INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND KYRGYZ REPUBLIC Joint World Bank-IMF Debt Sustainability Analysis July 2019 Prepared jointly by the staffs of the International Development Association (IDA) and the International Monetary Fund (IMF) Approved by Lalita Moorty (IDA) and Juha Kähkönen and Vitaliy Kramarenko (IMF) Kyrgyz Republic: Joint Bank-Fund Debt Sustainability Analysis Risk of external debt distress: Moderate Overall risk of debt distress Moderate Granularity in the risk rating Some space Application of judgment No This joint World Bank/IMF Debt Sustainability Analysis (DSA) has been prepared in the context of the 2019 Article IV Consultation, for the first time based on the revised framework for low- income countries.1 Results indicate moderate risk of debt distress for both external and overall public debt. However, the debt outlook remains vulnerable, especially to a deceleration in real GDP and exports growth and the depreciation of the KGS. To address these vulnerabilities, the authorities need to remain cautious when contracting and guaranteeing new debt, maintain fiscal discipline, improve public investment management, and continue improving the business environment to maintain the export potential of the country after the main gold mine will close in 2026. 1 See IMF, 2018, Guidance Note on the Bank-Fund Debt Sustainability Framework for Low-Income Countries. PUBLIC DEBT COVERAGE 1. Public sector debt comprises state government debt (both central and local government), state guarantees, and the debt of the central bank towards the IMF (Text Table 1). Almost all the public sector debt is central government debt. Local governments have no external debt and negligible domestic debt vis-à-vis non-governmental entities. According to the 2019 budget, there is no outstanding state guarantee because the budget code has been preventing the state from guaranteeing debt of state-owned enterprises (SOEs) and other public entities since 2007, except for the cases stipulated by the obligations of the Kyrgyz Republic within its membership in international and inter-governmental organizations. SOEs have no external debt, while their domestic debt vis-à-vis non-governmental entities is limited to short term borrowing from commercial banks and is not significant, as most of their borrowing is from the State. The social security fund has no debt. Nevertheless, a contingent liability shock of 7 percent of GDP was applied, reflecting risks around the operation of SOEs (2 percent of GDP, which is about the structural cash shortfall of loss-making energy sector SOEs)2 and the default value representing the average cost to the government during a financial crisis (5 percent of GDP, Text Table 2). Text Table 1. Kyrgyz Republic: Public Debt Coverage Text Table 2. Kyrgyz Republic: Combined Contingent Liability Shock 2 Kyrgyz Republic—Staff Report for 2019 Article IV Consultation, ¶35 (forthcoming). 2 BACKGROUND 2. Public debt decreased over the last three years, driven by external debt (Text Chart 1). Following a sharp increase between 2013-15 mostly due to the significant depreciation of the KGS vis-à-vis the U.S. dollar, public debt decreased from 67.1 percent of GDP in 2015 to 56.0 percent of GDP in 2018. This was the result Text Chart 1. Public Debt (percent of GDP) of the decline in external debt by 16 percent 70 70 of GDP thanks to the appreciation of the 60 60 KGZ as well as the debt relief received from 50 50 3 Russia. At the same time, domestic debt 40 40 rose from 3.6 to 8.0 percent of GDP, thereby 30 30 increasing its share from 5 to 14 percent in 20 20 total debt. The domestic public debt is 10 10 0 0 composed of treasury bills and bonds that 2010 2011 2012 2013 2014 2015 2016 2017 2018 are mostly held by commercial banks (50 External Domestic Total percent) and the social security fund (30 percent). UNDERLYING ASSUMPTIONS 3. The current DSA is built on revised macroeconomic assumptions (Text Table 3). Economic growth is projected to be slightly lower in the near term than in the last DSA. Following a substantial widening in 2018-19, the current account deficit is expected to narrow between 2020- 22 on the back of a recovery of remittances and a slight increase in gold exports. Over the medium term, the current account deficit is projected to increase owing to the decline in gold production and exports starting in 2023. Over the long term, other exports are projected to materialize to partially replace the exports of the main gold mine that accounted for 37 percent of exports in 2018 and is projected to cease operations in 2026. The