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Standard & Poor’s Ratings Services has raised its long-term issuer credit and senior unsecured debt ratings on Development Bank of Kazakhstan (DBK) to ‘BB+’ from ‘BB’. At the same time, Standard & Poor’s affirmed its ‘B’ short-term issuer credit rating on DBK. The outlook is stable.

The rating action reflects the upgrade, on May 28, of Standard & Poor’s long-term foreign currency ratings on the Republic of Kazakhstan to ‘BB+’ from ‘BB’, and of its local currency ratings to ‘BBB-/A-3’ from ‘BB+/B’. The ‘B’ short-term foreign currency rating on Kazakhstan was also affirmed. The outlook on Kazakhstan is stable.

“The ratings on DBK are supported by the bank’s clearly defined and strategic public policy role for the government of the Republic of Kazakhstan and its 100% state ownership, which ensure strong government support,” says Standard & Poor’s credit analyst Luc Marchand. Apart from DBK, there is currently no dedicated domestic supplier of long-term credit to the non-extractive sectors of the Kazakh economy.
The government is maintaining an arm’s length relationship with DBK and does not guarantee the bank’s obligations, although it keeps the bank well-capitalized relative to the size of its business.

In 2003, the government renewed its support to the bank by increasing its capital to Kt37.7bn (US$250mn). The increase in DBK’s capital is an integral part of the first stage of the current 2003-15 strategic development programme. The government is also closely involved in defining DBK’s strategy and controls the bank through the Council of Directors. The council is headed by the vice-minister of economy and budget planning, Arman Dunaev. Although the bank is not subject to the National Bank of Kazakhstan ‘s (NBK) prudential regulation, it complies with most of the NBK’s requirements and regularly reports its financial performance for scrutiny.

In view of the substantial development needs in Kazakhstan ‘s infrastructure and manufacturing sectors, DBK has a vital role to play for many years to come. Total assets amounted to Kt57.6bn (US$372.6mn) at year-end 2002, still mainly reflecting the bank’s equity capital. Loan commitments have been slowly built up since the inception of the bank, and at year-end 2002 DBK had a small portfolio of disbursed investment projects and export operation loans, with a total volume of US$77.2mn. The bank is expected to grow its loan portfolio prudently in a high-risk market environment. Although DBK’s Memorandum on Credit Policy limits total liabilities to 600% of the bank’s capital, management policies have capped the bank’s leverage at a borrowed-funds-to-capital ratio of 100%.

“The outlook reflects Standard & Poor’s view that government support will remain strong, as demonstrated by the expected further increase of about US$150mn in DBK’s capital in 2004-05,” says Marchand.

Standard & Poor’s expects no changes in the policy and legal framework that would weaken the bank’s key policy role in the government’s development plans over the foreseeable future. A deviation from DBK’s policy role or government support, however, would probably result in downward pressure on the ratings.