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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 KYRGYZ STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Economic and Political Environment The political situation in the Kyrgyz Republic shows no sign of stabilizing, and tensions between the president, Kurmanbek Bakiyev, and the prime minister, Feliks Kulov, remain high. The strife between the factions allied to the two men is not only creating political incoherence but also fuelling accusations that the political elite is co-opting criminal elements. Further conflict can be expected over constitutional reform, as Mr. Bakiyev and Mr. Kulov each seek to strengthen their respective posts at the expense of the other. The government will continue with a "multivectoral" foreign policy. This is a core principle in the five former Soviet republics of Central Asia, given these countries' paucity of resources and need for foreign investment. Although earlier in the year Mr. Bakiyev publicly stated that the US should set a timetable for the withdrawal of coalition troops from Central Asia, the base at Manas international airport provides the Kyrgyz Republic with much-needed income. Consequently, a US withdrawal is unlikely to be a near-term proposition, as confirmed by the fact that an agreement on the coalition forces' continued use of the base, reached by the two sides in October 2005, did not set a fixed date of departure. The IMF has favorably reviewed the Kyrgyz Republic's progress under the three-year poverty reduction and growth facility (PRGF) signed in February 2005. Heavily reliant on multilateral funding, the Kyrgyz Republic clearly has a strong incentive to maintain good relations with the IMF, but meeting the IMF criteria will have to be balanced with preventing a rise in social instability. This task will be eased by the IMF's recognition of the difficult circumstances in the country. Nonetheless, the IMF has expressed grave concerns over corruption and the large quasifiscal deficits in the electricity sector; the government will therefore seek to make concrete progress in these spheres. Strong Russian demand, largely attributable to persistent high oil prices, is helping to support growth in the Commonwealth of Independent States (CIS). Although the rate of Russian real GDP growth will trend downwards in 2006-07, Russian import demand growth will stay strong, ensuring that the country remains the Kyrgyz Republic's most important destination for non-gold exports. The Kyrgyz Republic is also benefiting from strong growth in neighboring Kazakhstan. Economic Performance Real GDP contracted by 0.6% in 2005, according to the National Statistical Committee. Falling output at the Kumtor gold mine played a crucial role in the slowdown, but output in other sectors also performed poorly. The low base of comparison in 2005 will allow for a rebound in growth rates in 2006 to 3% of GDP. For 2007, we forecast GDP growth is expected to be 4%. Based on monthly data from the National Statistical Committee (NSC), year-end inflation in 2005 was 5.9%, resulting in an annual average rate of 5.2%. This was an increase from annual average inflation of 4% in 2004, largely attributable to the supply disruptions resulting from the political upheavals in 2005. As the economy stabilizes over 2006-07 and returns to growth, inflation will trend upwards towards the end of the two-year forecast period, further boosted by rising inflows of workers' remittances. The central bank will try to limit its interventions on the foreign exchange market to the minimum required to smooth daily fluctuations and strengthen international reserves. However, political uncertainty raises risks to the conduct of exchange-rate policy, as further turmoil could weaken the exchange rate and force the bank to intervene more heavily. According to the central bank, the current account posted a deficit of US$ 191 million in 2005, roughly double that posted in 2004. The government's efforts to bring the deficit down will be helped in 2006-07 by steadily rising net transfers and the successful renegotiation of Paris Club debt, which will bring about a significant reduction in interest payments. The current account balance will nonetheless remain negative, given rapidly rising imports and moderating growth in export revenue–itself caused by declining output at the Kumtor gold mine.* * The Economic Intelligence Unit Ltd., May 2006 Key Information Contacts National Bank of the Kyrgyz Republic www.nbkr.kg Ministry of Finance www.minfin.kg State Commission on Securities Market www.nsc.kg 4.Ministry of Foreign Trade and Industry of the Kyrgyz Republic www.mvtp.kg 2005-ORIGINS OF GROSS DOMESTIC PRODUCT (%) 2005-COMPONENTS OF GROSS DOMESTIC PRODUCT (%) Services Agriculture & forestry Industry Private consumption Public consumption Gross fixed investment Change in stocks Net exports 34.1 100 80 80.9 45.0 60 40 20.9 20 18.9 15.7 0 -20 -0.1 -19.6 PAGE 92
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 KYRGYZ STOCK EXCHANGE KYRGYZSTAN ECONOMIC CHARTS AND TABLES 2002 (a) 2003 (a) 2004 (a) 2005 (a) 2006 (b) GDP at market prices (Som billions) 75.4 83.9 94.4 100.1 107.9 GDP (US$ billions) 1.6 1.9 2.2 2.4 2.7 Real GDP growth (%) 0.0 7.0 7.1 -0.6 2.5 Consumer price inflation (av; %) 2.1 3.0 4.1 4.3 5.8 Population (million) 5.0 5.0 5.1 5.1 5.1 Exports of goods fob (US$ millions) 498 590 733 687 704 Imports of goods fob (US$ millions) -572 -724 -904 -1,106 -1,283 Current-account balance (US$ millions) -80 -99 -101 -204 -343 Foreign-exchange reserves excl gold (US$ millions) 289 365 528 570 587 Exchange rate (av) Som:US$ 46.94 43.65 42.65 41.01 40.28 (a) Actual. (b) Economist Intelligence Unit estimates. ECONOMIC FORECAST SUMMARY 2003 2004 2005 2006 Real GDP growth (%) 7.1 -0.6 2.0 4.0 Consumer prices (% change) 4.1 4.3 6.4 7.0 Government balance (% of GDP) -0.5 0.2 -1.2 -1.0 Merchandise exports (US$ millions) 733 687 702 815 Exchange rate (Som:US$1) 42.65 41.01 40.67 40.69 2005-PRINCIPAL EXPORTS (%) 2005-PRINCIPAL IMPORTS (%) Precious & semi-precious metals Mineral products Textiles Mineral products Machinery & equipment Chemicals Glass & construction materials Other Food, beverages & tobacco Other 14.4 13.1 35.1 11.5 27.9 10.9 6.9 8.5 32.1 39.6 2005-MAIN DESTINATION OF EXPORTS (%) 2005-MAIN ORIGINS OF IMPORTS (%) UAE Russia Kazakhstan Switzerland Other Russia China Kazakhstan USA 17.3 16.3 20.0 15.5 34.2 9.3 6.1 25.8 21.4 34.1 The Economic Intelligence Unit Ltd., April 2006 PAGE 93
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