source of such exports could be new gold mines, other minerals, such as rare earths, or hydropower, for which only 10 percent of the potential has been exploited so far. A steady flow of foreign direct investment (FDI) prompted by sustained improvement in the business environment is projected to materialize to limit the gradual drop of the level of exports to about 5 percent of GDP over the projection horizon. After an unexpectedly tight fiscal stance in 2018, we project a moderate fiscal loosening in 2019 to close the output gap to be followed by strict adherence to the fiscal rule presently considered by parliament that caps debt at 70 percent of GDP and the budget deficit at 3 percent of GDP over the medium and long term. The budget deficit should be recorded in line with the IMF Government Finance Statistics Manual (GFSM), that is including on-lending to loss making state-owned enterprises as capital grants contributing to the deficit rather than as a financing item. The authorities have room to keep 3 The initial agreement between Russia and the Kyrgyz Republic signed in 2014 to write-off of a $300 million debt (4.0 percent of GDP) in equal tranches over a 10-year period was revised to write off the outstanding $240 million in 2018. (continued) 3 the deficit at such level while financing their development needs by reducing tax exemptions, better capturing imports, reducing transfers to energy sector SOEs and identifying other expenditure savings through progress in public investment and financial management.4 Beyond firm commitments in the near term, a limited amount of grants (current grants around 0.4% of GDP and capital grants around 1% of GDP) is projected to continue over the medium term. These grants are highly likely and their inclusion does not change the risk rating. Text Table 3. Kyrgyz Republic: Selected Indicators, 2016-24 2016 2017 2018 2019 2020 2021 2022 2023 2024 Real GDP growth (percent) Current DSA 4.3 4.7 3.5 3.8 3.4 3.8 4.6 3.4 3.4 1 Previous DSA 3.8 3.2 3.3 4.9 4.6 4.0 4.8 3.3 3.7 Overall fiscal balance (percent of GDP) Current DSA2 -6.4 -4.6 -1.3 -3.3 -3.0 -3.0 -3.0 -3.0 -3.0 Previous DSA1,3 -6.9 -5.9 -4.0 -5.3 -3.2 -2.6 -2.4 -2.5 -2.5 Current account balance (percent of GDP) Current DSA -11.6 -6.2 -8.7 -9.6 -7.7 -7.1 -6.8 -8.4 -8.8 Previous DSA1 -12.1 -10.0 -13.1 -12.2 -11.6 -11.1 -10.6 -10.1 -10.0 PIP Disbursements (millions of US$) Current DSA 311 323 131 278 263 316 340 358 377 Previous DSA1 311 368 341 400 258 328 330 360 392 Sources: Kyrgyz authorities and IMF staff estimates. 1/ IMF Country Report No. 18/53, Kyrgyz Republic—4th and 5th Reviews under the Extended Credit Facility. 2/ Including onlending to energy SOEs. 3/ Including total onlending to SOEs. 4. The realism tools suggest that the baseline scenario is credible. There are small differences between the past and projected drivers of external and public debt dynamics; however, unexpected changes in debt are close to the upper end of the interquartile range (Figure 3). The lower projected contribution of the primary deficit to changes in public debt is due to the improvement in the fiscal balance. This, however, is in line with the historical distribution of adjustments under Fund-supported programs in LICs (Figure 4). Moreover, while the planned adjustment reflects the change in the fiscal balance between 2017-20, the bulk of the improvement already took place in 2018. 5. The stable debt outlook reflects the broadly neutral fiscal stance in the medium term. Total public debt is expected to hover around 55 percent of GDP over the medium term as the impact of positive growth/interest differential is offset by the fiscal deficit (Table 2). As the financing need is expected to be increasingly covered through domestic debt issuance, the composition of total public debt is projected to shift from external towards domestic debt. Domestic debt is expected to double from 8 percent of GDP in 2018 to 16 percent of GDP in the 4 Kyrgyz Republic—Staff Report for 2019 Article IV Consultation, ¶¶28-30 (forthcoming). 