Struggling to cope with huge external shocks
Overview:
Economic policies both in terms of macroeconomic stability and in implementation of structural reforms are amongst the best in Central Asia. However, the Kyrgyz Republic's (KR) poor natural resource endowments compared to its energy rich neighbours still make it very vulnerable to external shocks. The authorities have obtained an IMF agreement to try and cope with the affects of the global financial crisis in an effort to safeguard the reductions in poverty achieved over the last few years. However, given its small size and open nature, the economy will suffer from severe economic downturns developing in key trade partners Kazakhstan and Russia. Optimism after the Tulip Revolution of March 2005 has given way to disappointment at the lack of further progress in political liberalisation although the KR continues to exhibit a political pluralism otherwise absent in Central Asian.
Recommendation:
The authorities have succeeded in lowering debt ratios over time although these remain significant. The Som (KGS) will likely continue to be highly vulnerable and foreign exchange reserves remain under pressure as the balance of payments deteriorates on weakness in regional growth. Political risks are also likely to increase as presidential elections in 2010 approach. We are underweight on local currency assets despite high local interest rates.