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Rating Action:

Moody's changes Kyrgyz Republic's outlook to negative from stable, affirms B2 rating

26 Nov 2020

Singapore, November 26, 2020 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Kyrgyz Republic's local and foreign currency long-term issuer rating at B2 and changed the outlook to negative from stable.

The change in outlook to negative is driven by the risk that the current heightened political uncertainty, if prolonged, would restrict the government's very narrow financing options and pose liquidity challenges, particularly as funding needs have risen in response to the coronavirus pandemic. In addition, investment, particularly foreign investment, may weaken, weighing on the economy and constraining the recovery in government revenue, also amplifying the negative impact of the coronavirus pandemic.

The rating affirmation reflects the strong financial and technical support by development partners that anchors the government's credit profile. The country's medium-term growth prospects remain robust, underpinned by its mineral endowments, while external vulnerability risks are limited because of sizeable foreign direct investment into the mining sector and a benign external debt repayment profile. These credit strengths are balanced against the country's small economy, low incomes, limited scale of operations and weak economic competitiveness that constrain its shock-absorption capacity. Institutional weaknesses in respect of governance, control of corruption and administrative capacity, as well as long-standing domestic political risk hinder the economy's long-term development and diversification away from mining.

Kyrgyz Republic's long-term local currency bond and deposit ceilings remain unchanged at Ba3. The Ba3 long-term foreign currency bond ceiling and B3 long-term foreign currency deposit ceiling are also unchanged. These ceilings act as a cap on the ratings that can be assigned to the obligations of other entities domiciled in the country.

RATINGS RATIONALE

RATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVE FROM STABLE

The impact of coronavirus on economic activity will sharply increase the debt of the Kyrgyz Republic government and weaken its debt affordability, similar to developments across many emerging and frontier market sovereigns globally. Over time, Moody's expects the deterioration in fiscal and debt metrics to gradually reverse, given the government's track record in effective fiscal management, as demonstrated through the previous shock over 2014-15. However, recent political events have heightened political uncertainty, which if prolonged, has the potential to restrict the government's very narrow financing options and weigh on economic confidence and foreign investment. In turn, these would raise government liquidity risk, pose challenges to the recovery in government revenue, and leave the sovereign with a weakened credit profile over the medium term.

The political environment in Kyrgyz Republic continues to be clouded with questions over the timing of formation of the next government and the balance of power between political institutions since results of the 4 October parliamentary election were cancelled by the Central Election Committee and the president at that time subsequently resigned. While a snap presidential election has been scheduled for 10 January 2021, a date for the repeat parliamentary election has not been set. Recently proposed constitutional changes would also change the structure and relationship between the executive and legislative, with as yet undefined implications for the balance of power.

Moody's assumes that the political uncertainty will be temporary, and both elections will conclude with a new government within the first half of 2021. That said, this period of uncertainty may be prolonged and the formation of a new government delayed, should there be renewed protests associated with the votes, or lack of consensus regarding the constitutional changes.

Prolonged political uncertainty would introduce liquidity risks for the government, given its very narrow funding base. Liquidity risk is generally limited as gross borrowing requirements of the Kyrgyz Republic government are low compared to peers, while funding has been forthcoming from development partners, particularly during the initial stages of the coronavirus shock when the government was left with a significant financing gap. However, without a new government and parliament, new loan agreements with development partners to finance next year's deficit cannot be approved. This would leave the government reliant on domestic financing options, which tend to be shallow, short-dated, and significantly more expensive than loans from bilateral and multilateral partners.

Extended political uncertainty would also weigh on economic sentiment, particularly of foreign investors including in the mining sector that rely on negotiations with the governments for contracts and tax- and regulatory arrangements. In turn, this would hinder the economic recovery from the large coronavirus shock, weigh on government revenue for longer, and keep government debt elevated for some time beyond Moody's current assumptions.

Moody's baseline forecasts assume that economic growth in Kyrgyz Republic will rebound in 2021, growing by around 6% after a sharp contraction this year of around 6%. Besides a large base effect, the recovery is likely to be driven by the gradual lifting of coronavirus-related restrictions, including the cross-border movement of goods, reopening of international borders, and normalisation of economic activity. Mining activity outside of Kumtor, which has been disrupted by protestors in October, will also likely resume by the spring of 2021.

