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Fitch predicts new currency devaluation in Kazakhstan

8 April 2015 17:08 (UTC+04:00)
Fitch predicts new currency devaluation in Kazakhstan

By Sara Rajabova

Fitch Ratings said the devaluation of the Kazakhstan’s national currency tenge would pressure banks' asset quality and capitalization.

Fitch said on April 8 that Kazakh banks' already low rating levels (mainly in the 'B' category) and the solid sovereign credit profile mean this would not necessarily result in negative rating actions.

Fitch believes there is a possibility of a further devaluation after the upcoming presidential election.

The sharp drop in oil prices, as well economic recession in Russia greatly affected the outlook for Kazakhstan's economic growth and external and fiscal imbalances.

Rumors of devaluation have increased in February as the tenge devalued twice in the last six years, both times in February. The Central Asian economy experienced a 22 percent devaluation of its currency in February 2009 and then a one-step 19 percent devaluation of its currency in 2014, also in February. However, the government could prevent the tenge’s sharp devaluation, which could dramatically worsen the economic situation in the country.

Fitch said the authorities have previously indicated a comfort range of KZT3.5 to KZT4.5 per rouble, implying a 13 to 45 percent potential devaluation versus the dollar, relative to the end-2014 exchange rate.

The direct impact on bank's capital through risk-weighted assets (RWAs) inflation and FX losses would be limited, as FX assets comprise less than 30 percent of most banks' balance sheets, and banks generally do not have big open currency positions, according to the report.

Fitch said a 30 percent tenge devaluation would likely reduce core Tier I capital ratios by around 0.3 to 1.5ppts in Fitch-rated banks. Sizeable short on-balance-sheet FX positions at end-2014 were largely matched by off-balance-sheet KZT/USD swaps, provided intermittently by the National Bank of Kazakhstan since mid-2014.

It went on to say that the potentially greater hit would come from asset quality deterioration.

Devaluation could put adverse pressure on foreign-currency loan quality, given that significant amounts of FX loans were provided to unhedged borrowers, especially as uncertainty persists about the sufficiency of provisions at some of the largest banks, according to the report.

Fitch estimates rated banks' gross foreign-currency loans to total $30bn, including accrued interest and loans sold by banks to captive special-purpose vehicles (SPVs).

The net FX loan exposure of $14bn (after deducting specific impairment reserves) was double the banks' combined equity at end-2014 and included $3bn of unreserved non-performing loans (NPLs), according to Fitch.

It said Kazakh banks' legacy and emerging asset quality risks are consistent with their low Viability Ratings, which reflect weak standalone credit profiles, mostly in the 'b' category.


Sara Rajabova is AzerNews’ staff journalist, follow her on Twitter: @SaraRajabova

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