Singapore, March 24, 2022 -- Moody's Investors Service ("Moody's") has today placed the Government of Kyrgyz Republic's B3 long-term issuer (domestic and foreign currency) ratings on review for downgrade.
The review for downgrade reflects Moody's expectation that a sharp and prolonged economic downturn in Russia (Ca negative), following the invasion of Ukraine, will lead to a sustained deterioration of Kyrgyz Republic's growth potential, primarily through a projected fall in remittance inflows and exports, and threaten the sovereign's external position.
The review period will allow Moody's to better assess the potential scale of the impact of lower remittances on the sovereign's credit profile and the size and timeliness of potential financial support to Kyrgyz Republic provided by International Financial Institutions (IFIs).
Kyrgyz Republic's local- and foreign-currency country ceilings remain unchanged at B2 and B3, respectively. The 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.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
RATIONALE FOR THE REVIEW FOR DOWNGRADE
The decision to place the ratings on review for downgrade reflects the negative credit implications for Kyrgyz Republic's credit profile from the broader credit consequences of Russia's invasion of Ukraine. Moody's expects a severe growth downturn in Russia which will affect Kyrgyz Republic through key economic links, in particular remittances flows and exports. Moody's now expects that remittances from Russia and exports into Russian markets will fall sharply and immediately, and likely for an extended period of time.
Russian sourced flows make up over 80% of Kyrgyz Republic's total remittances and around 30% of its GDP. At this point, and for the medium-term, it is likely that the contraction in Russian economic activity will lead to significant reduction in long-term demand for migrant workers, including those from Kyrgyz Republic, and in incomes of those staying employed, especially when converted in som. Moody's has revised its expectations for GDP growth in Kyrgyz Republic to -1.0% in 2022 and 2.6% in 2023.
Historically, economic cycles in Russia and their impact on remittance and export flows, have been buffered by financial support from IFIs including the IMF, the offsetting impact of gold and commodity revenue, and – more recently - the positive impact of depreciations of the som in supporting trade competitiveness. However, it is unclear to what extent these mitigants can offset the impact of the current shock on Kyrgyz Republic's economic, fiscal and financial sector strength.
The review period will allow Moody's to evaluate the scale of the impact of Russia's declining economic activity on Kyrgyz Republic's long-term economic strength and external position, especially the demand for Kyrgyz migrant workers and consequent remittance flows, and the response of China (A1 stable) and the multilateral finance institutions, who are Kyrgyz Republic's key finance providers. Moody's will also take into account the degree to which policymakers can buffer the shock on the economy and balance of payments.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Kyrgyz Republic's ESG Credit Impact Score is highly negative (CIS-4), primarily reflecting its highly negative 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.
Moody's assesses Kyrgyz Republic's exposure to environment risk as 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.
Moody's assesses Kyrgyz Republic's exposure to social risk as 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 still low education attainment levels. These tensions, which often erupt into violence and political instability, drive our assessment of Kyrgyz Republic's event risk. While demographics are favourable, high rates of emigration given a shortage of domestic employment opportunities limits the potential positive impact on the economy over the long term.
Moody's views the influence of governance as 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
FACTORS THAT COULD LEAD TO AN UPGRADE OF KYRGYZ REPUBLIC'S RATING
Given the review for downgrade, an upgrade of Kyrgyz Republic's ratings is remote. The ratings could be confirmed if Moody's were to conclude that the medium- to long-term implications of the shock to the Russian economy on Kyrgyz Republic's economic and fiscal strength and external position were limited. This could be because funding arrangements with development partners provide significant and lasting support.
FACTORS THAT COULD LEAD TO A DOWNGRADE OF KYRGYZ REPUBLIC'S RATING
The rating would likely be downgraded if it becomes clear that the impact of sustained significantly weaker Russian economic growth will lead to lower Kyrgyz Republic potential growth, wider fiscal and/or current account deficits and higher debt, pointing to a deterioration in its debt repayment capacity.
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)
Economic resiliency: b3
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 21 March 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 not materially changed. 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.
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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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
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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