4 long term and the increase is projected to be subscribed by commercial banks while leaving room for credit to the private sector, in sync with the gradual deepening of the financial sector. COUNTRY CLASSIFICATION 6. The Kyrgyz Republic’s debt-carrying capacity is assessed to be strong. The country’s Composite Indicator (CI) index, 5 calculated based on the April 2019 WEO and the 2017 World Bank Country Policy and Institutional Assessment (CPIA) score, is 3.19, above the threshold of 3.05 for strong debt-carrying capacity (Text Table 4). This translates into the following external debt burden thresholds and public debt benchmark: 240 percent for the present value (PV) of external debt-to-exports ratio, 55 percent for the PV of external debt-to-GDP ratio, 21 percent for the external debt service-to-exports ratio, 23 percent for the external debt service-to-revenue ratio, and 70 percent for the PV of total public debt-to-GDP ratio. EXTERNAL DSA 7. The debt outlook remains vulnerable to external and domestic shocks. Because of the write-off of Russian debt, external public and publicly guaranteed (PPG) debt declined to 48.0 percent of GDP in 2018 from 53.0 percent in 2017. PPG external debt is projected to gradually 5The CI is a function of the CPIA, international reserves, remittances, country and global economic growth. The calculation is based on 10-year averages of the variables, across 5 years of historical data and 5 years of projection. For more details, see IMF, 2018, Guidance Note on the Bank-Fund Debt Sustainability Framework for Low-Income Countries. (continued) 5 decrease further over the medium term. Total external debt decreased from 91.0 percent of GDP in 2017 to 85.0 percent in 2018 and will decline further towards 75 percent in the medium term.6 8. External debt remains at moderate risk of distress. Public and publicly guaranteed (PPG) external debt in PV terms is estimated to decline from 35 percent of GDP in 2018 to below 30 percent of GDP over the long term. While most external debt burden indicators remain below their indicative sustainability thresholds under shock scenarios and suggest limited rollover risks, the debt service-to-exports ratios breach its threshold in the medium term in the case of a shock to exports (Figure 1 and Table 3), indicating moderate risk of debt distress. Moreover, the PV of debt- to-exports also breaches its threshold, albeit for only a year. The assessment of moderate risk is also supported by the overvaluation of the exchange rate highlighted by the External Sector Assessment,7 the need for continued fiscal discipline in strict adherence to the draft fiscal rule, the expectations of continuing external concessional financing, and the large dependence on remittances and gold exports. 9. The Kyrgyz Republic is assessed to have some space to absorb shocks. The external PPG debt outlook remains vulnerable to large external shocks, to a decline in exports and other flows, the depreciation of the KGS as well as combined external shocks. Given the gap between debt burden indicators and their respective thresholds, the Kyrgyz Republic has some space to absorb shocks without being downgraded to high risk of debt distress (Figure 5). PUBLIC DSA 10. The public debt outlook has remained broadly unchanged since the last DSA (Text Table 5). Public debt (external plus domestic) decreased from 58.8 percent of GDP in 2017 to 56.0 percent of GDP in 2018. Total public debt is expected to be manageable in the medium and long term but remains sensitive to shocks, especially to real GDP growth and the depreciation of the KGS. Specifically, the PV of debt-to-GDP ratio breaches its sustainability threshold in the case of shocks to real GDP growth over the medium and long term (Figure 2 and Table 4). Rollover risks associated with public debt are expected to remain modest in the years ahead, albeit increasing over the long term. AUTHORITIES’ VIEWS 11. The authorities agreed with the overall assessment. They noted that the fiscal rule being considered by Parliament will help keeping the overall public debt sustainable. 6 This implies that private external debt (for example, debt of commercial banks) would be in the range of 20-40 percent of GDP in the medium term. 7 Kyrgyz Republic, Staff Report fort the 2019 Article IV Consultation, Annex 2. External Sector Assessment (forthcoming). 6 Text Table 5. Kyrgyz Republic: Comparison of Debt Ratio (percent of GDP) Long Term 2016 2017 2018 2019 2020 2021 2022 2023 2024 (2028) PPGE debt to GDP ratio Current DSA 54.4 53.0 48.0 47.9 46.7 45.4 44.0 43.2 42.7 37.8 1 Previous DSA 56.6 54.5 55.8 56.1 54.1 53.1 51.5 50.1 48.7 42.0 Public debt to GDP ratio Current DSA 59.1 58.8 56.0 56.1 55.5 55.3 54.5 54.4 54.4 54.0 Previous DSA1 58.1 57.1 58.2 58.4 56.2 55.0 53.2 51.7 50.9 47.1 Sources: Kyrgyz authorities and IMF staff estimates. 1/ IMF Country Report No. 18/53, Kyrgyz Republic—4th and 5th Reviews under the Extended Credit Facility. CONCLUSION 12. Both external and overall public debt remains at moderate risk of distress. Both the results of stress tests and country-specific circumstances point toward moderate risk of external debt distress. Given this assessment of external debt and that at least one indicator breaches the threshold under the public debt stress tests, overall public debt is also assessed to have moderate risk of debt distress. 