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
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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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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
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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
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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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.
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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
