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Fitch Ratings: New Kazakhstan President Maintains Economic Policy Settings
Fitch Ratings-London-24 July 2019: Kazakhstan's President Kassym-Jomart Tokayev looks set to pursue the main economic policy priorities of his predecessor, Fitch Ratings says. These included structural reforms and, more recently, increasing social spending.

We expected policy continuity following Tokayev's landslide victory in June's presidential election. He had taken over as interim president following the resignation in March of the previous president, Nursultan Nazarbayev, after 30 years in office. Tokayev is a long-standing Nazarbayev ally and former prime minister. Nazarbayev will retain considerable influence as chairman of the Security Council and president of the Nur Otan party (he endorsed Tokayev as the party's presidential candidate).

Kazakhstan's parliament in July adopted the national budget for 2019-2021. The budget enacts the large programme of social expenditure announced by Nazarbayev in February 2019 that includes a 50% increase in the minimum wage, tax cuts for low-income earners, and investment in housing and transport infrastructure. It continues to target a close-to-balanced budget by 2021, and reductions to the non-oil deficit.

Government debt is low and favourable oil prices will help to contain the budgetary impact of higher government spending. Higher oil prices and output boosted fiscal receipts in 2018, helping to shrink the consolidated general government deficit to an estimated 0.6% of GDP from 6.4% in 2017, when support for the banking sector led to a surge in public expenditure.

We forecast the unconsolidated central government deficit to widen to 2.1% of GDP (from an estimated 1.4% in 2018). Tokayev may seek to consolidate his popularity with further increases in social and investment spending. Following the election, he has asked the prime minister to develop new social policy initiatives and measures to boost employment.

Tokayev has also announced debt relief 'for people who find themselves in very difficult living circumstances', telling Bloomberg on 26 June that the initiative would target 3 million Kazakhs, or 16% of the population. It will cost about KZT105 billion (USD274 million, or 0.17% of GDP). In the same interview, he said there should be no more government bailouts for privately owned Kazakh banks.

The debt-relief program will be financed from the recent targeted transfers (which are allocated to specific measures) from the National Fund of the Republic of Kazakhstan (NFRK) to the budget, amounting to KZT370 billion. The government in April 2019 increased the yearly guaranteed NFRK transfers for 2019-2021 to KZT2.7 trillion. Its medium-term fiscal target aims to cut transfers to KZT2 trillion by 2020, from KZT2.6 trillion in 2018.

The clean-up of Kazakhstan's banking sector has continued in 2019, with the state-owned Problem Loan Fund purchasing an additional KZT604 billion of distressed assets from Tsesnabank, using proceeds from bonds subscribed by the central bank. Given the levels of bad loans (mostly deep-seated legacy loans to corporates) at end-2018 revealed by IFRS 9 disclosures, we think some medium-sized banks could require fresh capital injections or other forms of external support (such as sales to the Problem Loan Fund) to absorb potential additional impairment losses.

We think off-government balance sheet transactions could be used again to fund further government bank support if it were needed; for example, following the central bank's Asset Quality Review, due by end-2019.

We expect the new president will continue existing efforts to improve the business climate and institutional policymaking framework, support agriculture and the digital economy, and speed up privatisation. However, economic diversification will be slow as non-oil growth is constrained by low productivity and labour supply growth, in our view.

Kazakhstan's 'BBB'/Stable sovereign rating balances strong public and external balance sheets against high commodity dependence, a weak banking sector, weak governance relative to ratings peers, and high inflation.

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