13. The authorities need to maintain fiscal discipline, remain cautious when contracting or guaranteeing new debt and continue to improve the business climate. To keep the public debt sustainable, the authorities will need to strictly adhere to the fiscal rule considered by Parliament. While necessary to fill the large infrastructure gap, externally-financed public investments, could undermine debt sustainability. In this context, further efforts are needed to strengthen public debt and public investment management, to ensure that potential gains from externally financed public investment projects are fully realized. Moreover, the authorities should keep improving the business environment to maintain the country’s export beyond the closure of the main gold mine. An attractive business environment will be of paramount importance to generate new exports to replace those of the main gold mine that will close in 2026. 7 Table 1. Kyrgyz Republic: External Debt Sustainability Framework, Baseline Scenario, 2015–38 (In percent of GDP unless, otherwise indicated) Actual Projections Average 8/ Historical Projections 2015 2016 2017 2018 2019 2020 2021 2022 2023 2028 2038 External debt (nominal) 1/ 109.4 99.7 91.0 85.0 84.7 82.3 79.7 77.1 75.4 64.6 56.6 88.3 75.4 Definition of external/domestic debt Residency-based of which: public and publicly guaranteed (PPG) 63.5 54.4 53.0 48.0 47.9 46.7 45.4 44.0 43.2 37.8 37.0 51.2 43.3 Is there a material difference between the No two criteria? Change in external debt 19.7 -9.7 -8.7 -5.9 -0.4 -2.3 -2.7 -2.6 -1.7 -2.0 -0.6 Identified net debt-creating flows 11.5 1.0 -4.3 5.1 1.8 0.4 -0.4 -1.4 1.7 -1.2 0.9 -5.0 0.8 Non-interest current account deficit 15.0 10.6 5.2 7.7 8.5 6.6 6.1 5.7 7.3 6.1 7.3 6.9 7.0 Deficit in balance of goods and services 36.4 34.3 32.1 36.0 35.9 35.3 35.6 35.4 37.0 34.5 36.8 31.5 35.9 Exports 37.0 35.9 34.2 32.7 32.8 31.9 31.5 31.5 29.4 28.8 27.4 Imports 73.4 70.3 66.4 68.7 68.7 67.2 67.1 66.8 66.5 63.3 64.2 Debt Accumulation 4.0 35 Net current transfers (negative = inflow) -24.2 -27.9 -30.7 -29.9 -29.8 -30.9 -31.8 -32.1 -31.7 -30.5 -31.0 -28.9 -30.9 of which: official -1.5 -1.2 -1.4 -0.6 -0.9 -0.1 -0.5 -0.5 -0.5 -0.4 -0.3 3.0 35 Other current account flows (negative = net inflow) 2.9 4.2 3.8 1.6 2.3 2.2 2.3 2.4 1.9 2.1 1.5 4.4 2.0 35 Net FDI (negative = inflow) -15.1 -8.5 1.0 -0.6 -4.6 -4.5 -4.6 -4.7 -4.2 -5.5 -5.1 -7.1 -4.4 2.0 Endogenous debt dynamics 2/ 11.6 -1.2 -10.5 -2.1 -2.0 -1.6 -1.9 -2.4 -1.4 -1.7 -1.3 35 Contribution from nominal interest rate 1.0 1.0 1.0 0.9 1.1 1.1 1.0 1.0 1.1 1.0 1.0 1.0 Contribution from real GDP growth -3.9 -4.7 -4.2 -3.0 -3.1 -2.7 -2.9 -3.4 -2.5 -2.8 -2.3 34 0.0 Contribution from price and exchange rate changes 14.5 2.5 -7.3 … … … … … … … … 34 Residual 3/ 8.2 -10.7 -4.5 -11.0 -2.2 -2.7 -2.3 -1.2 -3.4 -0.8 -1.6 4.9 -3.2 -1.0 of which: exceptional financing 0.0 -0.4 -0.5 -3.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 34 -2.0 34 Sustainability indicators -3.0 34 PV of PPG external debt-to-GDP ratio ... ... 40.1 35.5 35.5 34.8 34.0 33.0 32.5 28.0 27.1 PV of PPG external debt-to-exports ratio ... ... 117.2 108.3 108.3 109.2 108.0 104.9 110.4 97.2 98.8 -4.0 33 PPG debt service-to-exports ratio 4.6 5.4 6.1 18.9 8.6 7.9 8.8 8.6 9.1 10.8 8.4 2018 2020 2022 2024 2026 2028 PPG debt service-to-revenue ratio 5.1 6.2 6.7 19.9 8.7 8.0 8.9 8.7 8.6 10.3 7.5 Gross external financing need (Million of U.S. dollars) 680.4 783.8 1052.7 1320.4 853.3 720.3 760.1 766.7 1039.6 1123.3 2069.6 Rate of Debt Accumulation Grant-equivalent financing (% of GDP) Key macroeconomic assumptions Grant element of new borrowing (% right scale) Real GDP growth (in percent) 3.9 4.3 4.7 3.5 3.8 3.4 3.8 4.6 3.4 4.4 4.3 4.4 3.9 GDP deflator in US dollar terms (change in percent) -13.9 -2.2 7.9 1.5 -0.7 1.9 1.9 1.9 1.9 1.0 1.0 3.5 1.4 Effective interest rate (percent) 4/ 1.0 0.9 1.1 1.1 1.3 1.3 1.3 1.4 1.5 1.6 1.8 1.0 1.4 External debt (nominal) 1/ Growth of exports of G&S (US dollar terms, in percent) -26.9 -0.9 7.7 0.4 3.2 2.5 4.4 6.5 -1.5 7.6 6.6 4.5 3.8 of which: Private Growth of imports of G&S (US dollar terms, in percent) -24.8 -2.3 6.8 8.8 2.9 3.0 5.6 6.1 4.7 5.0 5.9 7.2 4.9 90 Grant element of new public sector borrowing (in percent) ... ... ... 34.9 35.0 35.0 35.0 35.0 35.0 34.0 33.3 ... 