Uzbekistan ‘BB-/B’ Ratings Affirmed; Outlook Stable.

S&P Global Ratings affirmed Uzbekistan’s long-term and short-term foreign and local currency sovereign credit ratings at “BB-/B”. Outlook Stable.

Overview

• S&P Global Ratings forecasts that economic growth in Uzbekistan will remain strong at an average of 5.6% over 2024-2027, bolstered by public investment and private consumption.
• In our view, a persistent and unchecked increase in public sector and external leverage could present risks, but we expect the country’s fiscal and current account deficits to narrow after peaking in 2023.
• At an estimated 39% of GDP in 2024, Uzbekistan’s gross general debt stock remains moderate in a global context–most of that debt is to official creditors and on concessional terms.
• We therefore affirmed our ‘BB-/B’ foreign and local currency sovereign credit ratings on Uzbekistan. The outlook is stable.

Rating Action

On Nov. 29, 2024, S&P Global Ratings affirmed its ‘BB-/B’ long- and short-term foreign and local currency sovereign credit ratings on Uzbekistan. The outlook is stable.

The transfer and convertibility assessment remains ‘BB-‘.

Outlook

The stable outlook balances Uzbekistan’s favorable growth prospects over the next 12 months against risks from a continued increase in external and public sector leverage.

Downside scenario

We could lower the ratings if external and fiscal deficits weaken beyond our expectations due to less favorable terms of trade, persistently high government spending, or higher borrowing costs. We could also lower the ratings if growth levels slow significantly, for instance due to lower-than-anticipated benefits from debt-financed investment projects.

Upside scenario

We could raise the ratings if Uzbekistan moderates its budgetary and current account deficits without impairing economic performance significantly. We could also consider an upgrade if Uzbekistan’s governance quality and institutional settings were to improve–for example, if governance gaps at government-related entities (GREs) narrowed.

Rationale

Uzbekistan continues to gradually modernize its economy, a process that began in 2017 with the liberalization of the exchange rate. To address issues related to energy security, the high fiscal cost of subsidies, and rising gas imports, the government started raising electricity and gas tariffs in October 2023. Authorities plan for energy pricing to reflect costs by 2027. Lower subsidies and favorable gold prices should help Uzbekistan slowly reduce its fiscal deficit to 3.5% of GDP, on average, over 2024-2027, from 5% in 2023. We anticipate that ongoing economic reforms, government fiscal support measures, and remittance inflows will support stronger annual growth in real GDP, relative to many similarly rated peers, through 2027.

Nevertheless, the development plan requires sizable debt-financed investments. We anticipate that these will continue to drive up Uzbekistan’s net general government and external leverage, although the speed of the increase may ease. The current account deficit reached a record high of 7.7% of GDP in 2023, and we forecast that deficits will remain elevated at 6.8% of GDP a year, on average, over 2024-2027.

Overall, our ratings on Uzbekistan are supported by the economy’s still-moderate level of net general government debt. We forecast that this will reach 35% of GDP by the end of 2027. The sovereign’s fiscal and external stock positions have historically benefited from its policy of transferring some revenue from commodity sales to the Uzbekistan Fund for Reconstruction and Development (UFRD; a sovereign wealth fund).

Our ratings are constrained by Uzbekistan’s low economic wealth, measured by GDP per capita, and its limited monetary policy flexibility. Although the latter is improving, we still consider policy responses difficult to predict, given the highly centralized decision-making process, developing accountability mechanisms, and the limited checks and balances between institutions.

Institutional and economic profile: Growth momentum predicted to remain strong, despite balance-of-payment risks

• We forecast that economic growth will average 5.6% over 2024-2027, after reaching 6.3% in 2023.
• Economic and governance reforms, including planned hikes to energy tariffs, will support the country’s investment prospects.
• Decision-making will remain centralized, and despite some improvements, perception of corruption is likely to be high.

