Political

All eyes in the Kyrgyz Republic are on where the gripping power struggle between President Sooranbai Jeenbekov and his predecessor Almazbek Atambayev goes from here. It was all supposed to be so different. Atambayev went out of his way to back the ascension of Jeenbekov to the presidency in late 2017, in what was Central Asia’s first peaceful democratic replacement of a leader. Plenty of observers were convinced that his support was merely a facade, and that Atambayev planned to rule from the shadows.

If that was the plan, then it lies in tatters. Jeenbekov and Atambayev are by now involved in something of a catfight. In mid-November, the incumbent went so far as to say: "[Atambayev’s] attempts to turn me into a puppet leader through some third individuals, to direct my actions, discredit him as a person, as an ex-president, as a fellow party member and associate."  Atambayev, meanwhile, has accused Jeenbekov of arranging the arrests of his closest allies to put on “a show” to give the impression that "a fight against corruption is under way". He has vowed to remain in “big politics” and has suggested he will seek to rein in Jeenbekov.

President Sooranbai Jeenbekov. 

In early October, the Kyrgyz Supreme Court ruled that the immunity enjoyed by the country's former presidents was unconstitutional. The parliament subsequently approved the first reading of a bill that will strip that immunity away. Although Atambayev is the boss of the Social Democratic Party of Kyrgyzstan (SDPK), of which Jeenbekov is also a member, the parliamentary representation of the party, appears to be aligned with the president.

Kyrgyzstan, a country of 6.4mn, is known for its political volatility—revolutions toppled the governments of Askar Akayev in 2005 and Kurmanbek Bakiyev in 2010, respectively. In both cases, Atambayev was at the centre of things. Where political stability in 2019 is concerned, that could be seen as unnerving. But at the same time, Atambayev is on record as saying he has no intention of starting another revolution. The implication is that his “big politics” participation should be enough to restrain Jeenbekov. It’s very much a case of watch this space.

When it comes to Kyrgyzstan’s foreign relations, one issue to watch will be Bishkek’s approach to the growing protests at home and in Kazakhstan against the “re-education” centres in China’s northwestern Xinjiang region. Groups citing alleged systematic “persecution” of ethnic Kyrgyz, Kazakh and Uyghur citizens in the Chinese province are becoming more vociferous. However, Chinese investment is emerging as more and more valuable to the economies of Kyrgyzstan and Kazakhstan, meaning their governments will tread carefully, very likely not wanting to upset Beijing too much over the human rights cause.

There have been some initial negotiations with China for the construction of a China-Kyrgyzstan-Uzbekistan railway that would come under China’s huge One Belt One Road (OBOR) trade infrastructure initiative.

Kyrgyzstan was labelled as “Partly Free” by Freedom House’s Freedom in the World 2018 report, meaning it compares favourably to the four other nations of Central Asia. The 2019 rankings are due out in January.

To its west, Kyrgyzstan has been working on a possible land swap deal with Uzbekistan. The Kyrgyz-Uzbek border, 15% of which is still undergoing the formal delineation process initiated after the collapse of the USSR in 1991, has long been a source of conflict between local inhabitants and border guards. But some of these conflicts were toned downed or halted entirely after the coming to power of reform-minded Uzbek President Shavkat Mirziyoyev in late 2016. Mirziyoyev, in comparison to his cautious and somewhat paranoid late predecessor Islam Karimov, has been re-orienting Uzbekistan’s focus on regional cooperation.

Economics

Kyrgyzstan, GDP growth. Source: World Economic Outlook, IMF.

The IMF sees slightly less 2018 growth for Kyrgyzstan than the EBRD. It anticipates 2.8%.

Kyrgyzstan's economy expanded by 3.1% y/y in the first 11 months of 2018, as against the 3.7% y/y recorded for the same period of the previous year.

In December, Kyrgyz Prime Minister Muhamedkaliy Abilgaziyev announced that he had met with Canada’s Centerra Gold CEO Scott Perry to discuss the future of the flagship Kumtor gold mine. During the meeting, the two sides reportedly agreed that Kumtor would produce 16 tonnes of gold in 2018 and “no less” than that in 2019. Kumtor, as the largest contributor to the GDP of Kyrgyzstan, can make or break its economy. If output at Kumtor stays stable year on year in 2019, then Kyrgyz growth should not slip back.

