Yekaterina Lipatova: Devaluation will make negative effect on state companies

Almaty. October 7. KazTAG - Contrary to popular belief that strong weakening of the national currency will bring benefit  for the real economy, it still does not look so unique. The problem is that many companies have a high debt burden and costs in foreign currencies. Sharp tenge devaluation creates preconditions for deterioration of their financial condition. In particular this applies to individual quasi-state structures.
Junior vice-president of the international rating agency Moody's Investors Service Yekaterina Lipatov commented on the risks and perspectives of the corporate sector after the new tenge fall on the background of declining macroeconomic conditions.

- Kazakhstan faced new devaluation, while tenge rate is in the free float. How can it affect the financial condition of quasi-state companies?

- The effect of the devaluation on the state-owned companies will be in different directions, depending on the specific activity. So, for the exporters, such as "KazMunaiGas" and "Kazatomprom", the impact will be positive or neutral due to sufficiently large share of operating and capital expenditures in the currency. They reduce the degree of positive effect on the growth of export earnings associated with the weakening of the tenge. In addition, the debt of these companies is mainly in currency.

- And what will be the effect of the devaluation for companies whose revenues are denominated in the national currency?

- The effect for public companies operating in the domestic market will be negative. We expect a decline in margins for companies due to high proportion of costs in foreign currency, as well as increasing inflationary pressures.
In addition, the debt burden will increase significantly as the debt of all the companies in the mainly foreign currencies. Nevertheless, we believe that the negative impact will be partly smoothed due to availability of state support.

- Could you tell us which companies tend to face higher risk following sharp drop of the national currency?

- Importers and companies operating in the domestic market with an overwhelming share of revenues in tenge, are most at risk from the weakening of the currency. The latter include "Kazakhstan Temir Zholy", "Kaztemirtrans", "Kazakhstan Engineering" and KEGOC.

- What is the reason?

- First of all, due to quite substantial share of foreign exchange expenses, capital expenditures and debt, which are not compensated by gain in the currency.
Devaluation leads to  weakening of domestic demand, which may also adversely affect the operating and financial performance of companies that are not able to  shift increasing costs on the consumers.

- And what will happen to private companies?

- We believe that the risks for private companies, for example, RG Brands, are significantly higher due to the lack of direct access to governmental support.

- What are the other major risks for the corporate sector, in addition to the devaluation?

- The main risks include the worsening macroeconomic environment, weakening of domestic demand and inflationary pressures, as well as the rising cost of borrowing and access to bank loans.

- Are there any positive factors that can support the ratings of companies and development institutions?

- One of the key positive factors for the ratings of state companies is support from the state in the form of indexation, capital injections, grants, access to concessional lending and others.

- Are there any negative factors that have a negative impact on the ratings of corporate structures?

- In addition to these risks, one of the main factors that has a negative impact on the ratings of all the companies in Kazakhstan, is the country risk. It is associated with a low level of institutional sustainability, less developed legal environment and higher political risks.
In addition, one of the risk factors is the state of the banking system.

- How high do you estimate the probability of state support of quasi-state companies in case of stressful situation?

- We estimate the probability of state support as quite high, which in turn is reflected in the high level of ratings of public companies on their baseline credit assessment (without state support - KazTAG) - higher on average by 2-3 degrees. For example, the base rating of "KazMunaiGas" is ba3, while the final rating of the company is - Baa3.

- Thank you for the interview!