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Standard & Poor’s Ratings Services has raised its long-term foreign currency ratings on the Republic of Kazakhstan to ‘BB+’ from ‘BB’, and its local currency ratings to ‘BBB-/A-3’ from ‘BB+/B’. The upgrade reflects the sustained strengthening of the republic’s economic prospects, as well as prudent policies keeping the government’s deficit and debt at low levels.

At the same time, the ‘B’ short-term foreign currency rating on Kazakhstan was affirmed. The outlook is stable.

“Public sector net external assets are expected to reach about 28.4% of current account receipts in 2003, on the back of continued economic growth and the resource-based tax revenues that follow,” says Standard & Poor’s credit analyst Luc Marchand. “Moreover, fiscal prudence is underpinned by the accumulation of oil and tax windfalls in a National Fund, which will smooth the impact of oil price volatility.”

The persistence of prudent financial policies has limited both fiscal deficits and inflation, thereby strengthening already robust economic prospects. The general government in 2003 is expected to record a small surplus of about 1% of GDP before tax revenue transfers to the National Fund (a deficit of about 2% after the transfers). General government debt is projected at a manageable 14.2% of GDP at year-end 2003, and will remain broadly stable over the next few years. Meanwhile, macroeconomic stabilisation should continue, with price growth estimated at 6.4% in 2003, and economic growth at about 8.6%. The government’s commitment to market-oriented reforms, as well as improved confidence in the banking sector, should deepen the financial system.

In addition, the vulnerability of the economy and the budget to external shocks has been decreasing. On the back of continuous increases in investment, production, and export capacities in the oil and gas sectors, Kazakhstan is able to post high potential growth and low deficits even in the face of low oil prices.

Kazakhstan ‘s credit standing is also supported by its robust external liquidity. The current account deficit is estimated at about 0.3% of GDP in 2003, compared with 2.5% of GDP in 2002, and is expected to decrease further on the back of moderating import growth and strengthening exports, especially of oil and gas. Furthermore, these deficits continue to be comfortably financed by foreign direct investment (FDI) inflows of about 6-7% of GDP annually.

Nevertheless, the highly centralised and opaque nature of governance, along with weak institutional and legal systems, continues to constrain the republic’s creditworthiness and renders policy-making less predictable than in similarly rated countries. This is compounded by a weak economic structure and low income levels.

“The stable outlook balances the expected strengthening of Kazakhstan ‘s external position and continued fiscal prudence, which should keep general government debt at a moderate level, against sluggish institutional and structural reforms,” adds Marchand. “Progress in political liberalisation, improvements in the business environment, and an acceleration of structural reforms including the development of the non-resource-based sectors and the privatisation of large-scale companies would be positives for the country’s credit standing.”