34.7 80 Government revenues (excluding grants, in percent of GDP) 33.5 31.0 31.1 31.2 32.3 31.6 31.3 31.2 31.0 30.2 30.6 30.6 31.0 Aid flows (in Million of US dollars) 5/ 143.7 144.4 171.8 222.7 326.9 212.7 282.1 291.5 300.9 357.8 530.7 70 Grant-equivalent financing (in percent of GDP) 6/ ... ... ... 2.5 3.4 1.9 2.5 2.5 2.4 2.3 2.2 ... 2.5 60 Grant-equivalent financing (in percent of external financing) 6/ ... ... ... 60.7 61.0 49.9 53.0 52.4 52.2 50.5 48.8 ... 53.2 Nominal GDP (Million of US dollars) 6,678 6,813 7,703 8,093 8,334 8,781 9,288 9,897 10,423 13,674 22,904 50 Nominal dollar GDP growth -10.6 2.0 13.1 5.1 3.0 5.4 5.8 6.6 5.3 5.4 5.3 8.2 5.4 40 Memorandum items: 30 PV of external debt 7/ ... ... 78.1 72.5 72.3 70.5 68.3 66.1 64.7 54.8 46.6 20 In percent of exports ... ... 228.2 221.4 220.4 221.0 216.8 210.2 219.8 190.2 170.1 Total external debt service-to-exports ratio 27.8 26.1 21.6 28.0 19.5 19.4 21.2 21.4 23.4 26.5 24.7 10 PV of PPG external debt (in Million of US dollars) 3091.4 2869.6 2959.6 3057.1 3156.8 3267.0 3385.4 3826.0 6208.3 0 (PVt-PVt-1)/GDPt-1 (in percent) -2.9 1.1 1.2 1.1 1.2 1.2 0.6 1.4 2018 2020 2022 2024 2026 2028 Non-interest current account deficit that stabilizes debt ratio -4.6 20.4 14.0 13.7 8.8 8.9 8.7 8.3 9.0 8.1 7.9 Sources: Country authorities; and staff estimates and projections. 0 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - ρ(1+g) + Ɛα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 8 Table 2. Kyrgyz Republic: Public Sector Debt Sustainability Framework, 2015-38 (In percent of GDP, unless otherwise indicated) Actual Projections Average 6/ 2015 2016 2017 2018 2019 2020 2021 2022 2023 2028 2038 Historical Projections Public sector debt 1/ 67.1 59.1 58.8 56.0 56.1 55.5 55.3 54.5 54.4 54.0 54.0 55.3 54.8 Definition of external/domestic Residency- of which: external debt 63.5 54.4 53.0 48.0 47.9 46.7 45.4 44.0 43.2 37.8 37.0 51.2 43.3 debt based of which: local-currency denominated Change in public sector debt 13.5 -8.0 -0.3 -2.8 0.1 -0.6 -0.2 -0.7 -0.1 0.0 0.0 Is there a material difference Identified debt-creating flows 12.4 -5.9 -2.6 -3.9 1.5 -0.1 -0.3 -0.7 -0.1 -0.2 -0.1 -0.4 -0.4 No between the two criteria? Primary deficit 1.8 5.4 3.5 0.0 1.9 1.6 1.6 1.5 1.4 1.0 0.9 2.9 1.3 Revenue and grants 35.6 33.1 33.4 32.8 34.5 32.5 32.6 32.5 32.3 31.4 31.6 33.3 32.3 of which: grants 2.2 2.1 2.2 1.6 2.2 0.9 1.3 1.3 1.2 1.1 1.0 Public sector debt 1/ Primary (noninterest) expenditure 37.4 38.5 36.8 32.8 36.4 34.0 34.2 34.0 33.7 32.4 32.5 36.2 33.6 Automatic debt dynamics 10.6 -10.8 -5.7 -0.9 -0.3 -1.6 -1.8 -2.1 -1.4 -1.2 -1.0 of which: local-currency denominated Contribution from interest rate/growth differential -2.3 -3.3 -3.2 -1.9 -1.5 -1.6 -1.8 -2.1 -1.4 -1.5 -1.3 of which: foreign-currency denominated of which: contribution from average real interest rate -0.3 -0.5 -0.5 0.1 0.5 0.2 0.2 0.3 0.3 0.8 0.9 of which: contribution from real GDP growth -2.0 -2.8 -2.7 -2.0 -2.0 -1.8 -2.0 -2.4 -1.8 -2.3 -2.2 60 Contribution from real exchange rate depreciation 12.9 -7.5 -2.4 ... ... ... ... ... ... ... ... 50 Other identified debt-creating flows 0.0 -0.4 -0.4 -3.0 -0.1 -0.1 -0.1 0.0 0.0 0.0 0.0 -0.1 -0.3 Privatization receipts (negative) 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.1 0.0 0.0 0.0 0.0 40 Recognition of contingent liabilities (e.g., bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 30 Debt relief (HIPC and other) 0.0 -0.4 -0.4 -3.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other debt creating or reducing flow (please specify) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20 Residual 1.0 -2.2 2.3 2.1 -0.2 -0.5 0.1 -0.1 0.0 0.5 0.5 0.5 0.3 10 Sustainability indicators 0 PV of public debt-to-GDP ratio 2/ ... ... 46.0 44.0 44.2 44.2 44.4 44.0 44.2 44.6 44.5 2018 2020 2022 2024 2026 2028 PV of public debt-to-revenue and grants ratio … … 137.8 134.1 128.1 136.1 136.0 135.5 136.9 142.2 140.8 Debt service-to-revenue and grants ratio 3/ 4.8 5.8 6.3 37.2 32.4 33.4 35.9 38.8 41.4 58.9 61.5 Gross financing need 4/ 2.9 6.6 5.6 9.3 13.0 12.4 13.2 14.0 14.7 19.5 20.3 of which: held by residents of which: held by non-residents Key macroeconomic and fiscal assumptions 60 Real GDP growth (in percent) 3.9 4.3 4.7 3.5 3.8 3.4 3.8 4.6 3.4 4.4 4.3 4.4 3.9 Average nominal interest rate on external debt (in percent) 1.3 1.3 1.3 1.3 1.6 1.6 1.5 1.5 1.6 1.7 1.8 1.2 1.6 50 Average real interest rate on domestic debt (in percent) -3.3 -5.7 -6.0 6.7 8.5 4.9 4.8 4.8 4.8 5.8 5.8 -8.4 5.6 40 Real exchange rate depreciation (in percent, + indicates depreciation) 26.6 -12.3 -4.7 … ... ... ... ... ... ... ... 0.6 ... 