Before the pandemic hit, Uzbekistan’s GDP was rising at a rate of more than 6% a year. But in 2020 growth fell to a mere 1.7%. The bounceback in 2021 brought 6.9% in the first nine months, according to the Central Bank of Uzbekistan (CBU).

As the economy returns to health, the international financial institutions (IFIs) have upped their forecasts for 2022. The International Monetary Fund (IMF) revised its GDP growth outlook for 2022 to 6%. The World Bank is predicting 5.6%, while the Asian Development Bank (ADB) is a little more cautious at 5.5%. The highest growth rate is projected by the European Bank for Reconstruction and Development (EBRD). It sees 6%.

External environment

The Uzbek retail market is becoming increasingly attractive. The supermarket sector in particular has been singled out as “ready to boom”. The introduction of organised retail has led to rapid development.  

Finance minister Timur Ishmetov noted that there were rapid advances because retail in Uzbekistan is one of the few sectors with no state presence. The government doesn’t own stores and restaurants. They can move ahead fast.

The country’s total annual retail market volume is estimated at between $6bn and $8bn, of which supermarkets —or “organised retail”— make up between just 7% and 10%. This share, according to experts, is set to at least triple to 30% in the next five years. Retail turnover reached Uzbekistani som (UZS) 167,026bn ($15.6bn) in the first nine months of this year, according to investment bank Bluestone, up 9.8% y/y. By November, annual growth stood at 10.5%.

The European Bank for Reconstruction and Development (EBRD) has invested $40mn to take a stake in Korzinka, one of the biggest supermarket chains in Uzbekistan, while giant French grocer Carrefour became the first international retailer to enter the Uzbek market last year, intending to invest $100m.

Korzinka, which accounts for half of all supermarket turnover in the country, anticipates expanding its chain from 68 to 150 stores by 2025. Carrefour has opened three stores and has plans to open six more by year-end. The biggest expansion is expected from Makro, Uzbekistan’s current leader by number of stores, with 109 stores, mainly supermarkets and express outlets. Makro plans to have between 800 and 1,000 stores in Uzbekistan in the next five years, according to its chief executive, Roman Sayfulin.

The latest addition to the increasingly hot Uzbek retail sector, Ukraine and Moldova's largest online retailer Rozetka, has arrived on the Uzbek market. It launched website rozetka.uz in September. The site offers household appliances, electronics, sports equipment, books, children's toys and more. After just two months of commissioning, in November it announced an expansion of delivery points in the Uzbek capital. Vladislav Chechetkin, co-founder of the online store, said that two delivery points were already operating in Tashkent, and there were plans to open four more.

Uzbek banks experienced both positive and negative news in 2021.

Let's start with the bad. The biggest headache for domestic banks was their “neverending” lack of liquidity and rather high NPL (non-performing loan) ratios. In August, the LDR (Loan-to-Risk Ratio) for the entire Uzbek banking system hit a record 234%. For banks with a state share, it was even higher at 301%, twice as high as seen in the US, three times higher than the global average and 3.3 times higher than the average for developing countries.

As of January 1, the share of NPLs stood at 2.1%, but by August 1 it had grown to 6.2%. The amount of loans provided to the Uzbek population, meanwhile, over the past three years has increased 3.3-fold. The banks were not ready to account for NPLs in such volumes. But by November 1, the NPL ratio declined to 5.7%. It is set to normalise in the coming months.

Turning to the good news. One of the most positive changes the banking sector has started to witness is privatisation. A massive privatisation campaign is in it its infancy by now. It is expected to yield results in the coming years.

The banking system of Uzbekistan is characterised by high concentrations: 84% of all bank assets are still owned by state-owned banks, and 64% belong to five of the biggest state-owned banks (National Bank, Asaka Bank, Uzpromstroybank, Ipoteka Bank and Agrobank).

The privatisation of Uzpromstroybank and Ipoteka is set to be completed by the end of 2022. Both financial institutions were included in the most profitable bank top three rankings following the release of the 3Q results. Further plans include the privatisation of Asaka Bank, Aloqa Bank, Qishloq Qurilish Bank and Turonbank.

The year of 2020 brought huge reforms in Uzbekistan’s power sector. Addressing world anxiety over climate change, the government unveiled planned contributions in addressing the issue.

In particular, by 2030, the government aims to cut greenhouse gas emissions by 35% compared to the levels recorded in 2010, as the climate in Central Asia is changing twice as fast as in other regions due to the drying up of the Aral Sea.

