Kazakhstan’s Debt Focus Turns Domestic as Bond Buyback an Option

  • Finance minister says government is looking to borrow at home
  • Kazakhstan may decide against loan from World Bank next year

Kazakhstan will increasingly look to cover the budget deficit by raising capital at home as it faces a more protracted downturn and a slower recovery, its finance minister said.

The government may opt against borrowing another $1 billion from the World Bank in 2017 after tapping the same amount from the lender in the second half of this year, Bakhyt Sultanov said in an interview on Wednesday in the capital, Astana. It’s already absorbed a $1 billion loan from the Asian Development Bank in the first four months of 2016 and plans to borrow as much as 400 billion tenge ($1.2 billion) on the domestic market this year, according to the finance minister.

“There’s always the option of buying back bonds of the Republic of Kazakhstan -- considering that the cost of servicing debt has grown,” Sultanov said. “But markets are now behaving adequately in relation to Kazakh risks.”

The second-largest energy producer in the former Soviet Union has responded to the crash in oil prices by devaluing the tenge as its public finances swung into deficit. Kazakhstan’s sovereign credit grade was downgraded three times in three months, with Fitch Ratings in April forecasting that the budget will stay in the red in 2016 after five years of surpluses before 2015.

The central Asian nation sold a record $4 billion of bonds last July in 10-year and 30-year notes, coming back to the international market after raising $2.5 billion the previous October. The yield on Kazakh dollar bonds due in 2024 fell three basis points to 4.23 percent on Wednesday, compared with this year’s high of 5.05 percent in January.

Comfort Zone

The nation’s level of state debt is near a “comfortable” 20 percent of gross domestic product, according to Sultanov. More important is the ratio of debt servicing to budget revenue, which has approached 10 percent, compared to a 15 percent limit set by Kazakhstan, he said.

“These indicators must be monitored very carefully,” Sultanov said. “As a result of the adjustment in the exchange rate, we see inflation is in double digits.”

While the tenge has stabilized after the world’s second-worst performance last year, its weakness has fed into inflation, sending annual price growth to 16.3 percent in April, the fastest in eight years and more than double the central bank’s target. The Kazakh currency has gained 4.3 percent against the dollar in the past three months.

Recession Looms

Pummeled by the drop in commodities, the economy is at risk of its first contraction since 1998. GDP will probably contract by 1 percent in 2016, according to Fitch, which also estimates the budget deficit at 4.2 percent of GDP in 2016 compared with 5 percent in 2015.

The downturn will last longer while a recovery can be less pronounced, which may put the economy on a W-shaped trajectory and not a V-like path that followed the crisis in 2008, Sultanov said.

“These problems aren’t short-term in character,” he said. “We’ll always have time to burn through the National Fund and borrowing limits. It’s better not to burn through reserves.”

The pension fund is the main investor in sovereign bonds sold domestically this year, according to Sultanov. Authorities want the banking industry to play a greater role in 2017, he said.

Taking stock of the threats facing Kazakhstan’s finances, Sultanov said that what worries him most is how correctly he’s using the toolkit at his disposal.

“When there’re limited opportunities on the revenue side, the right balance must always be found, whether reserves should be used and how much,” he said.

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