On October 8, the international ratings agency Standard and Poor's (S&P) downgraded Astana’s sovereign credit rating to BBB-, the lowest investment grade category, due to funding problems in the country’s financial system.
S&P blamed the downgrade on a rapid rate of borrowing by Kazakh banks, citing signs of an economic slowdown and potential obstacles to new borrowing due in part to the U.S. subprime mortgage crisis. With the downgrade, Kazakhstan has become the only country so far to see its S&P rating fall since major turbulence over the U.S. mortgage crisis shook world capital markets last summer.
An Extreme Case
"Kazakhstan's case is arguably more extreme than most,” Ben Faulks, a London-based S&P sovereign-ratings analyst, told RFE/RL. “What you have had in Kazakhstan is that the rate of increase of the borrowing of the banks has been really exceptionally fast -- much faster than in most countries."
The Kazakh economy has grown at an annual rate of nearly 10 percent in recent years -- mostly due to oil revenues. To further accelerate growth, the country borrowed heavily on international capital markets when loans were relatively cheap. According to the "Financial Times," Kazakh banks' international borrowings total $40 billion -- more than half of their total non-equity funding.
Now, Kazakhstan appears set for a double credit blow. The U.S. mortgage scare has already raised the global cost of credit, but the downgrade is likely to make it even more expensive for Astana to borrow. And the Kazakh credit crunch could end up sending an economic shockwave across Central Asia.
Moreover, with their fortunes so closely tied to the country’s overall economy, Kazakhstan’s main wholly state-owned firms have also seen their ratings downgraded. The companies include the Kazakhstan Development Bank, postal and financial-services firm KazPochta, and Agrarian Credit Corporation.
Nonetheless, while “"slightly less creditworthy" than before, Kazakhstan is "still relatively safe" to lend to, according to Faulks. "We have taken this step of moving Kazakhstan down by one rating but we still keep it within the 'investment' grade,” Faulks said. “In other words, we still consider it a solid country from the point of view of commercial debt repayment and we have a stable outlook, so we expect the difficulties to be managed."
Russia and Kazakhstan are the only two former Soviet nations that S&P rates to "investment" grade. Russia's current rating of BBB+ is two notches higher than Kazakhstan's. Ukraine is rated BB-, three notches below Kazakhstan, while Belarus and Georgia are rated B+, four notches below Kazakhstan.
Kazakh banks are generally more dependent on foreign borrowing than are most banks across the former Soviet Union.
Russian banks have also increased international borrowing in recent years, but their share of borrowing is much lower than Kazakhstan's, while Moscow has far more international reserves than does Astana. Growth of the Azerbaijani and Belarusian banking sectors has been fueled mainly by customer deposits. In Ukraine, a lot of bank debt is structured so that there are no significant repayments falling due this year or next.
Kazakh banks are also highly exposed to the country's booming property market, with some 70 percent of loans reported to be directly or indirectly connected to real estate, compared to about 25 percent in Russia.
Russia's "Kommersant" daily wrote on October 10 that the impact of the global liquidity crisis on Kazakhstan might be moderate, but that the secondary effects on real estate and construction might be difficult to predict.
On October 8, another top credit rating agency, Fitch, maintained its Kazakh rating but changed its outlook from "positive" to "stable."
Kazakh economist Kanat Berentaev calls the downgrades "undoubtedly unpleasant." But he sees a silver lining as well. "Thanks to the mortgage crisis in the U.S., attention was focused on housing construction, and a correction of prices began,” Berentaev said. “One more positive impact of the downgrade is that second-tier banks will borrow less, which will lead to a correction of [Kazakhstan's] external debt."
Ratings decisions had an immediate impact on the trading of Kazakh bank bonds and hedging instruments, which investors use to protect themselves against default. Faulks describes the initial reaction to S&P's move as "quite extreme," although he says the situation "calmed down a bit" a day later.
S&P forecasts 6 to 8 percent economic growth in Kazakhstan over the next two years, compared to growth of around 10 percent in the past few years. Faulks says it is too early to tell, but Kazakh bank activities abroad are likely to slow, at least in the near term.
The key question will be the price at which Astana will be forced to refinance maturing bonds and other debt on international markets.
“The important thing will be what kind of price they'll have to pay to renew (debt), whether that price rises,” the S&P analyst said. “It is likely to rise because of conditions on international markets apart from anything else. And, obviously, the downgrade of the sovereign will have an impact as well."