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Rating Action:

Moody's downgrades Kyrgyz Republic's ratings to B3, changes outlook to stable from negative

25 Jan 2022

NOTE: On February 3, 2022, the press release was corrected as follows: The second sentence of the fourth paragraph of the Ratings Rationale section was changed to “If its full potential is not tapped due to constraints on its operations, the Kyrgyz Republic's growth potential will be materially affected.” Revised release follows.

Singapore, January 25, 2022 -- Moody's Investors Service ("Moody's") has today downgraded the Government of Kyrgyz Republic's local and foreign currency long-term issuer ratings to B3 from B2. The outlook has been changed to stable from negative.

The decision to downgrade the ratings is driven by Moody's assessment that recent developments affecting the economically important mining sector, and specifically the repossession of the Kumtor mine by the government, partly reflect relatively weak institutions and governance and are likely to negatively affect long-term economic growth particularly through the deterrence of foreign investment. Lower growth and undermined prospects for economic diversification will in turn negatively affect government revenue. With mining a major source of exports for the Kyrgyz Republic, the sovereign's external position is potentially durably weakened. Higher uncertainty around the investment climate following the repossession of Kumtor may also deter concessional finance flows which have supported the Kyrgyz Republic's financing of government deficits and its external position.

The change in outlook to stable from negative reflects Moody's view that the risks are balanced at the B3 rating level. In particular, while recent developments point to potentially higher government liquidity and external vulnerability risks, these risks remain manageable due to a buildup in foreign reserve buffers and a benign external debt repayment profile.

Concurrent to today's rating action, the Kyrgyz Republic's local currency ceiling has been lowered to B2 from B1 and the foreign currency ceiling has been lowered to B3 from B2. The narrow one-notch gap between the local currency ceiling and the sovereign rating reflects the government's relatively large footprint in the economy, the unpredictability of some government decisions as reflected in its decisions on the Kumtor mine, and a volatile domestic political environment that could hinder the economy's long-term development. The one-notch gap between the foreign currency ceiling and the local currency ceiling takes into consideration the authorities' commitment to flexible exchange rates and open capital accounts amid large inward remittances and foreign direct investment inflows, albeit Moody's sees the latter at some risk if the investment attractiveness of the Kyrgyz Republic wanes. These factors lower the risk of transfer and convertibility restrictions. This is balanced by a limited track record of monetary policy effectiveness and a significant share of foreign currency external debt.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE OF RATINGS

The downgrade in the Kyrgyz Republic's ratings to B3 is primarily driven by developments during 2021 and in particular government actions that are likely to durably affect the investment climate in the Kyrgyz Republic with consequences for the sovereign's economic and fiscal strength as well as the external position.

In May 2021, the Kyrgyz Republic's government took control of the Kumtor gold mine owned by Centerra Gold after passage of a law allowing it to impose external management for up to three months on mining companies operating under a concession agreement if it was found to have violated environmental regulations or endangered the environment. The time period for external control was then extended to the point in time where such issues were resolved. In the wake of this and other Kumtor related issues, in September 2021, the London Bullion Market Association suspended the membership of Kyrgyzaltyn JSC - the state-owned gold trading monopoly -- from its list of acceptable refiners, essentially barring Kyrgyz produced gold from international markets.

Moody's expects that the government's decision to repossess the Kumtor mine from long-time operator Centerra Gold (not rated) may significantly negatively affect the economic contribution of the mine itself but importantly have a negative impact on the investment climate in the Kyrgyz Republic.

The mine accounts for a large share of around 10% of the Kyrgyz Republic's GDP. If its full potential is not tapped due to constraints on its operations, the Kyrgyz Republic's growth potential will be materially affected.

The increase in investment uncertainty implied by recent events around Kumtor and the consequent negative impact on investor perception of the Kyrgyz Republic as a destination for much needed investment to broaden the relatively narrow base of its economy, adds to the political uncertainties which Moody's identified as a rationale for the negative outlook placed on the rating in November 2020.

The past relative stability in the Kyrgyz Republic's investment framework has played an important role in supporting high levels of financing and technical support from development partners including relative to other Central Asian sovereigns but such changes in the attractiveness of investment threaten the long-term attractiveness of the Kyrgyz Republic for foreign investors and potentially financing from international financial institutions.

