New York, December 09, 2015 -- Moody's Investors Service has today assigned first-time local-
and foreign-currency issuer ratings of B2 to the Government of
the Kyrgyz Republic. The ratings carry a stable outlook.
The rating assignment reflects the following considerations:
(1) The 'Low' strength of the Kyrgyz Republic's small but rapidly
growing economy, given in particular its high dependence on gold
mining and remittances from workers in Russia, and its vulnerability
to variations in those income sources,
(2) The Republic's 'Very Low' institutional strength, reflecting
very weak governance and institutional features, though Moody's
has taken note of its strong data transparency,
(3) The Kyrgyz Government's 'Medium' fiscal strength, which balances
a relatively high and rising debt burden and volatile fiscal balance against
the high affordability of its debt load given its predominantly concessional
nature, and
(4) The sovereign's 'Medium' susceptibility to event risks, given
in particular the highly dollarized banking sector and, at least
until recently, volatile political system.
Moody's has also assigned a Ba3 ceiling for local-currency bonds
and deposits, a Ba3 ceiling for foreign-currency bonds and
a B3 ceiling for foreign-currency deposits.
RATINGS RATIONALE
--'LOW' ECONOMIC STRENGTH: A SMALL AND OPEN ECONOMY,
YET WITH RELATIVELY STRONG TRACK RECORD OF GROWTH
The first driver underlying Moody's assignment of a B2 sovereign rating
for the Kyrgyz Republic is its assessment of 'low' economic strength.
This is reflected in a number of key indicators, including (1) the
economy's small size, with a nominal GDP of $7.4 billion;
(2) its low per capita income, at $3,262 on a purchasing
power parity basis; (3) the country's substantial reliance on trade
with and remittances from Russia, the latter representing 30%
of GDP, which create high exposure to slowdowns in Russia's
economy; and (4) high reliance on volatile gold production,
with output from one source - the Kumtor gold mine - representing
7.4% of GDP and 40% of exports. As a result
of these features, growth has been volatile in recent years and
is expected to remain so for some years to come.
Set against its small size and concentration, the Kyrgyz economy
has experienced relatively high growth in recent years, averaging
4.8% since 2011. Growth is likely to be sustained,
averaging 5.6% in 2015-2016, supported by the
Public Investment Program and sound gold production prospects.
It will be somewhat reduced over the near term as a result of the country's
entry into the Eurasian Economic Union (EAEU) in May 2015, which
is likely to slow non-gold growth this year as the country raises
trade tariffs with other non-EAEU partners. Over the medium
term, however, entry into the EAEU is likely to have a positive
effect on growth, reflecting improved access to the Kazakh and Russian
markets.
Over the coming years, growth will be supported by planned infrastructure
investment, based on continued financing from bilateral and multilateral
donors. At 27% of GDP, gross investment is already
high relative to peers. Kyrgyz competitiveness is hindered by infrastructure
bottlenecks, which are being addressed through the Public Investment
Program, and foreign direct investments remain volatile.
--'VERY LOW' INSTITUTIONAL STRENGTH, ALTHOUGH TRANSPARENCY
STANDS OUT
The second key driver of the Kyrgyz Republic's B2 sovereign rating is
the country's 'very low' institutional strength. The Kyrgyz Republic
scores very low in the World Governance Indicators, underperforming
many B-rated peers, particularly with regard to corruption
and the rule of law. The effectiveness of monetary policy -
a useful proxy for the capacity of the country's institutions to articulate
and achieve supportive policy objectives - is hampered by external
vulnerabilities, including currency and commodity prices fluctuations,
as reflected by the large depreciation in the Kyrgyz som this year.
Nonetheless, we note that there have been recent improvements in
monetary policy, with more effective transmission channels related
to financial deepening. Relations with the IMF and trade integration
are supportive of the Kyrgyz Republic's institutional strength.
A new, 3-year Extended Credit Facility (ECF) program approved
in April 2015, as well as technical assistance help the country
develop fiscal policy predictability. The scope and timeliness
of data are strong relative to peers, as reflected by the country's
participation in the IMF's Special Data Dissemination Standard (SDDS)
since 2004, a sign of growing institutional maturity.
--'MEDIUM-' FISCAL STRENGTH, WITH RISING DEBT
BURDEN SOMEWHAT BALANCED BY ACCESS TO AFFORDABLE CONCESSIONAL FINANCING
The third driver informing Moody's decision to assign a B2 rating to the
Kyrgyz Republic is its 'medium-' fiscal strength. This reflects
a relatively high and rising debt burden made affordable by a large concessional
financing base. At 54% of GDP, the Kyrgyz Republic's
debt load is high for a small, poor country and is set to rise in
the next two years to finance infrastructure. As a result of the
som's depreciation, we expect government external debt to
breach its legal limit of 60% of GDP this year, while government
domestic debt will remain very low.