In this economic environment, Moody's estimates the government's debt burden to gradually decline, albeit remaining at high levels of around 64% of GDP over the next 2-3 years after a sharp increase to around 68% this year, from 54% last year. This will be supported by a revenue recovery beginning in 2021 -- after a likely 8% year-on-year contraction this year despite additional grant funding from development partners -- that under Moody's projections will result in an average fiscal deficit of 3-4% of GDP over 2021-22, narrowing from Moody's estimate of a 6% deficit in 2020.

RATIONALE FOR THE RATING AFFIRMATION

The rating affirmation reflects the strong support by development partners that lowers financing costs for the government and provides technical expertise for effective monetary and fiscal management, the economy's robust medium-term growth prospects owing to its mineral endowments, and limited external vulnerability risks. These credit strengths are balanced against the country's small, low-income, economy with limited economic competitiveness, long-standing institutional weaknesses, as well as domestic political risk.

In particular, development partners continue to provide low-cost financing at long maturities to the government, supporting the sovereign's debt affordability. Most recently, these partners combined to provide around 6% of GDP in funds to help meet the government's financing needs arising from the coronavirus shock and its impact on government finances. Partners also provide technical support to key policymaking institutions, resulting in some gradual improvements in policy credibility and transparency. Under Moody's baseline assumptions, funding support will be forthcoming and resume once a new government is formed.

Meanwhile, Moody's expects Kyrgyz Republic's balance of payments dynamics to remain stable, aided by a narrower current account deficit and supportive inflows from development partners. Although remittance inflows are lower by 3% year-to-date compared to the same period last year, the increase in gold prices and exports, coupled with the sharp contraction in imports, will likely result in the current account deficit narrowing to around 8% of GDP in 2020, compared to 13% in 2019. Moody's expects the current account deficit to remain around 8-10% over 2021-23. Stable balance of payments dynamics in turn contain external vulnerability risks.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are becoming more relevant but at this point do not constrain the credit profile. Degradation and erosion of land will become potentially material if the agriculture sector moves to more intensive farming practices. Environmental issues associated with the mining sector also sporadically enter the domestic political debate.

Social considerations are material to the country's credit profile. Low incomes limit the economy's shock-absorption capacity and still low educational attainment levels partly constrain economic competitiveness and long-term growth outside primary sectors. The coronavirus pandemic is likely to put pressure on the limited health infrastructure and may raise social risks. In addition, inter-ethnic tensions are a key driver of our assessment of political risk.

Governance considerations are significant to the Kyrgyz Republic's credit profile. Weaknesses in respect of control of corruption and rule of law are reflected in the country's rankings on the Worldwide Governance Indicators, notwithstanding continued improvements in data availability and transparency.

GDP per capita (PPP basis, US$): 5,516 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.5% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3.1% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -0.1% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -13% (2019 Actual) (also known as External Balance)

External debt/GDP: 99% (2019 Actual)

Economic resiliency: b2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 23 November 2020, 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, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD CHANGE THE RATING UP

The negative outlook signals that a rating upgrade is unlikely over the near term. The outlook would likely be changed to stable if political uncertainty is resolved in a manner that preserves ongoing funding arrangements with development partners and stabilises economic sentiment, especially among foreign investors. Relatedly, a reduction in government liquidity risk that supports prospects for fiscal consolidation, resulting in a sustained and quicker pace of reduction in the government's debt burden and rebuilding of fiscal buffers would also change the outlook to stable.

WHAT COULD CHANGE THE RATING DOWN

The rating would likely be downgraded if liquidity strains and/or wide fiscal deficits were to persist for the government, pointing to a deterioration in its debt repayment capacity as well as its ability to reduce debt over the medium term and foster growth through development spending. In particular, prolonged political uncertainty that would affect foreign investment and the inflow of long-term capital, as well as support from the donor community with broad, negative implications for the sovereign credit profile, would also put downward pressure on the rating.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies 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 credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Christian Fang
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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