30 Inflation rate (GDP deflator, in percent) 3.4 6.1 6.3 1.5 2.2 4.9 5.0 5.0 5.0 4.0 4.0 9.6 4.1 Growth of real primary spending (deflated by GDP deflator, in percent) 2.3 7.3 0.3 -7.8 14.9 -3.3 4.2 4.0 2.4 3.6 4.4 7.0 2.8 20 Primary deficit that stabilizes the debt-to-GDP ratio 5/ -11.7 13.4 3.8 2.8 1.8 2.2 1.8 2.2 1.5 1.1 0.9 1.8 1.7 10 PV of contingent liabilities (not included in public sector debt) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 2018 2020 2022 2024 2026 2028 Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central, state, and local governments, central bank, government-guaranteed debt. Definition of external debt is Residency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 9 Figure 1. Kyrgyz Republic: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2018-28 1/ PV of debt-to GDP ratio PV of debt-to-exports ratio 60 300 50 250 40 200 30 150 20 100 10 50 Most extreme shock is Exports Most extreme shock is Exports 0 0 2018 2020 2022 2024 2026 2028 2018 2020 2022 2024 2026 2028 Debt service-to-exports ratio Debt service-to-revenue ratio 25 25 20 20 15 15 10 10 5 5 Most extreme shock is Exports Most extreme shock is Exports 0 0 2018 2020 2022 2024 2026 2028 2018 2020 2022 2024 2026 2028 Baseline Historical scenario 2/ Most extreme shock 1/ Threshold Customization of Default Settings Borrowing Assumptions for Stress Tests* Size Interactions Default User defined Shares of marginal debt No No External PPG MLT debt 100% Tailored Tests Terms of marginal debt Combined CLs No Avg. nominal interest rate on new borrowing in USD 1.9% 1.9% Natural Disasters n.a. n.a. USD Discount rate 5.0% 5.0% Commodity Prices 2/ n.a. n.a. Avg. maturity (incl. grace period) 27 27 Market Financing n.a. n.a. Avg. grace period 5 5 Note: "Yes" indicates any change to the size or * Note: All the additional financing needs generated by the shocks under the stress tests interactions of the default settings for the stress are assumed to be covered by PPG external MLT debt in the external DSA. Default terms tests. "n.a." indicates that the stress test does not of marginal debt are based on baseline 10-year projections. apply. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. 2/ The historical scenario leads to much more favorable debt dynamics than the baseline mainly because the average annual FDI inflow was much higher than projected in the base line (see Table 1). Note: debt service was very high in 2018 because debt relief by Russia ($240 million) was recorded as debt amortization financed by debt relief in the balance of payments. 10 Figure 2. Kyrgyz Republic: Indicators of Public Debt Under Alternative Scenarios, 2018-28 PV of Debt-to-GDP Ratio 80 70 60 50 40 30 20 Most extreme shock is Growth 10 0 2018 2020 2022 2024 2026 2028 PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio 250 120 100 200 80 150 60 100 40 50 Most extreme shock is Growth 20 Most extreme shock is Growth 0 0 2018 2020 2022 2024 2026 2028 2018 2020 2022 2024 2026 2028 Baseline Most extreme shock 1/ Public debt benchmark Historical scenario 2/ Borrowing Assumptions for Stress Tests* Default User defined Shares of marginal debt External PPG medium and long-term 23% 23% Domestic medium and long-term 0% 0% Domestic short-term 77% 77% Terms of marginal debt External MLT debt Avg. nominal interest rate on new borrowing in USD 1.9% 1.9% Avg. maturity (incl. grace period) 27 27 Avg. grace period 5 5 Domestic MLT debt Avg. real interest rate on new borrowing 0.0% 0.0% Avg. maturity (incl. grace period) 1 1 Avg. grace period 0 0 Domestic short-term debt Avg. real interest rate 5% 5.0% * Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. 2/ The historical scenario leads to more favorable debt dynamics than the baseline in spite of higher primary deficits mostly because of the countervailing impact of the higher GDP deflator and the lower interest rate than in the baseline (see Table 2). 11 Table 3. Kyrgyz Republic: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018-28 (In percent) Projections 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 PV of debt-to GDP ratio Baseline 35.5 35.5 34.8 34.0 33.0 32.5 32.2 31.1 30.0 28.9 28.0 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 35.5 31.2 28.4 26.0 24.2 21.1 17.8 15.3 13.1 11.3 10.2 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 35.5 37.5 38.7 37.8 36.7 36.1 35.8 34.6 33.3 32.2 31.1 B2. Primary balance 35.5 36.0 36.3 36.2 35.8 35.7 35.7 34.8 33.7 32.7 31.7 B3. Exports 35.5 41.6 50.7 49.6 48.2 47.5 47.0 45.5 43.4 41.5 39.8 B4. Other flows 2/ 35.5 40.7 45.8 44.8 43.6 43.0 42.5 41.1 39.2 37.5 36.0 B5. One-time 30 percent nominal depreciation 35.5 45.0 35.9 35.0 34.0 33.4 33.1 31.9 30.9 30.1 