Kyrgyzstan: Risk Assessment
Country Risk Rating
|D||A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very high.|
Business Climate Rating
|D||The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.|
Weak growth because of the Russian recession
After declining sharply in 2015, growth is expected to stabilize at a low level in 2016. The economy will continue to suffer from the Russian economic slowdown, in particular as a result of the fall in remittances by Kyrgyz expatriates in Russia, which represent the equivalent of 30% of Kyrgyz GDP. This decline will automatically reduce household consumption, despite better access to credit.
Gold production from the Kumtor mine, which accounts for 10% of GDP and 25% of industrial output, will support growth despite downward pressures on the gold price. The conflict relating to the exploitation of the mine between the Canadian firm operating the mine and the Kyrgyz government could threaten the growth and continuity of production, unless the talks quickly lead to an agreement. The construction sector will also help drive the industrial sector, although industrial activity is on a slowing trend. As in 2015, inflation is expected to edge up in 2016 and remain high, due in particular to a rise in imported inflation: downward pressure on the som could also last, given the likely depreciation of the Russian ruble and a stubbornly strong dollar. The upward adjustment of customs tariffs following the country's accession to the Eurasian Economic Union, will also accentuate the upward pressures on inflation, although this will be mitigated by the weakness of domestic demand.
A financial situation weakened by the current account deficit
The budget deficit is expected to continue to deepen in 2016, in particular because the weak growth will put pressure on any rise in revenue. Revenues are also likely to be hit by the decline in aid and foreign loans, as most of this comes from Russia. Despite the efforts to reduce spending, the deficit is likely to grow and thus fuel the steady rise in the country's public debt, which has reached worrying levels. The current account deficit, which increased in 2015, is expected to reduce slightly in 2016. Though imports are likely to remain weak because of still sluggish internal demand, the som's weakness will favor export growth, although this growth will, however, be offset by the moderation in the price of gold. The decline in expatriates' remittances and Russian FDIs will take the edge off this improvement in the current account deficit, which remains high. The size of the deficit, which is in particular explained by the country's energy and food dependence, makes the economy vulnerable to external shocks. Foreign exchange reserves, equivalent to three months of imports in 2015, will not be sufficient to reduce this risk.
Persistent political and social instability and greater dependence on Russia
The political equilibrium has again been destabilized by the resignation of Prime Minister Djoomart Otorbaev in April 2015. Temir Sariev was quickly named as his replacement and approved by the new parliament following the parliamentary elections in October 2015, the conduct of which was broadly applauded by the international observers. The elections gave rise to a governing coalition composed of the Social Democratic Party (SDPK), which won 28% of the votes as well as the Kyrgyzstan Party, the Onuguu Progress Party and the Ata-Meken (Fatherland) Party. This new multi-party government will face a number of challenges during its mandate, the two principal challenges being the economic situation and the ongoing social tensions fueled by protests demanding the nationalization of the Kumtor gold mine. The return of some Kyrgyz expatriates from Russia due to the economic crisis could exacerbate these tensions. Moreover, relations between the central government and the south of the country remain tense, in particular because of the nationalist opposition party, Ata-Jurt, which is well established in the region.
In the border areas, ethnic friction between the Tajiks, Uzbeks and Kyrgyz communities is also rising, as is the risk of terrorist activity since the withdrawal of NATO troops from Afghanistan at the end of 2014. Diplomatic relations are characterized by deepening links with Russia through membership of the Russian-led Eurasian Economic Union in May 2015. While this agreement allows the country to maintain access to Russian and above all Kazakh markets, it could also mean the loss of political independence from Russia and a halt to the expansion of relations with China, which have become much closer in recent years. Characterized by significant corruption and weak regulation, the business climate will remain difficult.