Fitch Ratings-New York/London-23 July 2015: Kazakhstan's Eurobond issue and widening of the tenge's trading band reduce the likelihood of a further step devaluation this year, Fitch Ratings says. But the key causes of exchange rate pressure remain.
Kazakhstan last week issued USD4bn in 5.125% 10-year and 6.5% 30-year bonds from its USD10bn medium-term note programme. The National Bank of Kazakhstan raised the tenge's upper trading limit to 198 tenge per dollar, leaving the lower limit unchanged at 170.
The hard-currency influx from the Eurobond issue, and the continued policy of controlled depreciation as the central bank shifts toward inflation targeting, limit the risk of another devaluation like that of February 2014. We have therefore revised our end-2015 KZT:USD forecast. We still expect the tenge to weaken and to reach the KZT198:USD limit by end-2015, but this would represent a drop of around 8.5% over the year, rather than the 20% devaluation we had previously factored in.
Current account balance deterioration will maintain pressure on the tenge. We forecast the balance to swing to a deficit of 3% of GDP in 2015 from the 2.2% surplus in 2014, mainly due to lower hydrocarbon export revenues (export earnings fell 44% year on year in 5M15). The fiscal deficit will widen to 3% of GDP.
The corridor adjustment is consistent with the gradual move towards inflation targeting by 2020 that the National Bank signalled in May. Greater exchange-rate flexibility would help cushion the economy and public finances from external shocks and could reduce incentives for dollarisation. Sharp devaluations in 2009 and 2014 have attempted to address the misalignment of the tenge with major trading partners' currencies, but have undermined public confidence in the monetary and exchange rate policy regimes (which we consider weak relative to ratings peers). Dollarisation of deposits was 52% in May, 15pp above the end-2013 level and only slightly below recent peaks.
The affirmation of Kazakhstan's 'BBB+'/Stable rating in May reflected our view that the strong sovereign balance sheet should be able to withstand recent external shocks, notably the oil price fall, Russian recession, and China slowdown.
Kazakhstan has ample external liquidity - its external liquidity ratio is 255% when the assets of the National Fund are included, against a 'BBB' category median of 144% and an Emerging Europe median of 95%. National Bank foreign currency reserves have been relatively stable since December. The government has also drawn down hard-currency assets from the National Fund, which fell USD4.5bn (6%) in 1H15, to finance the budget deficit.
A low gross general government debt burden of around 15% of GDP in 2014 - although we see this rising towards 20% by 2017, while the National Fund remains broadly stable in dollar terms - gives the authorities headroom for fiscal stimulus. But they are keen to preserve the Fund as a fiscal buffer and have reportedly postponed some of the USD9bn spending it was to finance over 2015-2017. This suggests the authorities are adapting to a lower norm for oil prices, promoting economic reforms to stimulate investment and growth rather than relying on fiscal stimulus.