29.3 B6. Combination of B1-B5 35.5 44.5 47.4 46.4 45.1 44.4 44.0 42.4 40.5 38.8 37.3 C. Tailored Tests C1. Combined contingent liabilities 35.5 36.6 36.7 36.5 35.9 35.7 35.6 34.8 33.7 32.8 31.9 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 55 55 55 55 55 55 55 55 55 55 55 PV of debt-to-exports ratio Baseline 108.3 108.3 109.2 108.0 104.9 110.4 115.8 111.7 106.6 102.6 97.2 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 108.3 95.2 89.0 82.7 76.9 71.7 64.2 54.9 46.6 40.1 35.5 0 108.3 103.8 103.8 102.3 99.6 103.6 106.4 101.8 95.9 90.6 83.9 B. Bound Tests B1. Real GDP growth 108.3 108.3 109.2 108.0 104.9 110.4 115.8 111.7 106.6 102.6 97.2 B2. Primary balance 108.3 109.9 113.9 115.1 113.7 121.2 128.3 124.9 119.9 116.0 110.3 B3. Exports 108.3 151.2 227.1 225.1 219.1 230.7 241.9 233.4 220.7 210.5 197.7 B4. Other flows 2/ 108.3 124.0 143.7 142.4 138.6 146.0 153.0 147.4 139.5 133.1 125.0 B5. One-time 30 percent nominal depreciation 108.3 108.3 88.9 87.7 85.2 89.5 93.9 90.2 86.7 84.1 80.3 B6. Combination of B1-B5 108.3 141.2 135.9 165.7 161.3 169.8 178.0 171.1 162.1 154.9 145.8 C. Tailored Tests C1. Combined contingent liabilities 108.3 111.5 115.0 115.8 114.1 121.3 128.3 124.8 119.9 116.1 110.7 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 240 240 240 240 240 240 240 240 240 240 240 Debt service-to-exports ratio Baseline 18.9 8.6 7.9 8.8 8.6 9.1 8.8 11.0 11.3 11.1 10.8 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 18.9 8.2 7.1 7.7 7.4 7.5 6.9 7.9 7.7 7.2 6.6 0 18.9 8.1 7.5 8.4 8.3 8.6 8.3 10.4 10.6 10.2 9.6 B. Bound Tests B1. Real GDP growth 18.9 8.6 7.9 8.8 8.6 9.1 8.8 11.0 11.3 11.1 10.8 B2. Primary balance 18.9 8.6 8.0 9.0 8.8 9.3 9.1 11.4 11.9 11.8 11.6 B3. Exports 18.9 10.7 12.9 15.3 14.9 15.6 15.2 19.8 22.1 21.6 20.8 B4. Other flows 2/ 18.9 8.6 8.3 9.8 9.5 10.0 9.7 12.8 14.0 13.7 13.2 B5. One-time 30 percent nominal depreciation 18.9 8.6 7.9 8.3 8.1 8.5 8.3 10.5 9.7 9.6 9.3 B6. Combination of B1-B5 18.9 9.5 10.4 11.8 11.5 12.0 11.7 15.8 16.5 16.1 15.6 C. Tailored Tests C1. Combined contingent liabilities 18.9 8.6 8.0 9.0 8.8 9.3 9.1 11.3 11.6 11.5 11.1 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 21 21 21 21 21 21 21 21 21 21 21 Debt service-to-revenue ratio Baseline 19.9 8.7 8.0 8.9 8.7 8.6 8.0 10.0 10.4 10.3 10.3 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 19.9 8.3 7.2 7.8 7.4 7.1 6.2 7.2 7.1 6.7 6.3 0 19.9 8.3 7.6 8.4 8.3 8.2 7.5 9.4 9.8 9.5 9.1 B. Bound Tests B1. Real GDP growth 19.9 9.2 8.9 9.9 9.7 9.6 8.9 11.2 11.6 11.5 11.4 B2. Primary balance 19.9 8.7 8.0 9.0 8.9 8.8 8.2 10.4 10.9 11.0 11.0 B3. Exports 19.9 9.1 9.1 10.7 10.5 10.3 9.6 12.6 14.2 14.1 13.9 B4. Other flows 2/ 19.9 8.7 8.4 9.8 9.6 9.4 8.8 11.7 12.9 12.7 12.6 B5. One-time 30 percent nominal depreciation 19.9 11.0 10.2 10.6 10.4 10.3 9.5 12.1 11.3 11.3 11.3 B6. Combination of B1-B5 19.9 9.3 9.3 10.5 10.3 10.1 9.4 12.8 13.5 13.3 13.2 C. Tailored Tests C1. Combined contingent liabilities 19.9 8.7 8.1 9.1 8.9 8.8 8.2 10.3 10.7 10.6 10.6 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 23 23 23 23 23 23 23 23 23 23 23 Sources: Country authorities; and staff estimates and projections. 1/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 2/ Includes official and private transfers and FDI. 12 Table 4. Kyrgyz Republic: Sensitivity Analysis for Key Indicators of Public Debt, 2018-28 Projections 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 PV of Debt-to-GDP Ratio Baseline 44.0 44.2 44.2 44.4 44.0 44.2 44.3 44.4 44.4 44.5 44.6 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 44 42 41 41 40 40 39 39 39 38 38 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 44 48 54 57 59 62 65 68 70 72 75 B2. Primary balance 44 47 51 51 50 50 50 50 50 50 49 B3. Exports 44 49 56 56 56 56 56 55 55 54 53 B4. Other flows 2/ 44 49 55 55 55 55 55 55 54 53 53 B5. One-time 30 percent nominal depreciation 44 52 49 48 45 43 41 39 37 36 34 B6. Combination of B1-B5 44 45 46 44 43 43 44 44 44 44 44 C. Tailored Tests C1. Combined contingent liabilities 44 51 50 50 50 50 50 49 49 49 49 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Public debt benchmark 70 70 70 70 70 70 70 70 70 70 70 PV of Debt-to-Revenue Ratio Baseline 134.1 128.1 136.1 136.0 135.5 136.9 138.7 139.6 140.3 141.2 142.2 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 134 123 127 126 125 124 124 124 124 124 124 0 134 130 144 149 153 159 165 170 175 180 185 B. Bound Tests B1. Real GDP growth 134 139 166 174 182 192 203 212 220 228 237 B2. Primary balance 134 137 156 155 154 154 156 156 157 157 158 B3. Exports 134 141 173 172 171 172 174 174 172 171 170 B4. Other flows 2/ 134 