Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings affirmed its 'B+' local and foreign currency long-term issuer credit ratings on the Uzbekistani Region of Ferghana. The outlook is stable.

The stable outlook reflects the agency’s assumption that Ferghana will maintain strong budgetary performance with transfers from the central government. In addition, the agency assumes the region will owe no debt to commercial lenders, absent changes in the national regulation that prohibits local and regional governments (LRGs) from commercial borrowing.

S&P Global Ratings might lower the ratings if the relationship between Ferghana and the Uzbekistani government changes, resulting in lifted restrictions on budgetary deficits, and the region's budgetary performance indicators deteriorates materially following such a change.

Also the agency might consider an upgrade if the institutional framework under which Ferghana operates improved or the region's wealth level materially increased.

The ratings on Ferghana are supported by S&P Global Ratings assumption that the region will maintain strong performance to comply with national regulation. 

S&P Global Ratings also factor in that Ferghana probably won't resort to commercial borrowing in the next several years. The ratings are constrained by the very volatile and centralized Uzbekistani institutional framework for LRGs, the region's low wealth--with local GDP per capita at about $1,300--and management's limited ability to influence regional budgetary performance, due to central government controls.

Ferghana operates under a volatile institutional setting. In S&P Global Ratings view, the highly centralized decision-making process affects the region's budgetary flexibility. The central government's stance on key taxes, transfers, and expenditure responsibilities changes frequently. The political practices, procedures, and regulatory environment are in early stages. The framework undergoes frequent modifications, upsetting the stability of both the region's revenue sources and its spending mandates. The central government oversees LRGs' activities, requiring the regions to maintain a balanced budget and forbidding commercial borrowing. The visibility on systemic changes remains low, consequently undermining reliable medium-term planning at the local level. Furthermore, the substantial investment requirements and a high share of social expenditure continue to restrict spending flexibility for Uzbekistani LRGs, including Ferghana.

Experts of the agency think the decision-making ability of Ferghana's financial management team is limited markedly by the centralized institutional settings in Uzbekistan. The region's management started medium-term planning in 2018, and there are discrepancies between forecast and actual financial indicators. In S&P Global Ratings view, debt and liquidity management practices are starting to develop, and their effectiveness has yet to be tested. These factors constrain the region's creditworthiness.

The agency views Ferghana's economy as very weak in a national and international context, mostly due to low GDP per capita. Moreover, S&P Global Ratings think the economy is relatively concentrated in agriculture. The region accounted for 10% of the country's population but contributed 5.5% of GDP as of mid-2023. Nevertheless, the agency expects the region's economy to expand parallel to that of Uzbekistan, at 5.5% real GDP growth on average per year until 2025, propelled by developments in the industrial and service sectors.

Budgetary performance should remain strong enough, and the debt burden will stay very low

Ferghana complies with Uzbekistani legislation that prohibits deficits in accordance with local definitions. However, S&P Global Ratings adjusted data based on their methodology, resulting in divergences from Ferghana's reporting. In particular, S&P Global Ratings don't consider budget surpluses from the previous years and loans from the central government revenue sources, nor do we consider debt repayments expenditure.

In accordance with S&P Global Ratings' definitions, Ferghana ran a deficit after capital accounts of 2.6% in 2022. The deficit was predominantly covered with the budget surplus of 2021 (170 billion soums) and short-term loans from the government (51 billion soums). The agency expects average the balance after capital accounts during our forecast period to 2025 to be close to zero. 

S&P Global Ratings anticipate that revenue sources will be volatile, given the central government's track record of frequently revising tax rates. The agency’s experts also project a slight increase in capital expenditure over the next few years, following the region's objective to invest more in infrastructure development predominately with central budget sources of financing.

 S&P Global Ratings think substantial infrastructure needs will limit economic development prospects and somewhat limit budget flexibility. However, the funding backlog is unlikely to lead to material debt accumulation because the national legislation prohibits LRG commercial borrowings. Currently, the region's debt to commercial lenders is zero.

S&P Global Ratings understand Ferghana oversees some state-owned enterprises in the region. It has no stakes in regional enterprises, with no track record of the regional government providing subsidies, capital injections, or extraordinary support to these companies. Districts and municipalities are financially healthy thanks to central government support.

Experts of the agency assume Ferghana's liquidity position will remain solid, particularly considering the almost-zero debt. However, S&P Global Ratings think the region's debt service coverage ratio might fall sharply if the region attracts debt over the long term. Nevertheless, this is not base-case scenario of S&P Global Ratings.

Ferghana is eligible to receive interest-free budget loans to cover liquidity shortages. Over 2022-2023 Ferghana received 101 billion soums of these loans with redemption in 2023-2024. However, in S&P Global Ratings view, these loans can be extended. 

At the same time, S&P Global Ratings think access to external funding is limited, due to the weaknesses of Uzbekistan's capital market and banking sector.