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Kazakhstan downgrade has little effect

Kazakhstan has received another rating downgrade due to an economy weakened by low oil prices. Although the country’s currency has performed poorly as of late, worrying entities with dollar denominated loans, its markets have recently been buoyed a revival in oil markets.

May 4, 2016 // 4:17PM

Fitch has lowered Kazakhstan’s credit rating from BBB+ to BBB, citing the negative impact low oil prices have had on the country’s economy.

The downgrade marks the third time the country’s rating has been lowered since its currency fell to record lows in January. Moody’s also recently downgraded the sovereign to Ba3 with a negative outlook.

“The impact of the recent rating downgrade will be minor, and the agencies are usually more backwards than forwards looking on the region. The effects will also partially be negated as there is not much foreign interest in Kazakhstan or the region,” said Clemente Cappello, Chief Investment Officer at Sturgeon Capital.

Devaluation of the country’s currency, the tenge, and rising interest rates have also damaged capital adequacy ratios at many of the country’s banks, which has factored into rating movements and investor sentiment.

“Currency devaluation and low oil prices have affected dollar denominated loans,” Cappello added.

He explained, however, that dollar loans are usually given to export companies trading in dollar priced commodities, so the risk is slightly offset.

Despite many lenders in the country having a number of restructured loans, many in US dollars, the recent rise in oil has aided the tenge’s revival.

“The tenge has been appreciating, and the renewed confidence in the currency can be seen in the shift in popularity from dollar to tenge accounts. This has also been helped by high interest rates,” noted Cappello.

Confidence is returning to the country’s banking sector, and analysts have suggested companies that do most of their business in US dollars, particularly exporters, are becoming increasingly competitive.

Despite concerns over its performance, Cappello said the banking sector receives expensive support from the government, including from the country’s central bank and from local pension funds, which could help buoy sentiment in the medium and long term.

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