Kazakhstan Local Rates - Seeking an Entry Point

With this note, we launch coverage of Kazakhstan's local rates space. The Kazakh tenge has underperformed both the ruble and oil prices since April, while local bond yields have been on the rise. The rest of the summer could also be challenging for the currency due to seasonal and temporary factors. However, we advise seeking potential spikes in USD/KZT in August for entry points into short-term government bills and bonds, which offer solid real yields. We expect local yields to stabilize, assuming that the National Bank of Kazakhstan keeps rates unchanged and the Unified Accumulative Pension Fund resumes being a net buyer of local government debt. > Tenge: Short-term headwinds, longer-term value. July and August are typically the toughest months of the year for the tenge. That said, we think potential dips during late summer could bring buying opportunities, as we see scope for the currency to firm to USD/KZT 400-410 by the year-end. Our optimism is underpinned by our bullish outlook on oil prices, our view that the ruble should strengthen to USD/RUB 70, and a potential wave of new international inflows into Kazakh government debt amid a more benign inflationary environment. The government's ongoing efforts to set up a link with Euroclear and get the country's local debt added to GBI indexes could also help. > Rates: Upward pressure on bond yields should subside. Inflation is on the rise in Kazakhstan, albeit largely due to transitory factors. This should allow the National Bank of Kazakhstan (NBK) to keep rates unchanged at 9%. The bond market has already priced in some tightening by the NBK, so we expect yields to stabilize at the very least. The Unified Accumulative Pension Fund reduced its government debt purchases in 1H21 due to a voluntary savings withdrawal campaign, but it should return to buying as peak outflows have already passed. > Macro: Inflation set to slow. The impact of rising food prices should fade away in 4Q21, and a more stable tenge should help to bring inflation back to the target corridor of 4-6% in late 2021 or early 2022. This would keep the real key rate in the 2-3% range, which is considered to be neutral for monetary policy. Meanwhile, we expect economic activity to remain strong in June and in early 3Q21, with growth starting to slow after that, as the low-base effect fades. We project GDP growth of 3.7% for this year. Fiscal policy should remain supportive this year. Key near-term events include: NBK's policy meeting on July 26 and July CPI release on August 2-4.