Fixed Income - Kazakhstan Virtual Trip Notes

Last month, we took a "virtual trip" to Kazakhstan during which we held talks with officials and representatives from the National Bank, Finance Ministry and EBRD, as well as the corporate sector.> Kazakh economy expected to bounce back with 3% growth this year. The pandemic hit the Kazakh economy hard last year but economic activity is expected to rebound this year. The government expects 2.7% GDP growth this year, based on an average exchange rate of USD/KZT 420 and $35/bbl Brent. The NBK is slightly more optimistic, forecasting $50/bbl Brent and 3.4-3.7% GDP growth. > Inflation remains above-target, but could ease by year-end. Inflation was 7.4% y-o-y in February, well above the target range of 4-6%, but is expected to fall by year-end, so some easing is possible then or at the beginning of next year. That said, the scope for cuts is limited.> Deficit financing focused on local market. The budget deficit is estimated at KZT2.6 trln ($6.2 bln), or 3.4% of GDP. The Finance Ministry does not currently plan to tap the Eurobond market this year, but it has not ruled this out.> Local debt market a key focus of investors. We believe that foreign money will likely continue to flow into NBK notes and short-term local sovereign debt in the coming months due to expectations of further monetary policy easing and high real yields. But long-term local sovereign papers are unlikely to find favor until more clarity on index inclusion emerges.> Eurobond market performing well versus peers. We see limited potential for spread tightening, as the risk of a further rise in UST yields remains, though the OPEC+ agreement will support oil prices and Kazakh Eurobonds. We think Kazakhstan's euro-denominated sovereigns have less downside risk than its dollar-denominated issues.> Banking sector gradually recovering from pandemic, now seems back to business as usual. It has been helped by relatively large state-sponsored support measures for borrowers. As was the case in many other markets, the pace of digitalization picked up last year in the banking sector as well. Meanwhile, some Kazakh banks are eyeing expansion to neighboring markets (Uzbekistan in particular).> ESG. The ESG theme is only starting to emerge in Kazakhstan, but it is increasingly being addressed by government officials and companies. It seems that the largest quasi-sovereign corporates with access to (or those planning on having access to) international capital markets are at the forefront of integrating ESG principles.