Moody’s upgrades Kazakhstan’s ratings, praising economic diversification

This article is part of our special report EU-Kazakhstan relations: A strategic and economic evolution towards a regional and global role.

Moody’s upgraded Kazakhstan’s long-term credit rating from Baa2 to Baa1 with a “stable” outlook - the highest rating the agency has assigned to the country since its independence.

A report published on 9 September by the financial services company acknowledges the ongoing improvement in Kazakhstan’s institutional and political environment, combined with sustained economic diversification.

These factors have contributed to an enhanced economic stability and improved creditworthiness. Experts at Moody’s expect these improvements to continue and credit resilience to further strengthen.

The stable outlook, according to the company, reflects balanced risks. Ongoing reforms both at the institutional and economic levels can make Kazakhstan a more attractive destination to invest.

This can, in turn, lead to an accelerated progress of economic diversification in the country beyond Moody’s expectations, further strengthening Kazakhstan’s credit profile.

However, a deterioration in regional geopolitics and the potential for secondary sanctions are highlighted as key risk factors. The re-emergence of domestic political risks or social unrest can dampen foreign investment and economic prospects.

Progress in economic diversification

Moody’s praised the progress Kazakhstan has made in lessening its economic dependence on hydrocarbons. Over the past year, the non-oil sector has demonstrated growth with notable performances in the ICT, transport and manufacturing sectors.

The report argues that diversification has helped maintain economic and financial stability even through shocks, and it mitigates risks associated with fluctuations in oil price and production.

Development in the transportation and logistics sector, according to Moody’s, is one of the key drivers of growth and diversification, highlighting the rapid growth in cargo transit activity across the Trans-Caspian International Trade Route.

Also known as the Middle Corridor, this route has stronger prospects to further shift regional supply chains away from Russia, something that has become interesting in the eyes of foreign investors, looking to expand in non-oil sectors - automotive manufacturing, pharmaceuticals, food industries, construction materials.

Moody’s assessed the government’s efforts aimed at improving the business climate and attracting investment, as well as measures to create a favourable ecosystem and reduce bureaucratic barriers.

Transparency and governance

The reports look favourably at the constitutional and electoral reforms over the 2022-23 period, that reduced presidential power and paved the way for broadened political representation and better civic engagement.

The Kazakh government is praised for pushing through reforms aimed at improving transparency and governance, with anti-corruption efforts persisting. It is also praised for addressing the social issues that arose during the January 2022 unrest, with requests for the improvement of education access and broadening gasification.

The report mentions the fact that Kazakhstan is the only country in Central Asia that has joined the Council of Europe’s Group of States against Corruption (GRECO), which includes 46 European countries and the United States.

Credit strength

Kazakhstan’s strong financial performance, with low debt levels and high ability to repay it, as well as the government’s policy to maintain a budget deficit at 2.5-3.0% of the GDP, will continue to underpin the country’s credit profile.

A new Budget Code is being drafted to improve fiscal accountability and efficiency, says the report, while planned revisions to the Tax Code foresee higher tax revenues and compliance.

As also highlighted in a press release by the Ministry of National Economy, this upgrade will strengthen the country’s economic and financial stability, improve the country’s international standing, and attract investments from capital markets.

Upgrading or downgrading the ratings

Should Kazakhstan continue with reforms aimed at improving institutional quality and policy credibility and effectiveness beyond expectations, Moody’s would likely upgrade its ratings.

Hence the country is encouraged to further progress in economic diversification and to carry on reforms addressing structural challenges, such as the limited role of the private sector in the economy, lack of skilled labour, and weaker energy and transport infrastructure.

The ratings could however be downgraded, if there is a significant and long-lasting deterioration in Kazakhstan’s economic and fiscal metrics, possibly due to a structural fall in oil production or exports, or a negative oil price shock that the government would not be able to handle.

Domestic political risks or a reemergence of social unrest, with potentially negative effects on oil production, minerals extraction or foreign investment, and eventually the government’s reform agenda, could contribute to downward pressure on the rating.

[Edited By Brian Maguire | Euractiv's Advocacy Lab ]