OREANDA-NEWS. On December 17, 2007 Fitch Ratings has revised the Outlooks on Kazakhstan's Long-term Issuer Default ratings (IDR) to Negative from Stable. At the same time, Fitch has affirmed Kazakhstan's Long-term foreign currency IDR at 'BBB' and the Long-term local currency IDR at 'BBB+'. The agency has also affirmed the Country Ceiling at 'BBB+' and the Short-term rating at 'F3', reported the press-centre of KASE.

The rating action reflects Fitch's revised assessment of the risks to Kazakhstan's sovereign credit profile arising from a severe curtailment in the Kazakh banking sector's access to international capital markets since August 2007. "The persistence of difficult market conditions has increased the risk that Kazakh borrowers may struggle to attract foreign capital well into 2008, which could prolong the draw-down on foreign exchange reserves and widen the scope for external liquidity problems to spill over into a broader threat to financial stability," says Andrew Colquhoun, Director in Fitch's Sovereigns team.

The authorities have stepped up support to the financial system, in the process assuming a substantial contingent liability. The central bank is providing the commercial banks with some of the foreign currency liquidity required to meet external debt maturities, a strategy that is already impacting the sovereign's external balance sheet: central-bank reserves were down 22% from July 2007 to November 2007, to USD18,2bn (with a further USD20,8bn in the National Fund, a sovereign wealth fund). The authorities estimate the economy's external debt maturities (excluding FDI-related lending) at USD7,5bn in H108.

Overall deposit growth (retail and corporate) turned positive in November, buoyed by foreign-currency deposits, although KZT deposits are down 11% since June. The government has budgeted USD4bn to support credit growth, primarily in property and construction, in late 2007 and 2008, financed from the National Fund. Fitch projects that Kazakhstan's sovereign net foreign asset (SNFA) position will be eroded to 19% by end-2008 from 31% of GDP at end-2007. This erosion increases the risk that the domestic private sector could lose confidence in the KZT and the authorities' ability to support the financial system, leading to capital flight and a broader crisis, although Fitch continues to regard this as outcome as unlikely.

The authorities' task of safeguarding financial stability is complicated by a tough macroeconomic combination of surging prices and deteriorating growth prospects. Inflation soared to 17,5% yoy in November 2007. The National Bank of Kazakhstan hiked its refinancing rate to 11% from 9% in December 2007, despite concerns over the impact on an economy likely to slow as the banks cut back on credit growth from yoy rates of about 100% up until August 2007. The sovereign faces this challenge from a strong fiscal starting-point. Kazakhstan has the lowest ratio of general government debt to GDP in the 'BBB' range for end-2007 (7%) and a consolidated fiscal surplus, counting oil revenues, projected at 3,3% of GDP for 2007. However, structural and institutional weaknesses relative to the country's 'BBB' range peers continue to weigh on the ratings. The growing role of the state in the economy in response to external liquidity difficulties could exacerbate this weakness in future.