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. Last Updated: 07/27/2016

S&P Marks Down Kazakhstan's Ratings

International ratings agency Standard & Poor's has downgraded Kazakhstan's sovereign ratings to within a notch of losing its investment grade rating on concerns that the country's banks are overexposed to foreign borrowings.

A week after the agency put Kazakhstan's sovereign ratings on "credit watch," Standard & Poor's said in a statement late Monday that it had lowered its long-term foreign currency sovereign credit ratings to BBB- from BBB.

Kazakhstan has been hit harder by the global financial turmoil than Russia, because its banks have relied on foreign capital to finance aggressive growth.

"Kazakh banks have borrowed quite heavily on international capital markets and have lent on to the domestic economy," S&P credit analyst Ben Faulks said by telephone from London. "Our real concern is that the environment to borrow has changed quite significantly in the last few months and banks are consequently finding it more difficult to renew that external financing."

Since the summer, S&P said, the country's central bank has doled out about 1.3 trillion tenge ($10.9 billion) in support, equivalent to three quarters of the country's monetary base. The bank's international reserves have been drained by about $5 billion to $18.4 billion.

S&P said it did not rule out a further downgrade. "The key is how the authorities manage this and the measures they take to shore up confidence in the sector," Faulks said. "If the policy response falls short and there is a wider loss of confidence, that will put downward pressure on the rating."

Fitch Rating said Monday it was maintaining its sovereign ratings at BBB for Kazakhstan, while lowering its issuer default ratings from positive to stable. It noted that Kazakhstan's sovereign ratings continue to be propped up by the government's strong finances, underpinned by the country's natural resources.

The Kazakh authorities have indicated that they will step in again to help the ailing financial sector. At the end of last week, the Kazakh government pledged to provide the "necessary financial liquidity," prompting a recovery in the country's banking stocks.

"The fizz has gone out of Kazakhstan's champagne a little bit because the banks have been such a key driver of the economic boom," said Jarmo Kotilaine, associate director of financial services at London-based Control Risks Group. "Overall the crisis should be manageable. The government has quite a bit of cash in the bank. It could invest some of the oil fund money or it could gently nudge pension funds to invest more in Kazakh banks."

Consumer confidence remains fragile. There was a short-lived run on the country's banks in the summer after the tenge dropped against the dollar, and Alliance Bank said this week customers had withdrawn more than one-tenth of deposits, 27 billion tenge ($225 million), in July and August. The bank further warned that it could violate its loan covenants if depositors were to take out a further 10 billion tenge ($83 million).