Lower economic growth potential will constrain government revenue, especially since mining has been a major source of revenue for the government. In turn, weaker revenue generation may reduce the capacity for the government to support spending in key areas of policy including education and skills development, export infrastructure and capacity building and broader structural reform to boost productivity.

The implications for the Kyrgyz Republic's external position remain uncertain but risks have increased. The Kyrgyz Republic has run sustained significant current account deficits since the mid-2000s reflecting an ongoing excess of investment, notably in the mining sector, over narrow domestic savings. The deficit has been financed by inflows of foreign direct investment and concessional international financial institution lending. Moody's expects the current account to improve moderately in the short term as investment eases and domestic savings rise with fiscal consolidation taking place in the wake of the pandemic. However, the risks for the current account are to the downside, particularly if maintenance of gold production at Kumtor is not achieved. In addition, concessional financing may be less accessible. In this case, policy adjustments such as a tightening in fiscal policy to offset declining budget revenues, putting downwards pressure on growth would be likely.

While the political and investment climate has become more volatile since November 2020, institutional and governance strengths have remained essentially unchanged. Policy making remains hampered by relatively weak executive institutions reflective of limited administrative capacity. High levels of inflation may require significantly more tightening of policy particularly if imported goods inflation picks up with the consequence that the economic recovery in train will be stymied. It is also not clear that the central bank will be able to manage a period of high inflation effectively given current limitations in the monetary policy tools to effectively manage inflation and inflation expectations. Meanwhile, Moody's expects that the Kyrgyz Republic's authorities remain committed to prudent fiscal policy, and to reining in the fiscal deficit as the impact of the coronavirus on its economy wanes. The authorities have built a track record of fiscal prudence prior to the pandemic and we do not expect this to change.

RATIONALE FOR STABLE OUTLOOK

The change in outlook to stable from negative reflects Moody's view that the risks are balanced at the B3 rating level. In particular, while recent developments point to potentially higher government liquidity and external vulnerability risks, these risks remain manageable due to a buildup in foreign reserve buffers and a benign external debt repayment profile. Also, although diminished by the increased risk around development of the minerals sector, the country's growth prospects remain solid underpinned by its mineral endowments and advantageous demographic profile.

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

FACTORS THAT COULD LEAD TO AN UPGRADE

The rating could be upgraded if political and related economic developments were to lead to outcomes that preserve funding arrangements with development partners and stabilise investor sentiment around the policy and institutional framework governing investment in the Kyrgyz Republic's economy, especially among foreign investors. Relatedly, a reduction in the sovereign's external debt and strengthening of its external position would also be credit positive.

FACTORS THAT COULD LEAD TO A DOWNGRADE

The rating would likely be downgraded if wider 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. Political and institutional developments that hindered foreign investment and the inflow of long-term capital, as well as support from the donor community, to a greater extent than Moody's currently assume could also put downward pressure on the rating.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

The Kyrgyz Republic's ESG Credit Impact Score is highly negative (CIS-4), primarily reflecting its high exposure to social risk and weak governance profile, while the exposure to environmental risk is moderate. Weak institutions constrain the government's capacity to address ESG risks.

The exposure to environment risk is moderately negative (E-3 issuer profile score) and mainly relates to the degradation and erosion of the country's land, which -- given the importance of agriculture as a source of employment and exports -- has the potential to weigh on its economy in the long term. Environmental issues associated with the mining sector also sporadically enter the domestic political debate.

The exposure to social risk is highly negative (S-4 issuer profile score) and stems from factional tensions exacerbated chiefly by low incomes, as well as still limited social infrastructure and low education attainment levels. These tensions, which tend to erupt into violence and political instability, drive in large part our assessment of the Kyrgyz Republic's event risk. While demographics are favourable, high rates of emigration given a shortage of domestic employment opportunities limit the potential positive impact on the economy over the long term.

The influence of governance on the sovereign's credit profile is highly negative (G-4 issuer profile score), reflecting weaknesses in the control of corruption and rule of law, as well as the limited track record of effective policymaking, despite continued improvements in data availability and transparency. These constrain the long-term development of the country and its resilience to environmental and social risks.

GDP per capita (PPP basis, US$): 5,007 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -8.6% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 9.7% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -3.3% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 4.8% (2020 Actual) (also known as External Balance)

External debt/GDP: 112.4% (2020 Actual)

Economic resiliency: b3

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

On 20 January 2022, 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 materially decreased. 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.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.

Martin Petch
VP - Senior Credit Officer
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.
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