While efforts to deleverage are underway in a number of EU and CEE/CIS economies, Central Asia is headed the other way. Government debt burdens across the region are building, with currency weakness the overwhelming culprit.
Last year saw state debt in a number of Central Asian countries increase sharply. Azerbaijan’s public debt-to-GDP ratio came close to doubling in 2015 to finish at 28.3%. Priced in local currency, the burden rose to 78%.
In Tajikistan a 27% rise in nominal debt provoked a 7.6 percentage point (pp) ratio increase to 35.9%; Uzbekistan saw a 2.5pp debt ratio increase to 11%. Kazakhstan’s 8.4pp increase to 23.3% of GDP marked a massive 56% boost to nominal debt levels in local currency terms.
The spikes in public debt ratios can be attributed almost exclusively to currency shifts. Renaissance Capital summarises the on-going effect that currency devaluations and depreciations are having on Central Asian sovereign debt profiles as “problematic, especially in countries where commodity exports are important and where commodity prices themselves have halved.”
This is especially true for Kazakhstan and Azerbaijan, where dollar-priced oil makes up 58% and 87% of exports, respectively. Even with Brent crude’s rally to $50 a barrel, oil income has more than halved since mid-2014, when prices above of $110 were not uncommon.
Add to this the high level of external debt that is dollar-denominated and the fiscal prospects for these economies far from promising. Close to 100% of Azerbaijan’s public external debt is held by international financial institutions (IFIs) and therefore priced predominantly in dollars. Kazakhstan’s dollar exposure is a massive 94% of total external public debt.
The currency chart above illustrates just how sharp the depreciations and devaluations have been, making dollar-denominated debt increasingly costly to service. Few options are left available to governments beyond dipping into reserve or sovereign wealth funds, which are being depleted at an alarming rate.
The Kazakh and Azeri devaluations of early 2016 were deliberate measures to temper the effects of low oil prices. However, the currencies of other regional economies, such as remittance-dependent Tajikistan, weakened due to close monetary and trade links with the Kazakhstan and Russia, where the ruble depreciation slashed the volumes sent home.
Similarly, the Uzbek som has given in to downward pressure from the ruble losses to lose nearly 20% of its value against the dollar since the beginning of last year. Imports from Russia made up exactly a quarter of total Uzbek imports in 2014.