S&P Global Ratings revised its outlook on Kazakhstan to negative

On September 2, 2022, S&P Global Ratings revised the outlook on the sovereign credit ratings of the Republic of Kazakhstan from “Stable” to “Negative” as a result of the growth of external and financial risks. At the same time, the long-term and short-term sovereign credit ratings on foreign and national currency liabilities were affirmed at “BBB-/A-3” level.

Kazakhstan’s economy is overly dependent on the oil and gas sector, which accounts for about 19% of GDP. In the structure of Kazakhstan’s total exports, the share of oil is more than 50% of all goods. And revenue part of the budget directly depends on oil prices. Interruptions at the Caspian Pipeline Consortium (CPC) operation, which exports about 80% of the oil produced at the deposits, Tengiz, Kashagan and Karachaganak (three major oil and gas projects in Kazakhstan) and stagnation in oil production pose great risks to the economy. This was one of the main reasons for the revision of the rating.

We have noted the dominance of commodity revenues and their significant contribution to economic growth, as well as a business activity since the beginning of the year. The continued growth of the economy and its development are becoming increasingly dependent on raw material revenues and their redistribution through the budget channel. At the same time, the return from fiscal stimulus is less and less every year and requires a further increase to maintain an acceptable development trajectory. Such dynamics may indicate an increase in the Dutch disease signs with low labour efficiency.

The likely fluctuations in oil prices and the possible suspension of oil exports are extra critical aspects of the economy in such conditions. This problem reflects the squeeze of the domestic market economy and its replacement by government expenditures, depending on the prices for export raw materials. At the same time, the costs of servicing a relatively small amount of government debt increased by 30%. This happened due to an increase in the share of domestic debt obligations related to an increase in interest rates.

The rise in the cost of credit default swaps since the beginning of the year, which are a market tool for assessing credit risk, signals an increase in the assessment of the probability of default on government securities of Kazakhstan. It also affects the decrease in the country’s investment attractiveness among external and market investors.

At the same time, according to the regulator’s forecasts being kept for a certain time price instability, and the simultaneous growth of the expenditure part of the budget by almost 2 times to mitigate the effects of shocks in the economy, signal the persistence of negative factors on the domestic economy. To expand budget expenditures and finance them, it will be necessary to attract additional loans or re-use the resources of the National Fund, which usually acts as the prevailing factor in assessing the country’s solvency.

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