S&P affirms Uzbekistan's 'BB-/B' ratings, stable outlook seen despite rise in debt

By Mokhi Sultanova in Tashkent June 5, 2024

S&P Global Ratings has affirmed its 'BB-/B' long- and short-term foreign and local currency sovereign credit ratings for Uzbekistan, maintaining a stable outlook despite anticipated increases in the nation's net general government and external debt. 

The decision, announced on May 31, highlights Uzbekistan's moderate debt levels and economic growth, bolstered by extensive energy and infrastructure projects.

The affirmation reflects S&P's assessment that Uzbekistan's fiscal and current account deficits, after peaking in 2023, will moderate. The country's net general debt remains moderate at about 30% of GDP, a favourable position in a global context, said S&P. 

Strong investment, driven by the government's economic modernisation agenda, is expected to sustain annual growth exceeding 5% through 2027, it added.

However, the ratings agency cautioned that a rapid increase in public sector and external leverage could pose fiscal and balance of payments risks, particularly if benefits from projects do not materialise as planned. 

Conversely, if ongoing reforms lead to stronger-than-expected medium-term growth, the ratings could be raised.

Uzbekistan has embarked on a second phase of economic reforms initiated in 2017. To address energy security and reduce fiscal burdens from subsidies, the government has increased electricity and gas tariffs. 

Collaborations with international financial institutions (IFIs) and foreign investors, especially from the Middle East and China, are expected to drive significant investments in electricity generation, green energy, gas production and mining.

Despite these positive developments, substantial investments in development plans have driven up Uzbekistan's debt. 

The country saw a record-high current account deficit of 8.6% of GDP in 2023, with forecasts indicating a still-elevated annual average deficit of 7.6% of GDP over 2024-2027 due to continued import growth. 

By the end of 2024, net general government debt is projected to reach 31.7% of GDP.

The ratings are supported by the economy's moderate external debt and the policy of transferring some revenue from commodity sales to the Uzbekistan Fund for Reconstruction and Development (UFRD).

However, low economic wealth, limited monetary policy flexibility, and a highly centralized decision-making process constrain the ratings.

The government has introduced higher electricity and gas tariffs for businesses and households, aiming for cost recovery by 2027. 

Investments in green energy, particularly through public-private partnerships, are also a priority, with Saudi Arabia's ACWA Power investing heavily to achieve 25,000 megawatts of renewable energy by 2030.

The government's fiscal deficit increased to 5.5% of GDP in 2023 due to higher social spending and wages, but gradual fiscal consolidation is expected from 2024 onwards, S&P said. Efforts to improve operations at government-related entities and reduce the gray economy are anticipated in terms of expanding the tax base.

Authorities expect the fiscal deficit to drop to 4% of GDP in 2024 and 3% in 2025, with further consolidation bringing it to 3.2% by 2027. Gross government and government-guaranteed debt is expected to rise from 40% of GDP in 2023 to about 46% by 2027.

Uzbekistan's economy continues to manage the spillover effects from the Russia-Ukraine war, with remittance inflows and trade with Russia remaining significant, S&P noted.

However, risks of secondary US and EU sanctions on Uzbek companies doing business with Russia persist.

Despite strong growth, Uzbekistan's GDP per capita remains low at a projected $2,600 in 2024. 

The country's favourable demographics present an opportunity for labour-supply-led growth, though job growth may struggle to keep pace with demand, the ratings firm said.

The government's liquid assets have decreased, with UFRD's assets primarily held for fiscal needs rather than debt servicing. High current account deficits and increasing external debt could raise the balance of payments risks, but robust economic growth and ongoing reforms provide a stable outlook for Uzbekistan's ratings, S&P concluded.

Uzbekistan's exports continue to rely on commodities, which constituted almost 50% of goods exports in 2023, particularly gold (42% of goods exports). 

Favourable gold prices will boost exports in 2024, but these are expected to decline over the forecast period to $2,000 per ounce (/oz) in 2025 and $1,700/oz in 2026, from $2,100/oz for the rest of 2024. Conversely, increasing copper production and prices could offset part of the decline, S&P added.

Uzbekistan's monetary policy effectiveness has improved, with the central bank adopting measures to transition to an inflation-targeting mechanism, with a target of 5%, S&P observed. Inflation is forecast to reach 11.0% in 2024, up from an average of 9.1% in 2023, due to tariff hikes. Inflation is expected to fall gradually to 6.5% by 2027.

The banking sector remains resilient, said S&P, saying it was supported by favourable economic growth prospects and increasing disposable income. However, dollarisation, although declining, remained high at about 43% of loans and 30% of deposits as of March 31.

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