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International rating agency Fitch confirmed Uzbekistan’s foreign currency sovereign credit rating at VV-, with a stable forecast. Known as In the agency’s August 23 press release.
GDP data revision
Earlier, the IMF conducted the study to assess the size of Uzbekistan’s economy. ConductedAccording to him, last year the GDP of Uzbekistan amounted to 1192 trillion soums, equivalent to 101.6 billion US dollars. According to the data of the Statistics Bureau, the GDP before revision was 1066 trillion soums. Taking into account the unobservable economy, the nominal figure increased by 11.8%, a total increase of 125.6 trillion soums (10.7 billion US dollars).
Fitch said that although the starting position of the budget deficit improved by 0.5% of GDP last year due to higher nominal GDP, the government had no intention of unwinding the “planned fiscal adjustment”.
The consolidated budget deficit (including off-budget accounts, the Uzbek Reconstruction and Development Fund, and external financing expenditures) fell by 2.5 percentage points to zero in the first quarter compared to the 2023 target, with an annualized GDP growth of 1%.
Fitch expects the fiscal balance to improve in the second quarter, with an annual deficit of 4.2% and 4.9% in 2023, but 0.7 percentage points above target (excluding the recent GDP revision).
“We expect the deficit to narrow to 3.4% of GDP in 2025, partly reflecting the effect of the liberalization of energy tariffs in May 2024, which will offset further increases in debt interest costs, and to fall to 3% per year in 2026, which is still above the median of 2.4% for VV-rated countries,” the release said.
Low public debt levels
The rating agency expects public debt to rise by 2 percentage points to 32.5% of GDP (including external guarantees) in 2023 and to remain stable at 32.1% by the end of 2026, which is a VV-rated country. About 90% of the country’s debt is denominated in foreign currency, but the average repayment period of foreign debt is long at 9.2 years, of which 87% is concessional.
Government deposits are large, at 13.1% of GDP by the end of the first quarter of 2024, but down from 26.5% of GDP at the end of 2020. Fitch forecasts that this will fall to 10% by the end of 2026.
The agency’s analysts report that Uzbekistan has made progress in strengthening public financial management, including approved projects, public-private partnership risks (which have increased to 20% of GDP by the end of 2023), and unsecured debt of state-owned enterprises (25.6% of GDP), including private lending (external debt) monitoring by state-owned banks.
GDP growth trend
Uzbekistan’s economy grew 6.4% in the first quarter, driven by rising investment and 8.6% real wage growth, and the agency expects full-year GDP growth of 6.2% (6.3% per year in 2023-2024). Awaiting him is fiscal consolidation (measures to reduce the state budget deficit and debt levels) and investment “cooling” supported by lower inflation, averaging 5.5% of GDP by 2026.
These growth rates are 3.5% higher than the average for BB countries in 2026, also helped by a 2% annual population growth rate.
The agency noted that Uzbekistan’s economic dependence on Russia is high: Russia accounts for 13% of its exports and 21% of its imports. import Uzbekistan’s numbers have increased since the start of the deal, but Uzbekistan continues to cooperate and ensure compliance with Western sanctions.
Fitch expects Uzbekistan’s net foreign direct investment to grow to 2.5% of GDP, reflecting particularly strong investment flows in the energy sector. Gold currency reserves are expected to decline from 8.8 months in 2023 to 7.8 months of imports in 2026. However, this figure is significantly higher than the 4.5 months average for BB-rated countries.
Governance Reform and Progress
Fitch noted that significant progress has been made in economic reforms in recent years, including the privatization of Ipotekabank last year, and increases in gas and electricity prices for businesses in October 2023 and for residents in May 2024.
The privatization plan of the remaining two large banks, “Asakabank” and “Uzsanoatkurilishbank” (SQB), is being promoted. Since 2020, Uzbekistan’s World Bank governance quality index has improved by 9.6 percentage points, and negotiations for joining the World Trade Organization have also accelerated.
State-subsidized directive lending (state influence on activities related to resource allocation between banks and borrowers) accounted for 28% of the total, although it had fallen from 17% to 12% by the end of 2019. The report said that in June 2023, the transmission of monetary policy was deteriorating.
Relatively high inflation
Inflation rose from 8.1% to 10.5% in July due to higher energy prices in April, but core inflation is trending down (2.6% this year), and household inflation expectations are also expected to be 13% by the end of 2023. It has fallen from 6% to a still high 12%.
Fitch forecasts average inflation of 9.5% in 2024, 8% in 2025 and 5.8% in 2026, 5% above the Central Bank of Uzbekistan’s inflation target.
In July, the central bank cut its key interest rate to 13.5% for the first time since March 2023, and the agency expects further easing to around 3%, in line with the neutral real interest rate.
Neutral interest rate It refers to the interest rate level (specifically the central bank’s key interest rate) when the economy is at full employment and inflation is stable at the target level. The neutral interest rate is regarded as a benchmark for assessing the direction of monetary policy and is also a benchmark for measuring the long-term average interest rate level of the economy.
Stable banking sector
Fitch assesses Uzbekistan’s banking sector profitability as moderate, with a return on equity of 11% in June 2024. The agency also estimates a fairly low non-performing loan ratio of 4%, but significantly higher NPLs (non-performing loans accounting for more than 10% of the sector’s loans by the end of 2023).
Tightening macroprudential policies, due to a sharp increase in household loans, led to a slowdown in credit growth to 18.5% in June from a peak of 27% in August 2023. The dollarization coefficient of deposits fell by 9 percentage points to 30% in June compared with 2021. At the same time, the dollarization rate of loans fell more slowly – to 42.1%.
The rating is therefore supported by Uzbekistan’s relatively low public debt, large fiscal and external buffers, high GDP growth, and progress in economic liberalization reforms. These factors are balanced by low GDP per capita, weak but improving governance, high reliance on raw materials and financial dollarization, and the state’s large but uncompetitive (albeit shrinking) economy.
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