Kyrgyzstan’s total foreign trade turnover officially grew by 6.7% y/y to $5.38bn in the first 10 months of 2018. Imports grew by 9.8% y/y to $4.06bn on growing demand stemming from rising remittances. Exports shrunk 1.6% y/y to $1.32bn.

Average annual inflation for the January-November period in the country stood at 1.6%, down from the 3.1% rate recorded in the same period of 2017. The World Bank has noted that the countries of Central Asia are seeing waning returns on benefits that pushed expansion last year, including the follow-through effects of the moderate economic improvement in Russia. As such, a slowdown in inflation was expected.

Finance

Kyrgyzstan’s debt-to-GDP ratio stood at 47.5% as of end-October. The country owes approximately 40% of its foreign debt ($1.68bn) to China. Analysts are wary of the ex-Soviet nation's debt load to China resulting in a continuous debt spiral. Kyrgyzstan is likely to see its debt to China grow again in 2019, especially given Beijing’s active efforts to push infrastructure projects in Central Asia under the One Belt One Road initiative.

In November, the EBRD urged Kyrgyzstan to strengthen its banking sector. The call was made in its  EBRD Transition Report 2018-2019. The development bank noted that non-performing loans (NPLs) and dollarisation continue to pose challenges for the Kyrgyz economy. Given those and other difficulties, the Kyrgyz central bank should further strengthen its supervisory and regulatory capacity, it added.

The coming year should also see Bishkek-based Highland Capital push ahead with establishing the first institutional private equity fund with a focus on Kyrgyzstan. It got backing for the fund from the World Bank’s International Finance Corporation (IFC) in September. The new fund hopes to expand access to finance for small and medium sized enterprises (SMEs). in the country by providing equity and equity-like financing in a number of sectors including services, healthcare, education and media. Kyrgyzstan has attracted little foreign investment since achieving independence in 1991, aside from capital that has gone into Kumtor gold mine. Highland raised an initial $15mn for its Highland Private Equity & Mezzanine Fund, including $8mn from the IFC. It seeks to raise a total of $30mn and expects the fundraising to close by August 2019.

The Kyrgyz central bank and the Islamic Development Bank (IDB) have been working on creating a new fully-fledged Islamic bank in Kyrgyzstan. The Islamic Corporation for the Development of the Private Sector (ICD), the private sector arm of the IDB Group, has previously provided a Sharia-compliant $10mn credit facility for Kyrgyz micro-credit company Mol Bulak Finance to on-lend to MSMEs.

Business and trade & investment potential

Those looking to do business in Kyrgyzstan were this year given some encouragement by the World Bank. It rated Kazakhstan and Kyrgyzstan as the only Central Asia improvers in its latest  Doing Business 2019 report. Kyrgyzstan rose seven places to 70th in the ranking of 190 economies. The survey report noted Kyrgyzstan was among “notable” improvers of the year after implementing four significant business reforms.

In the 2018 edition of the Global Competitiveness Index (GCI) of the World Economic Forum (WEF), Kyrgyzstan moved up on improving economic conditions, gaining five positions to rank 97th. Kyrgyzstan saw improvements in its score for markets (48.4), human capital (62.5) and health and enabling environment (58.1).

Late 2018, saw the Asian Development Bank (ADB) provide $78mn to complete the rehabilitation of a key road that connects two major transport corridors that link landlocked Kyrgyzstan to international markets.

As regards prospects for expanding trade in the EEU, the Commission Council of the Russia-led union has approved a roadmap for Iran’s entry into a free trade zone to be shared with the bloc, but there is no clear indication of how fast progress will be.

In privatisation, Bishkek has opted against including state-owned mobile operator Alfa Telecom in its submitted draft privatisation programme for 2018-2020. It appears to have given up on the sell-off of a 100% stake in the country’s dominant telco after nearly a decade of efforts.

Unlike Alfa Telecom, Fund for State Property Management-owned Air Kyrgyzstan has been earmarked for a sell-off. A 51% stake in all is up for grabs but if a foreign investor purchases the major stake, the shares gained must not exceed 49% of ownership. The other 2% is to be sold to Kyrgyz private investors. The flag carrier is clearly in need of substantial investment. As things stand, it is banned in the European Union.