S&P: Recession in Russia can greatly impact Kyrgyzstan’s economy

S&P: Recession in Russia can greatly impact Kyrgyzstan’s economy

Baku, Azerbaijan, March 28

By Elena Kosolapova - Trend:

Standard & Poor's Ratings Services affirmed its 'B/B' long- and short-term foreign and local currency sovereign credit ratings on the Kyrgyz Republic (Kyrgyzstan), S&P said March 28.

The outlook is stable.

"The ratings are constrained by low GDP per capita and a narrow economic base, weak governance, and a weak external profile, characterized by high dependence on remittances from, and trade with, Russia, and weak monetary policy flexibility," the statement said.

The ratings are supported by so far moderate government debt, which consists mostly of official concessional loans, the statement said.

However, S&P still thinks that domestic political challenges present a risk to policy predictability, especially in light of upcoming local elections in 2016 and the presidential election in 2017, as both will be held in the context of weak personal income growth and currency depreciation. In the past, political stability in the republic has regularly been challenged at the time of elections.

Kyrgyz GDP per capita, which the agency estimates at about $1,100 in 2016, is low by international standards.

S&P expects GDP growth to slow to 3 percent in 2016. Risks to the growth outlook stem from the ongoing recession in Russia and lower growth in Kazakhstan and China, Kyrgyzstan's key trading partners. The impact from Russia is especially pronounced, given that it accounts for over 30 percent of foreign trade and 70 percent of worker remittances, which in turn contribute 30 percent of GDP via consumption, private construction, and imports of goods and services.

That said, 3.5 percent GDP growth reported in 2015 indicates that Russia's slowdown has so far been mitigated by the growth of output in the country's single biggest enterprise--the Kumtor gold mine, which accounts for 8 percent-9 percent of GDP and over 30 percent of exports. However, gold output and export performance has been very volatile due to fluctuations of international gold prices and ongoing political tensions around Kumtor's ownership structure. Growth volatility is evidenced by a drop in real GDP reported by the government in January-February 2016, due to weak industrial production and private construction, the statement said.

Although the government has been trying to reduce infrastructure constraints (mainly those in transport and energy), which could improve the country's growth potential, Kyrgyzstan's GDP trajectory will continue to depend heavily on Russia's performance, especially since Kyrgyzstan joined the Russia-led Eurasian Economic Union (EEU) in August 2015. The Kumtor mine's continued operations will also remain important to Kyrgyzstan's economic growth, the statement said.

Owing to the narrow export base and high dependence on consumer and fuel imports as well as remittance inflows, the country's external position is exposed to a marked deterioration in external financing.

Kyrgyzstan has traditionally relied on official loans, most of which have been related to public investment. Increasing borrowings from concessional lenders, as well as bilateral lenders such as Russia and China, will likely increase the country's net external debt to approximately 80 percent of current account receipts (CARs) in 2016-2019, compared with roughly 30 percent in 2012-2015, unless import adjustments continue or remittance inflows recover more rapidly. Net FDI is likely to stabilize at about 5 percent of GDP over 2016-2019, given a number of confirmed projects and Russia's commitment to support Kyrgyzstan's accession to the EEU via a newly established $1 billion Russia-Kyrgyz fund.

Because the government has relied on external foreign-currency-denominated borrowings and the Kyrgyz som has depreciated, gross general government debt to GDP is likely to approach 70 percent of GDP on average in 2016-2019, compared with roughly 55 percent in 2012-2015, the statement said.

Since Kyrgyzstan relies heavily on imports of food and fuel, inflation tends to fluctuate with global prices for these commodities as well as exchange rate movements. The depreciation of the som and higher import tariffs triggered by accession to the EEU will result in a hike of inflation to over 10 percent in 2016.

The stable outlook reflects our view that, over the next year, growing external risks coming from the sharp slowdown in Russia and hence significantly weaker remittances will be counterbalanced by the government's good access to concessional official funding.

S&P could lower the ratings if risks to domestic political stability rise or if political tensions around the Kumtor gold mine result in a significant drop of exports and output or weaker access to external concessional borrowings. Weaker fiscal discipline or deeper currency devaluation, resulting in net general government debt exceeding 80 percent of GDP could also put pressure on the ratings.

S&P could consider a positive rating action if we saw improvements in external and fiscal balances well beyond our base-case assumptions. Greater monetary policy flexibility, resulting from stronger financial intermediation and the lower dollarization of the financial system, could also support a higher rating. Finally, a higher degree of transparency and availability of external data would also support a positive rating action.

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