KMG: What will Happen if Nazarbayev Leaves

At the beginning of April, JSC NC KazMunayGaz (a joint-stock company incorporated in the Republic of Kazakhstan) and KazMunaiGaz Finance Sub B.V. (a limited liability company incorporated in the Netherlands unconditionally and irrevocably guaranteed by the JSC NC KazMunayGaz) published the U.S.10,500,000,000 $ Global Medium Term Note Programme.

The document is quite large and rather obtuse since it is intended for the qualified investors. Besides, the price of one note constitutes 100 $ thousand minimum. Therefore, few people in Kazakhstan know about this document and only a handful of them have read it. Meanwhile, this material is quite interesting, so we have decided to share if with our reader in detail.

We will start by saying that, even though the authors’ main task was to convince the investors to buy the notes, they had to search for and find a compromise between the obligation to present the real state of affairs (otherwise, they would lose the trust of the readers) and the requirement not to scare off the potential buyers.

And, judging by the fact that, last year, JSC NC KazMunayGaz placed the notes twice and mostly at the foreign stock exchanges, the phrasings of the Programme’s authors were received well by the foreign investors. (The first placement was made in April in the amount of 2.75 $ bln; the second on was made in September in the amount of 750 $ mln; in the first case, the number of orders constituted 9.2 bln, in the second — 3.4 bln).

This, in our opinion, is crucial since it allows to discern and register the assessment of Kazakhstan, its economy, and the events happening in the country by the people with the specific agenda. In particular, we are talking about their assessment of Kazakhstan’s political system and practices.

Here is a brief summary of the newest Kazakhstan history and the current state of affairs based on the U.S.10,500,000,000 $ Global Medium Term Note Programme (text in bold — Kazakhstan 2.0).

«Kazakhstan became an independent sovereign state in 1991 as a result of the dissolution of the former Soviet Union. Since then, Kazakhstan, under President Nursultan Nazarbayev, has experienced significant changes as it emerged from a centrally controlled command economy to a market-oriented economy. The transition was initially marked by political uncertainty  and  tension,  a  stagnant  economy  marked  by  high  inflation,  instability  of  the  local  currency  and  rapid,  but incomplete, changes in the legal environment. However, Kazakhstan actively pursued a programme of economic reform designed to establish a free market economy through privatisation of government-owned enterprises and deregulation and it is more advanced in this respect than some other countries of the former Soviet Union. Under President Nazarbayev’s leadership, Kazakhstan has moved toward a market-oriented economy.

If the current administration changes its outlook or, in the event of a change in administration, such future administration has a different outlook, the economy in Kazakhstan could be adversely affected. Changes to Kazakhstan’s economy, including in property, tax or regulatory regimes or other changes could have a material adverse effect on the Company’s business, financial condition, results of operations and prospects».

«Since the dissolution of the Soviet Union, a number of former Soviet Republics have experienced periods of political instability, civil unrest, military action and popular changes in governments or incidents of violence. Kazakhstan has had only one president, Nursultan Nazarbayev, who is 76 years old as at the date of this Base Prospectus. Under President

Nazarbayev’s leadership, the foundations of a market economy have taken hold, including the privatization of state assets, liberalization of capital controls, tax reforms and pension system development and the country has been largely free from political violence. In 2007, Kazakhstan’s Parliament amended Kazakhstan’s constitution to allow President Nazarbayev to run in an unlimited number of consecutive re-elections. The 2007 amendment permitted President Nazarbayev to seek re-election at the end of his terms in 2011 and 2015 and, in April 2015, President Nazarbayev was re-elected with 97,8% of the votes for a new five-year term.

In the last quarter of 2016, President Nazarbayev announced planned constitutional reforms that contemplate a distribution of authority among governmental bodies. The law amending the constitution was promulgated by President Nazarbayev on 10 March 2017. The law provides for 26 amendments, which transfer certain powers of the President to the Parliament and the Government. Despite this, given that Kazakhstan has not had a presidential succession and that there is no clear successor to Mr. Nazarbayev, there can be no assurance that any succession will result in a smooth transfer of office and economic policies. Thus, should he fail to complete his current term of office for any reason or should a new president be elected at the next election, Kazakhstan’s political situation and economy could become unstable and the investment climate in Kazakhstan could deteriorate, which would have a material adverse effect on the Company’s business, prospects, financial condition, cash flows or results of operations.