At the national level, Uzbekistan is implementing a comprehensive strategy for its transition to a green economy and a programme for the development of renewable and hydrogen energy. Some 200mn tree and shrub saplings are to be planted in the country annually.

By 2030, the energy efficiency of the economy is set to double, with the share of renewable energy comprising at least 25%.

Moreover, the year 2022 is set to see the construction of two nuclear power units with the participation of Russia's Rosatom, an initiative that has caused concern among Uzbeks and people in neighbouring Kazakhstan.

The biggest projects in the energy sector are currently under way with the participation of Total Eren (France), Masdar (UAE) and Aqua Power (Saudi Arabia).

Major lenders in the sector are EBRD and ADB.

Meanwhile, the volume of electricity generation at Uzbek hydroelectric power plants (HPPs) fell by almost 23% in 2021 amid low water levels.

Power generation at HPPs fell to 5bn kWh in 2021, against 6.5bn kWh in 2019.

High inflation observed in the country over the years has forced the central bank to keep its monetary policy rate relatively high.

However, banks with access to dollar funding have been able to afford the offering of significantly lower rates on dollar loans. The spread between the cost of borrowing in Uzbekistani som and dollars is so wide that most borrowing is done in FX. That exposes Uzbek companies to significant FX risks.

According to Mirsaid Nosirov, an analyst at the regulator, the dollar share of loans was 48% as of November, but there had been a gradual decline.

With retail deposits paying 17.5% and loans costing 21% in som, there was a 3-4% spread that remained a disincentive for business to borrow for investment capital in the local currency. However, Nosirov pointed out that the som has been very stable and only depreciated against the dollar by 2% in the first nine months of 2021.

The central bank has to be worried by the dollarisation of credits as other countries, such as Ukraine and Poland, have come-a-cropper in the past by exposing themselves to FX risks that proved too big.

The share of dollar loans has fallen from 70% previously to around 50%:50% local vs foreign exchange now.

“Things are changing now thanks to the stable currency and falling inflation,” said Nosirov. “But they will take several years to normalise.” 

According to the AFC Uzbekistan Fund, 2021 was a transitional year on the road to significant capital markets catalysts that will be seen in 2022. Earnings growth for companies listed on the Tashkent Stock Exchange continued its strong performance last year.

AFC has also divided Uzbekistan’s capital market into three phases. It expects Phase II to occur between 2022-2025. This phase should see certain state-owned enterprises (SOEs), what it calls the “crown jewels” of Uzbekistan’s economy, being privatised through domestic IPOs and SPOs and eventual dual listings abroad, likely in London. These companies include the national airline, Uzbekistan Airways, one of the biggest gold mining companies in the world, Navoi Mining and Kombinat, a leading copper producer, Almalyk Mining and Metallurgical Kombinat, and one of the largest steel plants in Central Asia, Uzmetkombinat, among others. These listings should attract significant foreign and local capital to the Tashkent Stock Exchange, increasing liquidity and interest in the market.

"Phase III is expected to involve IPOs by private sector companies once the stock market is liquid and has enough investor participants, both institutional and retail, to absorb larger share issues. “This phase should overlap with Phase II and we are already seeing private sector companies expressing an interest in eventual IPOs, which is highly encouraging," Scott Osheroff, an AFC analyst, said.

Odilbek Isakov, a Deputy Finance Minister, earlier announced the government’s plans to hold 15 IPOs in the next three years, including IPOs of equity in five state-owned banks, three insurance companies and metallurgical and other companies.

Isakov added that new financial products were to be released, including ETFs for gold, mortgage bonds and sukuk.

The government is also planning to issue bonds linked to inflation, while the Uzbek and international depositories will be connected.

For Uzbekistan, 2021 can truly be named the “Year of Bonds”. Dozens of large issuers joined the “eurobond bonanza”, initiated by the government back in 2019.

Capital markets “reforms” are expected to continue in 2022.

Mining giant Almalyk Mining and Metallurgical Combine (AMMC) plans to issue $500mn of eurobonds during the first half of 2022.

A eurobond debut is anticipated from Asakabank. Fitch Ratings assigned the bank’s upcoming issue of UZS-denominated senior unsecured eurobonds an expected long-term rating of 'BB-(EXP)'.

President Shavkat Mirziyoyev during his pre-election campaign said that commercial banks would release $467mn in eurobonds by the end of 2022.