Fitch Ratings on April 10 affirmed Uzbekistan's long-term foreign-currency issuer default rating (IDR) at 'BB-' with a stable outlook.

“The resilience of Uzbekistan's ratings to the economic impact of the global health crisis reflects the sovereign's robust external and fiscal buffers, a diversified commodity export base and access to external official financing,” the rating agency said in a note. “These factors provide Uzbekistan with the financing flexibility to respond to the [coronavirus] COVID-19 crisis by supporting economic growth, and mitigate near-term risk related to a large current account deficit and rising government debt.”

Despite challenges posed by the coronavirus outbreak, Fitch said it believed the Uzbek government under President Shavkat Mirziyoyev remained committed to the reform programme launched in 2017 to transition to a more open market economy, improve macroeconomic stability and growth prospects, decrease the state's role in the economy and address institutional and governance weaknesses.

Fitch said it expected Uzbek growth to fall to 2% in 2020, down from 5.6% in 2019, as the combined impact of a deteriorating global economic outlook, weaker remittances and pandemic containment measures took its toll. Financing of investment projects and anti-crisis policy will both curb the shock and provide the basis for higher growth at 6.8% in 2021, partly thanks to recoveries in Russia and China, Fitch said. The favourable post-crisis outlook is supported by Uzbekistan's young population, high investment rate and reforms to remove controls and distortions. 

The Ministry of Finance has created a $1bn externally-financed anti-crisis fund to support employment, social spending and sustain business and investment activity. More assistance will come from targeted and temporary tax relief along with a $3bn revolving credit line and loan repayment deferrals for crisis-impacted sectors.

Deficits to expand

The country’s overall deficit is forecast to rise to 5% of GDP in 2020, up from 4% of GDP in 2019. The ratings agency also forecast that the consolidated budget deficit will widen to 4.2% of GDP, up from 0.2% in 2019. The expansion would be driven by weaker tax performance, the counter-cyclical package and continued high public investment as net policy lending fell to 0.8% of GDP, down from 3.5% in 2019. Fitch expected Uzbekistan to reduce its overall fiscal deficit to 2.4% of GDP in 2020 supported by a recovery in revenues and removal of stimulus measures. The government was targeting a maximum 1.5%-of-GDP deficit by 2022.

“Fitch expects Uzbekistan's policy consistency to improve and reduce risks to macroeconomic stability. Starting 2020, the UFRD [Uzbekistan Fund for Reconstruction and Development] is included in the government budget, and is forecast to remain in balance (deficits of 3.4% and 1.8% of GDP in 2018-2019), thus reducing the scope for policy lending; a key driver of rapid credit growth in previous years,” according to the note. “Annual limits to external borrowing and government plans to introduce a debt ceiling of 50% of GDP (for public and public-guaranteed obligations) aim to reduce the pace of debt accumulation.”

Fitch mentioned the central bank’s newly launched transition to inflation targeting with the objective of reaching a 5% rate in 2023, noting that “starting in 2020, the Central Bank of Uzbekistan's (CBU) policy rate will set the floor for loans at preferential rates, and these will reflect market rates in 2021. However, monetary policy effectiveness remains constrained by high financial dollarisation, shallow capital markets and a still high stock of loans (58% in 2019 down from 71% in 2018) on preferential terms.”

Fitch predicted average inflation would decline to 10.5% by 2021.

The rating agency projected that government debt would reach 34.3% of GDP in 2020, up from 28.5% in 2019. It remained below the current 'BB' median of 46% of GDP, but had increased at a rapid pace and was nearly wholly denominated in foreign currency, Fitch added. This makes the government debt heavily exposed to currency risks. The ratings agency forecast that the current account deficit would widen to 7.6% of GDP in 2020, up from 5.6% in 2019.

“Reduced exposure to SOEs”

“The banking sector has reduced exposure to SOEs and foreign-currency risk while at the same time improving capitalisation. Close to USD4.3 billion of UFRD-funded loans to SOEs were moved from state-owned banks' balance sheets to the UFRD, and the UFRD also swapped USD1.5 billion in loans for equity participation in state-owned banks,” Fitch said. “As a result, regulatory capital rose to 23.52% (regulatory Tier 1 19.57%) by end-2019 from 15.6% at end 2018. NPLs are low at 1.5% but could increase due to the impact of the coronavirus crisis on the economy.”

Fitch's Macro-Prudential Indicator of 2*, indicates moderate vulnerability due to fast credit growth. Credit growth year on year declined to 24% in 2019 reflecting operations in December. “Nevertheless, credit had started to decelerate from a peak of 58% y/y in August to 47% in November,” the rating agency said. “Tighter policy lending will moderate overall credit growth. Authorities will reduce the reliance on subsidised lending for SOEs as well as the share of the public sector (85% of assets) in the banking sector. SOE reform continues with separating regulatory and commercial functions as well as unbundling in key economic sectors, and improvements in reporting and corporate and corporate governance standards.”

The agency concluded that the main factors with potential to lead to a positive rating upgrade included the strengthening of the policy framework for delivering improved macroeconomic stability and slowing the pace of government debt accumulation; significant improvement in structural indicators; and a significant strengthening of the sovereign balance sheet. A negative action could follow policy slippage or inconsistencies leading to sustained widening of macroeconomic imbalances; severe and sustained negative impact from the COVID-19 pandemic on medium-term GDP growth or public finances; a sustained fall in foreign exchange reserves or a rapid increase in external liabilities.