Tashkent, Uzbekistan (UzDaily.com) — Fitch Ratings has assigned long-term issuer default ratings (IDR) to the city of Tashkent in both foreign and local currencies at "BB-" with a "Stable" outlook.

The ratings reflect the agency’s expectations that the city’s financial indicators will remain in line with the current rating, with a debt repayment period of less than 9 years by 2028 under the base-case scenario. The IDR ratings are comparable to the city’s individual credit profile (SCP) at "bb-".

Tashkent’s individual credit profile reflects a combination of a "weak" risk profile and a financial profile at the "aa" level, as well as a comparative analysis with international peers.

Fitch has downgraded the city’s SCP by one notch to account for potential increased hidden risks and asymmetric risks associated with inconsistent information disclosure and financial reporting regarding the obligations of state-owned entities (GRE).

The rating reflects Fitch’s view of the high risk, relative to international peers, of Tashkent’s ability to meet its debt obligations through operational balance during the 2024–2028 period. This could be due to revenues below expected levels, higher-than-expected expenditures, or an unexpected increase in obligations or debt servicing requirements.

Tashkent’s revenue sources remain volatile due to ongoing tax and budget reforms. The composition of taxes collected by the city and their redistribution between levels of government frequently changes at the discretion of the central government. In 2023, taxes accounted for 50% of the city’s revenues, with transfers making up another 33%. Dependence on a weak central government and low predictability of fiscal policy justify the "weak" rating.

Tashkent’s ability to increase revenues in response to economic downturns is limited. The central government sets all tax rates and regulates the distribution of tax revenues between levels of government.

The city collects taxes on income and property (22% of operating revenue in 2023) as well as fees and charges (13% of operating revenue in 2023), some of which it can regulate. However, most revenue sources have already reached their potential, so any increase would cover less than 50% of expected revenue loss in the event of an economic downturn.

Expenditure resilience remains weak due to constant changes in the city’s responsibilities, reducing the predictability of expenditures. Historically, spending has been volatile due to the redistribution of responsibilities and high inflation, which averaged 12% between 2019 and 2023.

The city’s ability to reduce spending in response to declining revenues is limited, as the majority of expenses are mandatory. In 2023–2024, rigid expenses accounted for more than 80% of total spending. About 19% of operating expenses in 2023 were for salaries, which are indexed to inflation and are the least flexible.

This rating reflects the generally weak national debt and liquidity management system, as well as underdeveloped capital markets in Uzbekistan. Unlike most subnational entities, which are prohibited from borrowing (except for intergovernmental loans) and issuing guarantees, Tashkent has limited borrowing rights through state-controlled entities (GRE).

From 2019 to 2023, the city serviced GRE debts and obligations related to long-term public-private partnership (PPP) projects for the modernization of municipal infrastructure. GRE debts and PPP obligations are included in the city’s adjusted debt calculation. A significant portion of GRE debts is denominated in foreign currency, which increases currency risks due to national currency instability.

The city’s liquidity is limited by cash holdings, which totaled 822.5 billion soums at the end of 2023, supported by stable revenues. Access to borrowing markets is restricted by national regulations. However, most of the cash is reserved for specific expenditures. The city also uses a short-term borrowing mechanism from the central government to cover cash shortfalls during the year. The sovereign issuer rating of "BB-" as a source of additional liquidity also contributes to the "weak" assessment.

Tashkent’s financial profile aligns with the "aa" category due to favorable primary (debt repayment in less than 9 years) and secondary (debt burden under 70%) indicators according to Fitch’s base case for 2024–2028.

Fitch expects the city’s operational balance to average 1,376 billion soums in 2024–2028, down from 2,233 billion soums in 2023. The operational balance will be supported primarily by tax revenues, which are expected to grow to 12,182 billion soums by 2028, driven by the expansion of the local economy. However, this will be offset by the growth of operational expenditures due to ongoing high inflation.

Fitch also expects the city to continue implementing its investment program, averaging 2,642 billion soums annually from 2024 to 2028 for infrastructure development.

Tashkent’s long-term issuer default rating of "BB-" is based on its individual credit profile of "bb-", which is comparable to the sovereign borrower rating of Uzbekistan, as local and regional governments cannot have a rating higher than the sovereign due to the high degree of influence the state has over their functions and finances.

Tashkent’s individual credit profile of "bb-" is higher than that of Buenos Aires, comparable to the state of São Paulo, but lower than municipalities such as Ankara, Istanbul, Almaty, and Yerevan, which have stronger financial profiles at the "aaa" level.