Kazakhstan Local Rates - Exhibiting Resilience

Despite the outbreak of unrest at the start of the year, Kazakh asset prices barely retreated in January. We expect this relative stability to be preserved over the near term, though local-currency bonds are likely to prove an exception, as yields seem destined to continue climbing in response to the National Bank's tighter policy.> Tenge: The worst is over. The rapid normalization of the social and political situation and the NBK's reaction allowed the tenge to remain stable. Meanwhile, the rising oil price helped the local currency shrug off the ruble's depreciation. We expect these factors to remain in play and see USD/KZT staying around 434 over the coming months.> Macro implications of the January turmoil. The protests did not last very long, so we do not anticipate a tangible impact on economic growth. However, the course of fiscal and monetary policy could change, as the government is preparing additional social measures. The NBK has already hiked the key rate 50 bps to 10.25% and could tighten policy again at its next meeting. > Local debt: Yields set to cross above the 11% mark. Following the NBK's rate hike, the primary market yield on 15y bonds reached 11.05%, the highest level for government bond auctions since August. Most other tenors have yet to reprice. > Nonresident flows: Foreign participation at a one-year low. Following a large redemption of NBK notes in December, nonresidents have been reluctant to reinvest the proceeds. > Pension fund flows: $1.3 bln of Kazakh sovereign Eurobonds sold in 2021. The United Accumulative Pension Fund held only $320 mln in Kazakh sovereign Eurobonds as of end-2021. Meanwhile, the fund has remained a net buyer of government local debt in recent months, and this is likely to continue in 2022.