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. - Source: Coface

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.

Strengths

  • Abundance of metal resources (gold, copper, uranium, mercury, iron)
  • Tourism and hydroelectric potential (only 10% exploited)
  • Strategic position and transit corridor between China, Russia, and Europe
  • Financial support from multilateral and bilateral donors and China
  • Member of the Eurasian Economic Union (EAEU)
  • Member of China's Belt and Road Initiative (BRI)

Weaknesses

  • Small open economy highly dependent on economic fluctuations in Russia via remittances from expatriate workers (28% of GDP), in China and Kazakhstan.
  • High dependence on gold (50% of exports) and agriculture (18% of GDP, 27% of employment)
  • Fragile, concentrated, and dollarized banking system (41% of deposits and 34% of loans), and expensive, directed, and poorly developed credit (23% of GDP).
  • Difficult geography (landlocked and 94% mountainous) and high energy dependence
  • Deficient infrastructures (energy, water, health)
  • Weak governance (corruption, organized crime, strong politicization of the judicial system, largely informal economy (23% of GDP) that reduces public resources), and difficult business environment
  • Political and social instability linked to weak institutions, poverty, and ethnic, linguistic, and economic opposition between the northern and southern valleys

Current Trends

Political-institutional chaos that will weigh on the recovery

Kyrgyzstan has been marked by political instability since its independence in 1991. The corruption that undermines the country contributed to the two revolts of 2005 and 2010. The turbulent political landscape saw its third political crisis in 15 years when the parliamentary elections of 4 October 2020 gave victory to parties supporting President Jeenbekov. The opposition demonstrated, stormed official buildings, and freed imprisoned politicians, including Japarov, a former parliamentarian. The results were canceled on 6 October. On 8 October, the opposition appointed Japarov as prime minister through a contested parliamentary procedure. Jeenbekov resigned on 15 October and Japarov became acting president. After consolidating his position by appointing loyalists to key posts, he resigned in mid-November to run in the early presidential election of 10 January 2021. Benefiting from his control over the institutions and the support of Russia, he is favored to win it. He has announced his willingness to return to a presidential system by drafting a new constitution, superseding the one adopted after the 2010 revolts, which enshrined a parliamentary system. It is due to be put to a referendum on 10 January 2021 and is criticized, particularly by the West, for undermining the separation of powers and fundamental freedoms. Parliamentary elections have been pushed back to June 2021, leaving a high risk, at least in the first half of 2021, of greater political instability and economic repercussions. Mines were attacked during demonstrations, reflecting public hostility to China's economic presence.

A slow and uncertain recovery

This tense context, together with the pandemic, has plunged Kyrgyzstan into its worst recession since 1994. Restrictions from mid-March to mid-May 2020, including the closure of borders, businesses, and industries, have had a strong impact on domestic demand, the driving force behind growth. Private consumption (82% of GDP) and, in turn, services (56% of GDP) suffered from the fall in expatriate remittances from Russia, the October 2020 demonstrations, but also from the rise in poverty and unemployment. Supply chains were disrupted in 2020, causing manufacturing and mining production (18% of GDP) to fall. Investment (29.5% of GDP, 21% for its private share) collapsed, bringing with it imports of capital goods. In 2021, the recovery of domestic demand is expected to be slow and depends on the political context, the pandemic, and the recovery in Russia. It could be driven by the rebound in remittances that began in July 2020 and by the positive contribution of agriculture to growth. Industry, which has benefited from the suspension of business bankruptcy proceedings and deferrals, will benefit from the anti-crisis fund offering subsidized loans (2% of GDP in 2020, 7% in 2021). Despite a potential rebound in exports (one-third of GDP), the contribution of trade to growth is expected to become negative again. Indeed, the good performance of gold exports (50% of the total), driven by production at the Kumtor mine (10% of GDP), could be partially offset by the rebound in imports of capital goods (17%) and oil (10%) linked to a recovery in industry and construction (8% of GDP).

After rising sharply in 2020, inflation should return in 2021 to the 5%-7% target set by the central bank, despite the recovery of domestic demand and the rise in oil prices. Monetary policy, with a low policy rate (5% in December 2020), remains ineffective. The average lending rate is high (17%), which does not allow for an impulse of credit to the private sector that is not subsidized. The capitalization and liquidity levels of the banking sector have remained stable thanks to the relaxation of prudential rules, but the quality of its assets could deteriorate (10% of non-performing loans in October 2020).

Deterioration of twin deficits

The public deficit widened in 2020 and is expected to remain significant in 2021, in particular because of the electoral calendar, which is expected to sustain high public spending. It is financed by concessional loans and foreign grants, such as the USD 592 million (7% of GDP) from the International Monetary Fund (IMF) and the World Bank received in 2020. These loans have increased the public debt. 85% of the debt is denominated in foreign currency and is held by multilateral and bilateral lenders (62%) and the Chinese Eximbank (38%). Its sustainability could be ensured by potential restructuring by Paris Club creditors, who have already agreed to a deferral of its service to 2022-2024. Deferrals have also been agreed with China, which is expected to wait until after the elections to agree to a restructuring.

After falling in 2020 with the fall in imports that reduced the trade deficit (34% of GDP), the current account deficit could return to its pre-crisis level in 2021 with their recovery. While FDI may dry up in mining after the October 2020 attacks, multilateral lenders will take over, at the cost of an increase in the external debt-to-GDP ratio (87.5%, two-thirds of which is due to the public sector). Foreign exchange reserves remain comfortable (USD 1.7 billion in November 2020, 4.5 months of import coverage), making it possible to limit the depreciation of the som by intervening on the foreign exchange market.

 

Source:

Coface (02/2021)
Kyrgyzstan