Uzbekistan’s economy grew by 6.6% year-on-year during the first nine months of 2024, boosted by strong performance across a broad range of sectors, including information and communications, construction, and trade. From 2021-2023, the country’s real GDP growth was high at about 6.8% a year, on average. We predict that growth prospects will remain strong. Uzbekistan’s growth is heavily investment-led; it has one of the highest investment-to-GDP ratios globally, at about 34%. Under the “Uzbekistan 2030” strategy, the government and public entities are directing investments toward the energy, transport, telecommunications, agriculture, and tourism sectors.

The government has also started raising electricity and gas tariffs. It plans to diversify and modernize the generation of electricity, particularly green energy. This will mainly be achieved through public-private partnerships–for instance, Saudi Arabia’s ACWA Power plans to invest in electricity generation projects worth $7.5 billion (7% GDP) through 2030. Currently, about 20% of the energy consumed in Uzbekistan comes from green sources; it aims to increase that to 40% by 2030. The government also aims to expand production of copper, gold, silver, and uranium to boost the export base.

Despite the increasing energy tariffs and elevated interest rates, we anticipate an increase in consumption, sustained by remittance inflows and rising wages, combined with government measures to stimulate the economy, such as tax exemptions and regulated prices on certain consumer goods. Government efforts to strengthen the regulatory framework, privatize certain state-owned companies, and gain accession to the World Trade Organization (which is expected to take place in 2026) could also ultimately support private and foreign investment.

Despite strong GDP growth, we estimate that GDP per capita will be $2,900 in 2024, which is still low by global standards. This constrains our sovereign ratings on Uzbekistan. A quarter of the population is employed in agriculture, which makes up about 18% of the economy. That said, the country benefits from favorable demographics–almost 90% of Uzbekistanis are at or below working age. The country’s relatively young population presents an opportunity for labor-supply-led growth. Nevertheless, we anticipate that it will be difficult for job growth to match demand. Most of Uzbekistan’s permanent and seasonal expatriates are employed in Russia; therefore, the weakness of the Russian economy could further exacerbate this issue.

The government, with help from the International Monetary Fund (IMF), recently revised its methodology for measuring activity in the informal economy, resulting in upward revisions to the GDP data.

Uzbekistan’s economy continues to weather the spillover effects from the Russia-Ukraine war reasonably well. Remittance inflows grew by 35% over January-September 2024, compared with the same period last year, following a large decline in 2023. In our view, the size of the increase demonstrates that demand for labor in Russia is rising, as are wages. It also reflects growing diversification of remittance sources (including the U.S., Germany, Poland, and South Korea). Nevertheless, 78% of total Uzbekistan’s remittances in 2024 still stem from Russia. In addition, total trade with Russia increased by about 26% during the first nine months of 2024. Because of the Western-alliance-led sanctions on Russia, Uzbekistan has been able to increase its exports to the country to meet growing demand. In addition, in October 2023, Uzbekistan signed a two-year deal with Russia’s Gazprom to import 9 million cubic meters of gas per day.

Although the government tries to comply with sanction requirements, we still see a risk that the U.S. and EU could impose further secondary sanctions on Uzbek companies that do business with Russia. For example, the U.S. and EU have already sanctioned a few private Uzbek companies involved in trading electronic and telecommunications equipment and goods in the defense industry. In response, the government is implementing enhanced diligence processes, automated screening measures, and stress testing.

A new constitution adopted in May 2023 lengthened the presidential term of office to seven years from five and allows the current president, Shavkat Mirziyoyev, to remain in power until 2037. In our view, government policy responses can be difficult to predict in Uzbekistan, considering the centralized decision-making process and limited checks and balances between institutions. There is uncertainty regarding future power transfers.

Flexibility and performance profile: Government and external debt likely to rise further

• We expect net general government debt to reach 35% of GDP by 2027, compared with the net asset position in 2017.
• Uzbekistan’s current account deficits are forecast to average 6.8% of GDP through 2027 and be primarily funded through concessional external debt and, to a smaller extent, net foreign direct investment (FDI).
• Although monetary policy has improved in recent years, we still consider the central bank’s operational independence to be constrained and loan dollarization remains elevated, at over 40%.

