Kazakhstan: Sovereign sells first Eurobond for 14 years


Lucy Fitzgeorge-Parker
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Investor demand tops $11 billion; Oil price, rouble falls raise devaluation fears.

Falling oil prices and fears of an imminent currency devaluation failed to dampen demand for Kazakhstan’s first international sovereign bond for more than 14 years in October.

The $2.5 billion dual-tranche bond attracted more than $11 billion of orders and priced at the lowest levels ever achieved by a CIS sovereign, with 10-year and 30-year yields set at 4.07% and 5.12% respectively.

Analysts say the deal’s success is partly due to Kazakhstan’s strong economic fundamentals – GDP grew at 6% last year and is forecast to expand by a further 4% this year, while public sector debt amounts to barely 12% of GDP – and partly to the lack of activity elsewhere in the region.

“The sovereign bond was very well timed,” says Dmitri Fedotkin, CIS economist at VTB Capital. “The traditionally strong supply from Russia and Ukraine has been put on hold, and for investors looking for diversification the availability of regional options is somewhat limited.”

Short supply

Eurobond issuance volumes for the CIS region in the nine months to the end of September totalled just $13.1 billion, less than a quarter of the $57.7 billion sold in the same period last year, according to Dealogic. Sovereign paper was in particularly short supply, with only two deals emerging – a $1 billion US-guaranteed issue from Ukraine in May and Azerbaijan’s $1.25 billion inaugural bond in March.

Bankers working on Kazakhstan’s bond issue confirmed that, at the time of pricing in early October, the lack of investment alternatives helped to allay investor concerns around the falling price of oil – still the mainstay of the Kazakh economy despite attempts at diversification – and the slowdown in neighbouring Russia.

Within a fortnight, however, further weakening of both the Brent crude price and the rouble, as well as other regional currencies such as the Belarusian rouble and the hryvnia, prompted renewed speculation that Kazakh authorities could consider devaluing the tenge for the second time this year.

The possibility was rejected by Kazakhstan’s central bank governor Kairat Kelimbetov, who told local media on October 21 that there were “no grounds for concern” and that the 19% devaluation undertaken in February – to a narrow corridor around KT185 to the dollar – still provided “a significant margin of safety”. He blamed economists for “artificially intensifying” devaluation expectations, accusing them of “powerful rumour attacks”.

Oleg Kouzmin, Renaissance Capital
Assuming a rebound in oil prices, we see the tenge as currently at around fair value, adding that even with oil at $90 a barrel a further devaluation would be unnecessary

Oleg Kouzmin, Renaissance Capital

Fitch Ratings analysts, however, said as early as May that the central bank’s “surprise decision” to devalue had been responsible for denting confidence in the monetary policy framework and increasing dollarization in the Kazakh economy. This was borne out by a substantial rise over the summer in net foreign exchange purchases by households, which increased from $670 million in May to $1.75 billion in August.

The devaluation also helped to fuel inflation, which by the end of September had risen to 7.4% from 4.8% at the start of the year. According to a Sberbank CIB research note, this was partly due to increases in the price of non-food imports as well as to rising food inflation in Russia, which boosted demand for products from Kazakhstan – particularly following the creation in May of the Eurasian Economic Union of Kazakhstan, Russia and Belarus.

“Kazakhstan seems to have significantly increased its exports to Russia in recent months, especially in the agricultural sector, thanks to improvements in the cross-border trade environment,” says Anton Stroutchenevski, senior economist at Sberbank CIB. “Many Russian small businesses and individuals are buying goods and food directly from Kazakhstan, which is why the country’s retail sector has been able to grow at a double-digit pace despite very weak local consumption growth.”

Nevertheless, in contrast to Kelimbetov’s accusations, the consensus among analysts canvassed by Euromoney in late October was that an immediate devaluation was not on the cards.

Wait and see

While noting that the dollar-rouble rate and the Brent crude price had come close to the levels previously set by the Kazakh authorities for a second devaluation – of R43 and $80 a barrel respectively – Dominic Lewenz, co-head of research at local investment bank Visor Capital, says policymakers would likely “wait and see whether either or both rebounded from those levels” before taking action.

He added that the central bank’s expansion in September of the corridor in which the dollar-tenge rate is permitted to float to KT160-200 “should be sufficient for the present”.

Oleg Kouzmin, CIS economist at Renaissance Capital, goes further, dismissing the fall in oil prices as a “temporary supply shock” and forecasting a rapid return to a level of $105 a barrel. “Assuming a rebound in oil prices, we see the tenge as currently at around fair value,” he says, adding that even with oil at $90 a barrel a further devaluation would be unnecessary.

Even Fedotkin, who saw the tenge as overvalued by as much as 20% in late October, says a devaluation in the next six months is not certain: “The exchange rate is an important social and political indicator in Kazakhstan, so even the current weight of fundamental reasons might not be sufficient to persuade the authorities to allow the tenge to depreciate.”

As he notes, policymakers have ample means to support the tenge if required. Kazakhstan’s FX reserves increased by $10 billion in the first nine months of the year to $28 billion, partly as a result of intervening to prevent currency appreciation in the immediate aftermath of February’s devaluation. The government also has access to a further $76 billion via the country’s sovereign wealth fund.