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Kazakh bond return paves way for corporate borrowers

ASTANA -- The return of Kazakhstan to the international bond market after a 14-year absence has stirred investors' appetite for its long-awaited notes and paved the way for a resumption of international issues by local companies.

     "The placement was highly successful," Yerulan Mustafin, senior analyst at investment bank Halyk Finance, told the Nikkei Asian Review. "The Finance Ministry took advantage of the lending environment of low interest rates to fund a budget deficit and to set a benchmark for corporate borrowers."

     Russia's oil-rich southern neighbor closed the placement of two dollar-denominated bonds worth a total of $2.5 billion on Oct. 6. A $1.5 billion 10-year note was priced to yield 4.07%, and a $1 billion 30-year note was priced to yield 5.11%. It is the first time the country has tapped the international bond market since 2000, when it issued a $350 million 7-year bond with a yield of 11.13%.

     The deal was heavily oversubscribed, despite investors' worries about the impact of falling oil prices and the potential effects of an economic slowdown in Russia. According to Halyk Finance, orders for the deal exceeded $11 billion.

Clearing a path     

The two issues were part of a $10 billion program the government is planning as a way to diversify its financing sources. Kazakhstan's external financing needs are relatively low: In 2013, the budget deficit stood at 2.1% of gross domestic product and external debt was 68.5%. However, the bonds were also intended to clear the way for government-owned corporations and private companies to regain a foothold in the bond market following a $20 billion default by three local banks in 2009, which cast a shadow over Kazakh issuers.

     KazMunayGaz, the state-owned oil and gas company, raised $3 billion in 2013 and has signaled it may return to the international market with another issue of up to $3 billion. Private-sector borrowers are also gearing up to make the most of the favorable lending environment. Eurasian Bank, a local credit institute, plans a $500 million 3-year bond with a coupon of around 7.5%. The proposed issue was disclosed at the beginning of October, immediately after the Finance Ministry confirmed its plan to tap the international bond market.

     Analysts say the government might also return to the bond market soon. "I think the government would continue to take advantage of a low interest-rate environment to fund a budget deficit until the end of the year, in anticipation of a rate hike in the first half of 2015," Mustafin said, referring to the likelihood of a rise in benchmark U.S. interest rates. Kazakhstan has tried to raise money in the international bond markets several times in recent years, but it has repeatedly withdrawn bond issues because of "adverse market circumstances." 

     International investors' enthusiasm for emerging-market bonds is expected to fade in 2015 as the U.S. Federal Reserve tightens monetary policy, reducing the flow of cheap money that has flooded into developing markets. However, investors in the Kazakh bonds seemed unfazed by the country's economic difficulties.     

     Moody's Investors Service, the credit rating agency, said in a note issued shortly after the placement that Kazakhstan's key credit strengths included strong economic growth, the relatively large size of the economy, very low public debt and sizable foreign exchange reserves, which provide a significant buffer against external shocks.

     However, Moody's added: "The economy remains highly vulnerable to shocks from the oil sector, and susceptible to domestic political event risk related to uncertainty over [the] presidential succession." The agency assigned a Baa2 rating to both bonds, in line with Kazakhstan's overall country rating.

Growth concerns

Kazakhstan's economic growth is expected to remain stable at 6% in 2014, according to estimates by the Asian Development Bank. Yet the government is battling a number of unexpected events that may eventually reduce growth.

     Production at the Kashagan oil field, considered the largest outside the Middle East, was planned to start in 2013, but it has still not begun because of a pipeline problem. The new date has been moved to sometime before late 2016, government officials said during an oil conference in Almaty earlier this month. Meanwhile, domestic oil output remains stuck at 1.6 million barrels per day. Once up and running, Kashagan is expected to produce 370,000 barrels per day initially, eventually reaching about 1.5 million barrels per day.

     Plunging oil prices in the international market are further eroding the sector's contribution to GDP growth. Western sanctions imposed on Russia as a result of the Ukraine crisis have added to Kazakhstan's economic woes, with total trade with Moscow decreasing 24.6% on the year in the first half of 2014. The central bank devalued the currency by 19% in February, and rumors of a further devaluation have been widespread in recent weeks.

     As Moody's noted, Kazakhstan's medium-term risk scenario is also affected by uncertainties over who will take over the presidency after Nursultan Nazarbayev, who has led the country, largely unchallenged, since its independence from the former Soviet Union in 1991. No one knows who will succeed Nazarbayev, and there is widespread concern that political instability will follow his departure from the presidency as the system of personal power that underpins his rule begins to crumble.

Kanat Shaku contributed to this article.

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