In recent years, Uzbekistan has ramped up its investment in energy, mining sector capacity expansion projects, and other infrastructure projects, along with social spending. As a result, net general government debt (including government guaranteed debt) has increased by an average of 6.3% of GDP a year over 2020-2023, leading to a rapid rise in government and total external debt stocks.

From 2024, we expect gradual fiscal consolidation based on subsidy reforms, better-targeted social spending, and the removal of some tax exemptions. As the government works to reduce the gray economy and improve operations at GREs, we expect the tax base to gradually expand.

We forecast that the government will achieve its targeted fiscal deficit of about 4% of GDP this year, down from 5% of GDP in 2023. Gold prices have risen by about 20% so far in 2024 relative to end-2023, which supports government revenue through associated tax receipts. Authorities expect increasing energy and gas tariffs to deliver savings of about 1 percentage point of GDP in 2024.

Our projections are subject to downside risks including potentially higher expenditure on social protection. In addition, Uzbekistan relies on the sale of commodities such as gold–the prices of these can be volatile. Social spending, including government wages, makes up about 50% of government expenditure and can be difficult to adjust for political reasons.

Gross government debt (including government-guaranteed debt) is forecast to increase to 43% of GDP in 2027, from 34% in 2023. We include government-guaranteed debt with general government debt because of Uzbekistan’s close links with its GREs. The state debt law approved by the president in April 2023 sets a permanent debt ceiling of 60% of GDP, and mandates the application of corrective measures if it breaches 50%.

We think there is some risk that nonguaranteed GRE debt, which totaled about 4.6% of GDP in 2024, could crystallize on the government’s balance sheet. In recent years, GRE borrowing has significantly increased especially borrowing in foreign currencies. The debt is mainly being incurred to finance energy and infrastructure projects. Separately, the use of public-private partnerships (PPP) has seen a rapid increase and comprised about 20% of GDP in 2023. We understand that a new PPP framework will limit future PPP commitments. In our view, these projects may struggle to repay their debt if they fare worse than expected, or if there are lapses in management or supervision.

To reduce exposure to fluctuations in currency movements and build domestic capital markets, the government is increasing domestic borrowing. The proportion of domestic debt to total debt stood at 17% on June 30, 2024, up from 11% at year-end 2022. The rising proportion of domestic and commercial debt, combined with a lagged effect from the transition to Secured Overnight Financing Rate (SOFR) from London Interbank Offered Rate, is expected to increase interest payments by about 83% year-on-year in 2024. However, we expect interest to remain below 5% of revenue over the next three years.

Uzbekistan maintains a favorable debt profile, with about 86% of external debt on concessional terms, although commercial external debt is slowly increasing. In 2023-2024, the government issued U.S.-dollar-denominated Eurobonds of $1.26 billion and euro-denominated Eurobonds of €600 million ($652 million). The government also issued external debt in local currency, including the first green Eurobond in Uzbek sum (UZS), worth UZS4.25 trillion ($331 million), as well as bonds worth UZS3 trillion ($236 million) that make repayments in U.S. dollars.

The government’s liquid assets are estimated at 11% of GDP in 2024, down from 33% in 2017. Most of these assets are owned through the UFRD, which was founded in 2006. The UFRD was initially funded with capital injections from the government, as well as revenue from gold, copper, and gas sales above certain cut-off prices, until 2019. When calculating government liquid assets, we include only the external portion of UFRD assets. The domestic portion consists of loans to GREs and capital injections to banks, and we consider it to be largely illiquid and unlikely to be available for debt-servicing if needed.

