Konstantin Anglichanov: Privatization of state assets negative for rating but positive for macroeconomics

Almaty. May  20. KazTAG - Sergey Zelepukhin. The government has repeatedly stated its plans to privatize a large part of the national holding assets and has already started implementing these steps. Experts believe that this is the right decision, but warned of possible negative consequences for the privatized companies and for the state.
What are the main threats for the Kazakh state structures, what  impact  will it make on the ratings? How high is the probability of downgrading of the ratings of the national companies this year? Director of the analytical group on International Public Finance of the International Rating Agency Fitch Ratings Constantine Anglichanov answered these and other questions.

- The economic situation in Kazakhstan remains difficult. How in these circumstances, do you assess the prospects of quasi-public sector? What to expect fr om the privatization of national companies?

- The national holdings in Kazakhstan are the intermediate tools in solving important social and economic challenges: diversifying the economy, creating competitive environment, improving corporate governance, supporting social projects. This happens due to the poor development or absence of major market institutions.
So we find it difficult to compare similar companies in the country, so to speak, with a long history of development of the market economy. Formation of quasi-fiscal institutions such as Kazakhstani national holding  is the specificity of countries with emerging markets.
Now Kazakhstan, as well as other countries like it, are moving to the market asset management. Respectively, as time goes by, the role of national holdings will subside. In fact, the privatization plans directly indicate that the share of the public sector should be reduced from the current 45% of GDP to around 15%. This is a serious reduction - three times.
This can be achieved, only with gradual transfer to the market environment of those things which can survive without additional support. On the other hand this environment is only supposed to be created in some sectors.
Therefore, in our opinion, possible evolution of the national holding  is in their formation as the development institutions. That is, their transfer from the state assets management into the  market infrastructure in those fields, wh ere it is not sufficiently developed or in support of unprofitable "social" projects. There is a large field for activities.

For example?

- For example, to resolve one of the major concerns of developing countries. It is presence of "long" liabilities and absence of "long" assets. The national holding might work on resolution of these inconsistencies. For example, the capital accumulated in the Unified Pension Fund was supposed to work for creation of new added value in the "long-term projects" and ultimately - for economic growth. You need to do a lot to make it work. We need to develop the stock market, to increase investor confidence.
In other words, it is necessary to increase the level of planning and investment. It is clear that it will only come with time.  For a transitional period, of course, these holdings will remain. But what will they be, when the privatization plans will be implemented, - it is a question for a long term perspective.
For now the national holding assets are under control of the state, and many of them have accumulated large external debt. In connection with this there is a question: how much optimal is it and whether there is a risk that some quasi-state structures may face repayment problems in the environment of falling profitability?

- This issue should be considered from the perspective of hedging instruments. It is obvious that the problem with repayment of debt may be exacerbated in those companies that have funding in foreign currency and revenues in tenge. With rare exceptions, there are no reserves to cover this gap formed due to exchange rate differences. And this is also the question of formation of the market infrastructure. If some tools for these risks hedging are offered, there will be good opportunities on this market.
But until then, some national holdings or their subsidiaries may have difficulties with repayment of debts, some have already faced them, for example, in excess of the covenant. It was a reflection of the changed macro factors in the negative direction. Thus, in 2014-2015 the conjuncture on the basic export goods of Kazakhstan has significantly changed.
On the other hand, Kazakhstan to a certain extent is limited in economic decision-making by the union with Belarus and Russia. In other words, the country needs to check its economic policy with its partners in the Eurasian integration. On the third hand, it is necessary to take into account the scale of the Kazakh economy.
In other words, there are unfavorable factors, but there are also tools for maneuver. For example, provisions that allow the government to smooth out the shocks. Therefore, if they continue to support and mitigate the impact of negative factors on the basis of the accumulated reserves, they will be able to avoid the difficulties with payment of the debts of the national holdings, including external.

- So do you expect that the government will support the controlled holdings?

- Yes, we expect that state support will be maintained. But if we see significant signs that state support weakens, in the first place their ratings will be affected.
This can create additional difficulties because investors perceive the national companies, in fact, as a kind of continuation of the state. For the state it is useful as quasi borrowers, attracting commitments lay a certain benchmark for possible borrowing of the state.
If at some point they decide to raise additional funds in foreign capital markets, it will be easier to do this on the basis of pre-existing benchmarks. No one knows how long the period of low oil prices will continue. Therefore, it is possible that at some point the government will have to borrow again in the international markets.
Now Russia wants to do this. There was no such need for the period of high export prices. On the contrary, they were  accumulating reserves. But at the moment when they are under threat, it is necessary to insure themselves. And the capital markets may offer this insurance in the form of loans. But it will be easier to return if investors have a certain benchmark.

- Due to deterioration of economic conditions, how much is the situation on the external capital market unfavorable for Kazakhstani companies? How high is the risk of the debt refinancing?

- Of course, there may be risks, but, as it is well known, the investors in the market are ruled by two emotions - fear and greed.

- Is there any profitability between them?

- Yes, and sooner or later the fear of emerging markets will decline. But today it concerns not only Kazakhstan issuers – the  companies from emerging markets have difficulties in attracting funds.

The problem should be considered in terms of the offered opportunities. Fundamentally all the investors understand that Kazakhstan has a good resource base,  reserves are available there. Under undervaluation of debts of Kazakh companies comes a window of opportunity to carry out operations in the capital market in the hope that in the longer term Kazakhstani securities will rise in price.
But in fact, it is the issue of increasing quality of debt management. It is clear that Kazakhstan enters into a difficult period, when it is necessary to shift from the standard-established approaches and move to a more complex choice. And there are various opportunities.

- Let's talk about the rating outlook of the national companies. How high is the probability of negative rating actions by Fitch in respect of  Kazakh quasi-state structures?

- This year, the probability of negative rating actions in respect of individual national holdings is small. But if macroeconomic shocks increase, the state support laid in the ratings will decrease, then there is a probability for the ratings revision to the negative side.

-What factors are currently making impact on the ratings of the national holdings and their subsidiaries?  

- The main negative factor is possible weakening of the bonds of the national companies and the state. But, based on our criteria for a status assessment, control, integration of national holding with the state, everything indicates that in the short term, this bond will remain strong.

- It turns out, the privatization of national companies - is a serious risk to their ratings?

- Of course, because privatization leads to reduction of controlled assets in holdings, therefore reducing their strategic importance. In addition, it requires a very careful approach. But it is necessary because, on the one hand, the dominance of the state does not provide incentives for the development of private sector companies. However, on the other hand, it is important not to sell too cheap, and to hold it as efficiently as possible.
These factors probably should somehow be balanced. It is important to observe the price situation, relatively speaking, if there is a buyer for the proposed assets. That is to hold privatization  very carefully not to cause any significant negative consequences. So here the main risks lie in the management decision-making.

- Are there more advantages or disadvantages in the privatization?

- In terms of ratings, privatization of state assets is rather a minus as it can possibly reduce the strategic role of the national holdings, but in terms of macroeconomics - it is probably the most positive. Since the number as well as the quality of economic agents will increase, while the risks, including credit risks, will be divided over a wider base.

Thank you for the interview!