause by further falling of the exchange rate of tenge.

Senior director and head of the analytical group in natural resources and energy goods of Fitch Ratings Maxim Edelson talked of the tendencies and situation on the world market of energy resources.

Excess of supply has led to a lowering of oil prices in2014-2016, however, after an agreement of OPEC countries to lower extraction, it was possible to stabilize prices, thinks Maksim Edelson.

If nothing extraordinary happens, analysts of Fitch Ratings allow for possibility of rise in oil prices. “As for our expectations for 2017 and further years in mid-term prospect, our price mark is $65 per barrel”, – speaker said.

As for situation in Kazakhstan, based on Fitch Ratings’ data, oil extraction in the republic has doubled in 2012-2015, as well as export, and this tendency remains. “In its group of countries, Kazakhstan feels pretty confident in regards to both rate of growth of extraction, as well as sustaining of reserves”, – Edelson noted. In his words, Fitch analysts assume that “by 2025 extraction will comprise around 2.4 mln. barrels of oil a day”. And this will happen largely thanks to active work in Kashagan.

Expert also noted that this tendency will remain in a longer perspective, if new extraction sites won’t be put into use. “Extraction at other sites will gradually decrease,” – Edelson said.

Fitch rates national company KazMunaiGaz at the level BBB- with a “stable” forecast – a level lower than the republic of Kazakhstan, which has a rating, reflecting strong ties of company with the government,” – as follows from presentation.

“This support includes expectations that in addition to funds, allocated via program on eliminating debt of the company in 2015, government, in mid-term perspective will manage the company in such a way that her financial profile will secure a certain stability to shocks on an independent basis” – analyst assumes.

Speaker has noted that indicators of NK KMG had gotten better since 2016, partially due to devaluation of tenge and optimization of expenses: “According to Fitch’s calculations, corrected gross leverage on monetary funds from operational activity (FFO) of KMg was 7.5x at the end of 2016, which is higher than mid-term negative rating mark of Fitch, but lower than our previous forecasts”.

Thus, as follows from reports from main speakers of the roundtable “Corporate sector of Kazakhstan” that was held within the framework of annual conference Fitch Ratings Almaty, ratings of all national firms are affected by sovereign rating of Kazakhstan due to strong connections with the government. But if the forecast on oil extraction companies is stable, then many energy companies are unable to get out of the negative streak.

First report was Fitch: A little better than yesterday


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