Kazakhstan’s Credit Risk drops Most in World, as Oil revives Economy

Kazakhstan is regaining bond investor confidence faster than any other country as rising oil prices spur an economic rebound.
Credit-default swaps that compensate holders of government bonds in case of a default fell to 237 basis points this week from 498 basis points on June 30, the biggest decline this year, according to CMA Datavision prices for 38 countries on Bloomberg.
The decrease suggests improving perceptions of the nation’s ability to pay debt.
Kazakhstan, which owns 3.2 percent of the world’s oil reserves, is reviving after Central Asia’s biggest energy producer spent $19 billion, or 14 percent of gross domestic product, rescuing lenders and creating jobs. ING Groep NV, Commerzbank AG and JPMorgan Chase & Co. this month recommended buying bonds or shares in the nation’s banks, as crude oil approached $80 a barrel.
“Kazakhstan has certainly come back from the edge to some sense of normalcy,” said Harald Eggerstedt, a credit strategist at Edinburgh-based bond broker RIA Capital Markets Ltd., who worked for the World Bank between 1990 and 1995. “Oil prices have reduced pressure on the economy, renewed demand for fuel has brought down risk and the country is on the way to a smaller and more efficient banking system.”
At the height of the banking crisis in February, default- swap rates on Kazakhstan surged to 1,646 basis points, the fifth highest after Ukraine, Argentina, Pakistan and Iceland. The price is now closing in on the 192 basis points for Russia, which has a higher debt ranking, according to Bloomberg.


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Improving fortunes
Kazakhstan may sell about $500 million of debt in 2010, the Finance Ministry said last week. Officials from neighboring Russia, the world’s biggest energy supplier, briefed investors in London earlier this month on plans to sell as much as $17.8 billion of bonds next year.
“If oil prices stay where they are until 2011, Kazakhstan is completely safe,” said Tatiana Orlova, an economist at ING in London, which predicts further declines in the cost of protection. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country fail to adhere to its agreements. A basis point equals $1,000 on a contract protecting $10 million from default.
Commerzbank AG recommended the bonds of Almaty-based ATF Bank, a unit of UniCredit SpA and Bank CenterCredit, part owned by South Korea’s Kookmin Bank, last week.
ATF’s dollar- denominated debt due 2014 yields 7.91 percentage points more than Treasuries, according to data compiled by Bloomberg. ING also recommended ATF’s 2014 debt last week.
Buy banks
Shares of Kazkommertsbank and Halyk Savings Bank, Kazakhstan’s first and third biggest lenders, offer the best risk-reward ratio among lenders in eastern European, the Middle East and Africa, JPMorgan said in a Nov. 5 note. UBS AG also recommended the two banks this week.
Kazakhstan’s four biggest banks amassed at least $24 billion of debt as economic growth averaging more than 10 percent a year from 2000 through 2007 lured foreign lenders. When credit markets froze in late 2007 and the price of oil fell to as low as $39 a barrel, the nation’s biggest lenders couldn’t repay creditors.
Bank losses triggered a $19 billion government rescue for lenders and the economy.
The central bank devalued its currency in February. The government bought a 75.1 percent stake in BTA Bank, then the country’s largest lender, that month to avert bankruptcy.
Mortgage lender AO Astana Finance stopped paying interest and principle on $175 million of dollar bonds in May.
Signs of recovery
“Kazakhstan has gone from having a fairly high level of respect among international investors to confidence being undermined by the banking sector,” said Ian McCall, portfolio manager at London-based Argo Capital Management Ltd. Those concerns remain even as the economy ebounds, he said.
Kazakhstan’s $132 billion economy is showing signs of recovery after a 73 percent surge in crude this year. UBS predicts 1.5 percent economic growth this year will be followed by 5 percent expansion in 2010.
Industrial production grew an annual 6.4 percent in October from 2.8 percent growth a month earlier. The central bank said currency reserves climbed to a one-year high of $20.8 billion last month. The benchmark KASE stock index is up 66 percent for the second half of 2009, more than double the 27 percent gain in the MSCI Emerging Markets Index, according to Bloomberg.

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