Tashkent, Uzbekistan (UzDaily.com) —  Fitch Ratings has affirmed Uzbekistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB-’ with a Stable Outlook.

The rating is supported by the relatively low level of government debt, substantial fiscal and external buffers, high sustained GDP growth, and progress in economic liberalization reforms. These factors are balanced by a low GDP per capita, weak but improving governance, high dependence on commodity exports, and dollarization of the financial system, as well as a significant, though decreasing, state presence in the economy.

Earlier this month, official GDP data was revised to better account for informal economic activity, resulting in an 11.8% increase in the 2023 GDP level. This survey-based study was conducted jointly with the IMF, with major adjustments related to increased accounting of construction activity and restaurant operations. Fitch understands that the government does not intend to relax its planned fiscal adjustment despite the improved starting budget deficit position for 2023 by 0.5% of GDP due to the increase in nominal GDP.

The consolidated fiscal deficit (including off-budget accounts, the Fund for Reconstruction and Development of Uzbekistan, and expenditures financed by external sources) increased by 0.1% of GDP year-on-year in the first half of 2024, after missing the target by 2.5 percentage points in 2023. Fitch projects an improvement in the fiscal balance in the second half of 2024, with a full-year deficit of 4.2% of GDP (up from 4.9% in 2023), which is 0.7 percentage points above the target (excluding the recent GDP revision). The agency expects the deficit to decrease to 3.4% of GDP in 2025, partially reflecting the effect of energy tariff liberalization in May 2024, which offsets further growth in debt service costs, and to 3.0% in 2026, still above the median for the ‘BB’ rating at 2.4%.

Fitch forecasts that the general government debt-to-GDP ratio (including external guarantees), which increased by 2 percentage points to 32.5% in 2023, will remain broadly stable at 32.1% by the end of 2026, significantly below the median for the ‘BB’ rating of 53.6%. About 90% of government debt is denominated in foreign currency, but the external debt has a relatively long average maturity of 9.2 years, with 87% of this debt being concessional.

Central government deposits are significant, accounting for 13.1% of GDP at the end of the first half of 2024, although this is down from 26.5% of GDP at the end of 2020. The agency expects them to decrease to 10% by the end of 2026. Progress has been made in strengthening government financial management, including monitoring risks associated with public-private partnerships, which amounted to 20% of GDP at the end of 2023, and risks from non-guaranteed state enterprise debt (25.6% of GDP, including private external debt of state banks).

GDP grew by 6.4% in the first half of 2024, driven by a sharp increase in investment and an 8.6% rise in real wages. Fitch forecasts a growth rate of 6.2% for the full year (6.3% in 2023). The agency expects GDP growth to slow to 5.5% by 2026 as fiscal consolidation and cooling investment offset support from falling inflation. This is close to the trend level, supported by an annual population increase of 2%, and above the median for the ‘BB’ rating of 3.5% in 2026. There is significant economic dependence on Russia, accounting for 13% of exports and 21% of imports, exacerbated by last year’s agreement to begin importing natural gas, but Uzbekistan continues to cooperate on Western sanctions compliance.

The current account deficit (CAD) increased to a multi-year high of 7.7% of GDP in 2023, partly due to one-off investments in equipment and fiscal easing. Fitch forecasts a reduction in the CAD to 6.2% in 2024, supported by a 32% increase in remittances over the first seven months of 2024, and to 4.7% by 2026. Fitch anticipates net foreign direct investment to grow to 2.5% of GDP, reflecting strong investment potential, particularly in the energy sector. The agency forecasts that foreign currency reserves will decline to 7.8 months of current external payments by 2026 from 8.8 months in 2023, still significantly above the median for the ‘BB’ rating of 4.5 months, while the net external creditor position will deteriorate by 15 percentage points from 2023-2026 to 3.6% of GDP.

Significant progress has been made in economic reforms in recent years, including last year’s privatization of Ipoteka Bank and energy price hikes for enterprises in October 2023 and for households in May 2024. Plans for privatizing two other major banks, Asaka and Uzpromstroybank, are progressing, though slower than anticipated. The World Bank’s overall governance rating for Uzbekistan improved by 9.6 percentage points since 2020, and WTO accession talks have accelerated. The share of subsidized state lending fell to 12% of new loans in June from 17% at the end of 2023, but still constitutes 28% of the total volume, which hampers monetary policy signals.

Inflation increased to 10.5% in July from 8.1% in April due to higher energy prices, but core inflation showed a decline (down 2.6 percentage points this year), and household inflation expectations also decreased from 13.6% at the end of 2023 to a still high 12%. Fitch forecasts average inflation of 9.5% in 2024, 8% in 2025, and 5.8% in 2026, above the Central Bank of Uzbekistan’s inflation target of 5% and the median for the ‘BB’ rating of 3.5% in 2026. The Central Bank of Uzbekistan reduced the key rate in July for the first time since March 2023 by 50 basis points to 13.5%, and Fitch expects further easing, aligning with a neutral real interest rate of around 3%.

The sector is moderately profitable, with a return on equity of 11% in June 2024, a solid Tier 1 capital ratio of 13.9%, and a relatively low non-performing loan ratio of 4%, although Fitch believes the actual level of non-performing loans is significantly higher (over 10% of sector loans at the end of 2023). Tightening of macroprudential policies has helped reduce credit growth to 18.5% in June from a peak of 27% in August 2023, driven by a sharp increase in household loans. Dollarization of deposits decreased by 9 percentage points since 2021 to 30% in June, still above the median for the ‘BB’ rating of 27%, while dollarization of loans decreased more gradually to 42.1%.

Uzbekistan has Environmental, Social, and Governance (ESG) relevance scores of ‘5’ for political stability and rights, rule of law, institutional and regulatory quality, and corruption control. These scores reflect the high importance of the World Bank Governance Indicators (WBGI) in Fitch’s sovereign rating model. Uzbekistan’s low WBGI rating is at the 28th percentile, reflecting relatively weak political participation rights, institutional capacity, uneven rule of law application, and high levels of corruption.