Kazakhstan has a higher debt rating at Standard & Poor's than Russia for the first time since 2005 as the central Asian nation spends less of its commodities- fueled wealth than its northern neighbor.
S&P on Nov. 7 raised Kazakhstan's foreign-currency debt one level to BBB+, the third-lowest investment grade, on par with Ireland, South Africa and Thailand and two levels above Brazil. The ratings company, which cited the effect of rising commodity exports on the fiscal and current-account surpluses, has a stable outlook for its assessment.
Kazakhstan holds 3 percent of the world's crude reserves, compared with 5.6 percent for Russia, according to Bloomberg data. Lower government spending makes Kazakhstan less reliant on revenue from commodities than Russia, Julia Tsepliaeva, chief economist at BNP Paribas SA in Moscow, wrote in an e-mailed note yesterday. The oil price sufficient for Kazakhstan to balance its budget is $75 per barrel, compared with as much as $126 for Russia, she said.
'Expenditure Appetite'
"Unlike Russia, which drastically increased the government's expenditure appetite, Kazakhstan channels a bigger part of its oil revenues to the National Fund," Tsepliaeva said.
The Russian government is boosting social spending and pledged to raise military salaries by 170 percent next year as voters head to the polls in parliamentary elections on Dec. 4 and a presidential vote in March.
Kazakh crude output will almost double over the next decade and an $8 billion cap on spending from the oil fund means that the nation is saving about half of its revenue from the fuel each year, S&P said on Nov. 7.
The cost of protecting Kazakh debt against non-payment for five years using credit-default swaps was 240 basis points yesterday, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Russian CDS was at 210 basis points.
The Kazakh central bank expects further upgrades to the country's sovereign rating, eventually reaching an A grade, Chairman Grigori Marchenko told reporters in Almaty today. The bank views S&P's decision "as the first step on the road that rating agencies must take," Marchenko said.
The nation's currency, the tenge, which is managed by the central bank, gained 0.13 percent last month against the dollar and traded little changed today at 148.03 per dollar, Bloomberg data show. While the currency will probably gain in the near term, it won't appreciate beyond 145 per dollar, Marchenko said.
Kazakh Surplus
The Kazakh budget surplus will widen this year to 1.7 percent of gross domestic product and stay at the same level next year, compared with 1.4 percent last year, the International Monetary Fund said last month. Russia will post a deficit of 1.1 percent this year and 2.1 percent in 2012, from a 3.5 percent shortfall in 2010, the Washington-based lender forecast in October.
Russia's budget was 1.1 trillion rubles ($35 billion) in surplus in the first nine months, equal to 2.8 percent of gross domestic product, the Finance Ministry said on Oct. 13. Boosting military salaries will cost taxpayers 900 billion rubles ($30 billion) from 2011, according to Alfa bank, the country's biggest private lender.
Government Spending
Government spending in Kazakhstan will account for 22.8 percent of economic output next year, compared with 37.7 percent in Russia, according to IMF forecasts. Kazakh government debt will be 13.8 percent of GDP next year compared with 12.1 percent for Russia, the lender said.
"Kazakhstan's budget is much more durable than that of Russia's, with a much lower oil price required to balance the budget," Tim Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London, said in an e-mailed note. "Kazakhstan also benefits from huge potential for hiking oil and commodity production."
The economy of the biggest energy producer in central Asia will expand 6.5 percent this year and 5.6 percent in 2012, fueled by demand for its crude oil, according to the IMF's World Economic Outlook database.
Russia's economy will grow 4.3 percent this year and 4.1 percent in 2012, less than previously forecast because of a worsening outlook for oil prices, the IMF said in September.
Moody's, Fitch
Moody's Investors Service rates Kazakhstan one level lower at Baa2, while it maintains a Baa1 rating on Russia, a step higher. Fitch Ratings has Kazakhstan at its lowest investment grade, BBB- compared with BBB for Russia, its second lowest.
"S&P's action is in line with our long-standing call on Kazakhstan, outperforming Russia economically and in the credit space in the medium term," Alexander Morozov, chief economist for Russia and the Commonwealth of Independent States at HSBC in Moscow, said in an e-mailed note. "Decent macroeconomic performance and policies are still rewarded."
A doubling of oil production and net foreign direct investment that will average about 4 percent of gross domestic product a year will feed annual per capita GDP growth of 6 percent from 2011 to 2014, S&P said.
'Political Uncertainties'
Still, S&P said it weighed its decision "against political uncertainties and a stronger, but still weak, financial sector."
Kazakh President Nursultan Nazarbayev's reported hospitalization in Germany in July raised questions about succession in the former Soviet nation, which he has ruled since 1989. In April, he won elections with 95.5 percent of the vote. Kazakhstan lies along strategic energy transit routes for China, Russia and the U.S.
The nation's banks are still reeling from the global financial crisis that followed the collapse of Lehman Brothers Holdings Inc. Kazakhstan used $10 billion from its oil fund to support banks and companies after credit markets froze two years ago. BTA Bank, the biggest lender at the time, Alliance Bank and Temirbank agreed with creditors' on discount and extension of payments on about $20 billion of debt after they defaulted in 2009.
Kazakhstan is considering selling its first foreign- currency bonds in more than a decade next year, which may well pave the way to its first sovereign Islamic debt, Deputy Finance Minister Ruslan Dalenov said in an Oct. 26 interview.
The S&P rating upgrade "opens possibilities for rating growth of all companies and residents in the country and decreases interest rates on international loans," the Astana- based Economic Development and Trade Ministry said in a statement posted on Kazakh government website.
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