Kyrgyzstan: Risk Assessment

Country Rating¹

Rating: D

Business Climate Rating¹

Rating: D

Risk Assessment²

Economy affected by political turmoil
The economy declined in 2010 due to political instability and violent unrest between April - when former president Kurmanbek Bakiyev was ousted - and June, causing severe damage to infrastructure in the south and leading to the closing of the country's borders. The recession would have been even more severe if it had not been the Kumtor goldmine, which benefited from rising world gold prices. Even in the mining sector, social unrest and strike actions affected production targets and led to a fall in investment. Agriculture and construction in particular were also severely affected. In 2011, the Kyrgyz economy is expected to resume growth, provided the country avoids further instability. Gold production is expected to grow, and Kyrgyzstan will likely benefit from the buoyant Russian and Kazakh economies via remittances, trade, and investments. However, structural weaknesses will persist (power shortages, inadequate infrastructure, and so on), holding the economy below its growth potential. Inflation is expected to rise due to firming domestic demand and imported inflation caused by the Kyrgyzstani som depreciation

Importance of international support
Public debt widened in 2010 because the state has to significantly increase spending to offset the consequences of its domestic unrests. The total cost of crisis-related measures- especially infrastructure reconstruction, victim compensation, and bank recapitalisation - represented 5% of GDP. Support from the international financial community will be crucial in financing the deficit, and even though half the aid comes in the form of grants, the public debt has increased sharply since 2009. Since then it has remained high, as have debt servicing costs, and the Kyrgyz authorities are expected to step up appeals to official backers for debt cancellation in 2011, having already obtained an agreement from the German development bank, KfW. The government is also considering some privatisations to fund the deficit in 2011. Furthermore, pressure on external accounts will remain strong in 2011 in a country with limited foreign exchange reserves, and further depreciation of the som appears likely. Given the extensive dollarization of the banking system, such depreciation would adversely affect borrower solvency, with banks already looking at weakening balance sheets since the second quarter 2010. In addition, the solvency of the country's first bank, the systemically important Asia Universal Bank, was jeopardized in the wake of a massive bank run from abroad at the time of the Bakiyev ouster

Uncertainty over the new parliamentary regime
Legislative elections in October 2010, sanctioned by CIS and OSCE observers, failed to enable the formation of a clear-cut coalition. Only five of the 29 parties involved reached the 5% threshold required to secure a seat in parliament. In addition, two of these parties wish to return to a presidential regime, running counter to the results of the June 2010 referendum. The formation of a new government is not expected to alleviate political tensions. Supporters of the 24 parties not represented in parliament and those that will be part of parliamentary opposition parties are expected to express their discontent in 2011 with new demonstrations in Bishkek likely. The risk of political instability and further social unrest is very high.

Strengths

• Significant financial support from bilateral and multilateral donors
• Investment efforts from Russia, Kazakhstan and China
• High hydroelectric potential
• Improved management of public accounts
• Kumtor goldmine

Weaknesses

• A small enclosed economy strongly dependent on energy
• Impoverishment of the rural population
• Problems of electricity supply because of inadequate infrastructures and frequent drought
• Difficult business environment because of a strong concentration of economic power and corruption
• Complex clan division between north and south of the country
• Increasingly poor, predominantly rural population