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Kazakhstan: Agency Downgrades Debt Rating

London, 17 September 1998 (RFE/RL) -- Standard and Poor's, one of the world's leading credit rating agencies, has downgraded the sovereign (state) debt rating of Kazakhstan, a move reflecting its reliance on Russia as a trading partner and a fall in commodity prices.

The decision, announced yesterday, means that the Kazakh government and private enterprise will find it harder and more expensive to borrow money on international capital markets.

The agency downrated Kazakhstan's debt rating by one notch to "single-B plus" (on a scale designed to give investors a guide to the health of an economy). It also revised the outlook for Kazakhstan from "stable" to "negative," warning that Kazakhstan may be moving into stagnation or a recession.

Konrad Reuss, director in S and P's sovereign ratings department, said the downgrade partly reflects Kazakhstan's exposure to Russia, its main trading partner. By one estimate, almost half of Kazakhstan's exports went to Russia last year. The lower credit rating also reflects the fact that Kazakhstan has a substantial budget deficit and a growing current account deficit.

The S and P report says the slowing global economy, weak commodity prices and the Russian crisis are likely to put further pressure on Kazakhstan's budget and external financing position. Its economic prospects will also be affected by a slackening in foreign direct investment this year and what the report calls its "lackluster" (disappointing) privatization results.

The report says Kazakhstan has made substantial progress in transforming its economy into a market-based system. Inflation was down to around six percent in mid-1998, and it has achieved growth of about two percent over the past 18 months. But Kazakhstan now faces growing risks to its financial stability.

The report says the budget deficit is expected to be about eight per cent of gross domestic product this year, and is targeted to be around 6.5 percent next year. But it warns that financing, from foreign borrowing and the proceeds of the privatization program, is going to less readily available than in previous years.

It says that international investors' interest in Kazakhstan is likely to weaken for some time to come because of soft commodity prices and an expected global economic slowdown.

The report notes the Kazakh government announced spending cuts equal to one-fifth of this year's budget expenditures, a move designed to offset the impact of lower exports, slower economic growth and lower than expected proceeds from privatization.

But it warns that with interest rates tight, and the economy moving into recession (or stagnation at best), the government "soon may face the need for further fiscal adjustment."

It says Kazakhstan's current account deficit, which has widened as it has increased capital goods imports to develop its natural resources, is expected to worsen this year as world prices for its key commodity exports deteriorate. It says austerity measures and slowing domestic demand next year will likely reduce this deficit.

But foreign direct investment, which has financed the deficit in past years, has begun to moderate. Investors are unlikely to withdraw from ongoing projects, but commitments to provide funding for new projects may be more difficult to obtain.

The report says the effect of the global turmoil on Kazakhstan's foreign exchange and treasury bill markets have reduced foreign exchange reserves for the currency, the tenge, to just $1.3 billion.