As there is currently no clear successor, the issue is a potential cause of instability in Kazakhstan. If a future president is elected with a different political outlook, the business regime in Kazakhstan could change. Political instability in Kazakhstan or changes to its property, tax or regulatory regimes or other changes, resulting from a new administration or otherwise, could have a material adverse effect on the Company’s business, prospects, financial condition, cash flows or results of operations.

Kazakhstan’s economy and finances have and continue to experience slower levels of growth since the global financial crisis which began in 2008. According to Government statistics, real GDP growth was 4,1% in 2014, 1,2% in 2015 and 1,0% in 2016. Real GDP estimates published by the International Monetary Fund (the «IMF»), however, state that GDP declined by 0,8% in 2016. The IMF forecast for real GDP growth in 2017 is 0,6%. 

Weaknesses in the global financial markets since the onset of the global financial crisis also contributed to several major bank failures in Kazakhstan and subsequent restructurings. The Kazakhstan banking system overall remains under stress with persistently high levels of non-performing loans, and there can be no assurance that the reforms recently implemented with the aim of reducing non- performing loans will be successful or sufficient. There is also a high level of concentration in the banking sector, with the five largest banks holding more than half of all customer deposits. While measures have been taken to address and reduce systemic risk, such measures are ongoing and there remains a risk that further reforms may be required, the impact of which is not certain. There is also a risk further financial assistance to the banking sector may be needed from the State, which it may not be willing and/or able to provide».

Unfortunately, we do not have the data on the nationalities of the investors that bought the KazMunayGaz notes. However, it is clear that the existence of the authoritarian political regime led by the president who has not been replaced for almost three decades as well as the risks of the sudden power transition in the country and, in consequence, of the serious domestic political troubles did not scare off the investors. Both the demand level and the price of the listing testify to that.

To confirm our thesis, we will cite the assessments (text in bold — Kazakhstan 2.0).

«First, on April 19, KazMunayGaz announced the successful placement of three issues of its international equities in the total amount of 2.75 $ bln: 500 $ mln with 3,875% coupon rate mature in 2022; 1 $ bln with 4,75% coupon rate mature in 2027; and 1.25 $ bln with 5,75% coupon rate mature in 2047.

The deal was accompanied by a significant demand on the part of the international investors that surpassed 6.5 $ bln which enabled the company to achieve the target issue volume at the attractive price level. The issues’ parameters established a new benchmark for KazMunayGaz and the other Kazakhstan corporate issuers: the yield rate for the Eurobonds with a 5-year maturity in the amount of 500 $ mln constituted 3,95%, for the Eurobonds with a 10-year maturity in the amount of 1 $ bln — 4,875%, for the Eurobonds with a 30-year maturity in the amount of 1.25 $ bln — 5,875%.

Apart from that, this deal has become the biggest corporate Eurobonds issue in the CIS countries since 2014. The Eurobonds listed at the London Stock Exchange and the Kazakhstan Stock Exchange were rated at the BBB– (Fitch) / BB (Standard & Poor’s) / Baa3 (Moody’s) levels.

Then, on September 21, KazTransGaz announced the successful issue of the 10-year Eurobonds nominated in the US dollars in the total amount of 750 $ mln listed at the Ireland Stock Exchange and the Kazakhstan Stock Exchange. The deal was the long-awaited KazTransGaz’ debut at the Kazakhstan and international capital market. The fact that the global order book surpassed the offer several times testifies in favor of the investors’ interest.

At the peak of the placement, the order volume reached 3.4 $ bln. With that, the Kazakhstan investors ordered the purchase of the Eurobonds in the amount of more than 100 $ mln. During the auction, the price guidance was lowered from the initially announced 4,7% to 4.5-4.6% then reaching the historically minimal level of 4,4% that became the final active rate».


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