Fiscal balances have been volatile, reflecting both fluctuations
in government revenue stemming from the mining sector and large but uneven
capital expenditures. General government fiscal deficits have averaged
just under 4% over the past five years, slightly lower than
the median for B-rated countries, partly reflecting high
capital outlays relative to tax revenue. The fiscal deficit reached
a small surplus in 2014, mainly driven by one-off revenue
and a slowdown in investment. We expect the deficit to widen again
in 2015 and 2016 to about 3% of GDP on the back of increased infrastructure
spending.
Set against those weaker features, the Kyrgyz Republic continues
to benefit from strong donor support, as reflected by large investments
financed by China's Export-Import Bank and the recent set-up
of the $1 billion Russia-Kyrgyz Investment Fund, of
which $250 million has been disbursed. The existing debt
stock is 93% held by non-resident multilateral and bilateral
creditors, with a very long maturity and low interest payments.
Debt-servicing costs are very low relative to peers, with
interest payments amounting to only 2.4% of general government
revenue in 2014.
The high affordability of the government's debt stock offsets somewhat
the challenges posed now and in the future by the high debt load and its
exposure to currency fluctuations. Meanwhile, the government
retains flexibility resulting from the gradual decrease in current expenditures
as a percentage of GDP. This may support the gradual reduction
of debt over time, particularly should concessional debt begin to
be replaced by market debt.
--'MEDIUM' EXPOSURE TO EVENT RISKS STEMMING FROM POLITICAL
AND BANKING SECTOR
The fourth driver underpinning the B2 rating for the Kyrgyz Republic is
Moody's assessment of the country's moderate susceptibility to event risk
which is driven by political and banking sector risks.
The political arena has been troubled in recent years. Perception
of poor and worsening governance led to the ousting of two presidents,
in 2005 and 2010, polarizing society. While the most recent
transition of power was relatively smooth, internal strife could
reemerge over time. The Kyrgyz Republic's economic dependence on
both Russia and China also increases the impact of regional tensions,
which the entry into the EAEU could exacerbate.
The banking sector has seen high credit growth (albeit from a low level)
and the level of dollarization is high and rising, with 65%
of deposits and 51% of loans in dollars as of September,
posing contingent liability risks for the government. Proposed
improvements in the regulatory framework, including a new Banking
Code, mitigate those risks.
A further source of event risks is the external payments position,
which is weakened by persistently very large current account deficits,
only partly funded by foreign direct investments. The country's
net international investment position has deteriorated markedly in recent
years to -79% of GDP, pointing to increased reliance
on debt financing. This risk is mitigated by very low external
debt service payments.
The indicative rating range resulting from the combination of the four
factor scores is B1-B3.
RATING OUTLOOK
The stable outlook reflects Moody's assessment of Kyrgyz Republic's
prospects for high economic growth and donor-funded infrastructure
investment. The stable outlook is based on our expectation that
government debt increases will be limited and the authorities will tackle
external and banking sector vulnerabilities.
WHAT COULD CHANGE THE RATING -- UP/DOWN
Upward credit pressure could develop as a result of (1) growth-enhancing
structural reforms combined with banking sector stability; (2) fiscal
consolidation efforts that lead to a reduction in the government's
debt burden; and (3) improvements in price and exchange rate stability
that do not impair the country's external position.
Downward pressure would be exerted on the rating in the event of (1) the
withdrawal of donor support, which would add to the government's
borrowing costs; (2) large financing needs due to fiscal deficits
combined with a substantial deterioration in debt structure; or (3)
economically destabilizing political and social tensions.
GDP per capita (PPP basis, US$): 3,262 (2014
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.6% (2014 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 10.5%
(2014 Actual)
Gen. Gov. Financial Balance/GDP: 0.2%
(2014 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -24.2% (2014 Actual)
(also known as External Balance)
External debt/GDP: 108.0% (2014 Actual)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 11 August 2015, a rating committee was called to discuss the
rating of the Kyrgyz Republic, Government of. The main points
raised during the discussion were: the issuer's economic fundamentals,
including its economic strength; institutional strength/ framework;
fiscal or financial strength, including its debt profile and susceptibility
to event risk. This rating level was also considered relative to
its peers.
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this rating action, if applicable.
The local market analyst for the Kyrgyz Republic's rating is Mathias
Angonin; +971.4.237.9548
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Ernest Sergenti
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns first-time B2 issuer ratings to Government of the Kyrgyz Republic; stable outlook