143 171 170 169 170 172 171 170 169 168 B5. One-time 30 percent nominal depreciation 134 151 151 146 139 134 130 124 119 114 109 B6. Combination of B1-B5 134 132 143 134 133 134 136 137 138 139 140 C. Tailored Tests C1. Combined contingent liabilities 134 147 155 154 152 153 155 155 156 156 157 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Debt Service-to-Revenue Ratio Baseline 37.2 32.4 33.4 35.9 38.8 41.4 43.3 46.6 50.9 55.0 58.9 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 37 30 32 36 39 42 43 46 49 51 53 0 37 33 36 43 49 54 58 63 69 74 79 B. Bound Tests B1. Real GDP growth 37 34 41 52 60 68 74 81 88 95 102 B2. Primary balance 37 32 42 52 51 51 51 53 57 60 64 B3. Exports 37 32 34 37 40 42 44 48 54 58 61 B4. Other flows 2/ 37 32 34 37 40 42 44 48 53 57 61 B5. One-time 30 percent nominal depreciation 37 31 33 32 38 41 42 45 49 53 56 B6. Combination of B1-B5 37 32 33 36 38 41 43 46 50 54 58 C. Tailored Tests C1. Combined contingent liabilities 37 32 50 49 49 50 50 52 56 59 62 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Sources: Country authorities; and staff estimates and projections. 1/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. 2/ Includes official and private transfers and FDI. 13 Figure 3. Kyrgyz Republic: Drivers of Debt Dynamics—Baseline Scenario External debt Gross Nominal PPG External Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Current DSA 60 80 Residual 60 Previous DSA proj . 50 70 DSA-2013 40 Interquartile range (25-75) Price and 40 60 exchange rate 30 50 20 Real GDP 20 growth Change in PPG 40 10 debt 3/ 0 30 Nominal 0 interest rate -1 0 20 -20 Median Current -2 0 10 account + FDI -3 0 0 Change in -40 -4 0 Contribution of Distribution across LICs 2/ 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 PPG debt 3/ 5-year 5-year unexpected changes historical projected -5 0 change change Public debt Gross Nominal Public Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Residual 30 Current DSA Previous DSA proj. 20 DSA-2013 Other debt 20 Interquartile 80 creating flows range (25-75) 15 70 Real 10 Exchange 60 rate depreciation 10 50 Real GDP 0 growth Change in debt 40 5 -10 Real interest 30 rate 20 -20 0 Primary deficit 10 -30 -5 Median 0 Change in debt 5-year 5-year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Distribution across LICs 2/ Contribution of historical projected unexpected -10 change change 1/ Difference between anticipated and actual contributions on debt ratios. 2/ Distribution across LICs for which LIC DSAs were produced. 3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation. 14 Figure 4. Kyrgyz Republic: Realism Tools 3-Year Adjustment in Primary Balance Fiscal Adjustment and Possible Growth Paths 1/ (Percentage points of GDP) 12 4 Distribution 1/ 14 Projected 3-yr 10 3 12 adjustment 3-year PB adjustment greater than In percentage points of GDP 2.5 percentage points of GDP in 8 2 10 approx. top quartile In percent 6 1 8 4 0 6 2 -1 4 0 -2 2 0 -2 -3 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 -4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 More 2012 2013 2014 2015 2016 2017 2018 2019 Baseline Multiplier = 0.2 Multiplier = 0.4 Multiplier = 0.6 Multiplier = 0.8 1/ Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show 1/ Data cover Fund-supported programs for LICs (excluding emergency financing) approved since possible real GDP growth paths under different fiscal multipliers (left-hand side scale). 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the percent of sample is found on the vertical axis. Public and Private Investment Rates Contribution to Real GDP growth (% of GDP) (percent, 5-year average) 34 6 32 30 28 5 26 24 4 22 20 18 3 16 14 12 2 10 8 6 1 4 2 0 0 Historical Projected (Prev. DSA) Projected (Curr. DSA) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Gov. Invest. - Prev. DSA Gov. Invest. - Current DSA Contribution of other factors Priv. Invest. - Prev. DSA Priv. Invest. - Current DSA Contribution of government capital 15 Figure 5. Kyrgyz Republic: Qualification of the Moderate Category, 2018-2028 1/ PV of debt-to GDP ratio PV of debt-to-exports ratio 60 300 Threshold 50 250 (1-X)*Threshold 40 200 (1-Y)*Threshold 30 150 20 100 10 50 0 0 2018 2020 2022 2024 2026 2028 2018 2020 2022 2024 2026 2028 Debt service-to-exports ratio Debt service-to-revenue ratio 25 25 20 20 15 15 10 10 5 5 0 0 2018 2020 2022 2024 2026 2028 2018 2020 2022 2024 2026 2028 Threshold Baseline Limited space Some space Substantial space Sources: Country authorities; and staff estimates and projections. 1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent. 16