Kazakhstan Remains Upbeat Despite Negative Credit Rating

Standard & Poor's credit rating for Kazakhstan has been downgraded from stable to negative, but economic chiefs in Astana remain resolutely upbeat despite rising inflation, stalled construction projects and a shaky global outlook.

Officials at the Kazakhstani Ministry of Economy and Budget Planning have dismissed the credit ratings agency's assessment as the work of "skeptics" and say a mixture of financial discipline and creativity will enable the economy to wea ther the storm.

Financial experts say a quick cash fix to bolster banks now troubled by a property slowdown and outstanding loans to international creditors would tarnish the reputation of Central Asia's largest economy. However, tailored short-to-medium term strategies such as increased oil export tariffs and a financial stimulus package focusing on public works may be enough to see Kazakhstan ride out the global credit crunch.

But despite its vast natural wealth and rising commodity prices, Kazakhstan is not immune to the financial crisis which has bitten otherwise successful economies, said Ben Faulks, a London-based credit analyst at S&P.

Deteriorating bank assets, a shrinking pool of international lenders and generous loans made to the previously buoyant property sector will "impair policy flexibility and growth prospects," he said.

"Kazakh banks' scheduled principal repayments on external debt amount to $14 billion this year, and much of this debt may not be rolled over because of higher borrowing costs and counter-party difficulties. This is likely to force a contraction in outstanding domestic credit, despite a government program to place temporary loans and deposits with banks to mitigate external funding difficulties. Consequently, economic growth is likely to fall sharply in 2008 to below 4 percent, putting pressure on banks' asset quality," he added.

Liquidity problems in the global banking sector may tempt Kazakhstan to dip into its National Fund, a stockpile of $23 billion in energy revenues, and a last refuge in times of hardship, but it is a move that would dent Kazakhstan's image, warned Faulks.

"The ratings would likely be lowered if a large portion of the National Fund were used for bank recapitalization. External liquidity difficulties could also bring downward pressure on the ratings. Conversely, the outlook will revert to stable if banking sector difficulties are contained in a manner that has limited impact on the economy and public finances," he said.

In line with the falling credit rating, S&P has changed its outlook to negative on several high-profile Kazakhstani companies: Kazakhstan Electricity Grid Operating Co., KazMunaiGas and its subsidiaries, KazMunaiGas Exploration Production and KazTransGas, the Development Bank of Kazakhstan, Kazakh Agrarian Credit Corp., the Mortgage Guarantee Fund of Kazakhstan, and Kazpost. The demotions are based on the belief that these state-owned enterprises would be offered "extraordinary support in case of financial distress" – a potential reference to the National Fund.

However, the government has already indicated that it has other means at its disposal. Newly proposed export duties on crude oil and metals promise to put billions of dollars into the state's coffers, leaving the National Fund, which has grown at the phenomenal rate of 162 percent in the last five years, intact.

"Social conditions will not get worse. The government has introduced an oil export duty," Kazakhstani President Nursultan Nazarbayev said confidently last month in remarks published on the presidential website. Suspension of "innovative projects" and various construction projects unrelated to healthcare, housing or education is another option, he added. "This way we can overcome the effects of the global financial crisis without touching the National Fund."

The International Monetary Fund (IMF) has praised Kazakhstan's handling of the crisis to date, but it, too, has warned that economic growth is likely to fall below government expectations.

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