High current account deficits and increasing external debt could raise balance-of-payment risks for Uzbekistan, in our view. However, we estimate that the external imbalance will narrow to about 6.2% of GDP in 2024, from a peak of 7.7% in 2023, thanks to strong remittance inflows and large one-off imports (like aircrafts and cars) last year. To slow the growth of imports, authorities removed import tax exemptions on cars and almost 40 essential food items that it had introduced in 2023. Despite this, we expect import growth to remain high because of the large pipeline of investment projects. In addition, Uzbekistan became a net importer of gas in October 2023 after it started importing Russian gas via a pipeline through Kazakhstan.

Much of Uzbekistan’s exports consist of commodities, particularly gold, which comprised 43% of goods exports in the first half of 2024. Favorable gold prices will boost exports in 2024, but over our forecast period to 2027 we predict that prices will decline to $1,800 per ounce (/oz), from the current high of close to $2,400 this year (see “S&P Global Ratings Metal Price Assumptions: Prices Hold Steady Despite Headwinds,” published Oct. 16, 2024, on RatingsDirect).

Mirroring the sizable current account deficits, the country’s gross external debt has risen in recent years across the government, corporate, and financial sectors. A significant portion of future current account deficit financing will likely still be through debt. We expect FDI inflows to increase gradually as the government implements its pipeline of privatizations, although the timeline will depend on market conditions.

We estimate that Uzbekistan’s usable foreign exchange reserves will decline through 2027, partly because of valuation effects linked to the expected fall in gold prices. However, usable reserves should still cover about five months of current account payments in 2027. The Central Bank of Uzbekistan’s (CBU’s) holdings of monetary gold constitutes about 90% of total usable reserves. The CBU has priority rights to purchase gold mined in Uzbekistan. It purchases the gold with local currency, then sells U.S. dollars in the local market to offset the effect of its intervention on the Uzbek sum.

We exclude UFRD external assets from the CBU’s reserves because we consider that the former are primarily held for fiscal reasons, rather than to support monetary or balance-of-payments needs. Our view is supported by the budgetary use of UFRD assets in the domestic economy over the past four years.

Uzbekistan’s monetary policy effectiveness has improved in recent years. One of the most significant measures, in our view, was the liberalization of the exchange rate in September 2017 to a crawl-like peg. The CBU intermittently intervenes in the foreign exchange market to smooth volatility and mitigate the increase in local currency via its large gold purchases.

In the near term, we expect that ongoing increases in energy tariffs will keep inflation high. For 2024, we estimate inflation of 9.8%, compared with a 10.4% average in 2023, but we predict that it will gradually fall to 6.5% by 2027. In 2020, the CBU adopted measures to transition to an inflation-targeting mechanism, with a target of 5%.

State-owned banks dominate the sector and hold 67% of total assets. This, combined with preferential government lending programs (albeit declining), reduces the effectiveness of the monetary transmission mechanism, in our view. Following the sale of Ipoteka Bank in 2023, authorities now plan to privatize two more banks: SQB and Asaka. To address very strong growth in consumer loans over the past few years, the central bank has implemented more-stringent lending requirements, including limits on car loan portfolios for banks and tighter debt service-to-income limits for retail borrowers. Although dollarization is declining thanks to CBU policies, it remains high: about 42% of loans and 27% of deposits were denominated in U.S. dollars, as of September 2024.

Uzbekistan’s banking sector is likely to continue to show resilience. We consider that favorable economic growth prospects, strengthening disposable income, and low penetration of retail lending in Uzbekistan (with household debt to GDP below 10% of GDP) will remain among the key factors contributing to strong demand for lending in the next few years. Most Uzbek banks have stable funding profiles, supported by sizable funding from the state and international financial institutions, as well as growing corporate and retail deposits. At the same time, access to long-term funding in the domestic market remains scarce. We continue to see bank regulation in Uzbekistan as reactive, rather than proactive. Regulatory actions are not always predictable and transparent. However, regulation is gradually improving.

Key Statistics

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Ratings Score Snapshot

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Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• Criteria | Governments | Sovereigns: Sovereign Rating Methodology, Dec. 18, 2017
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
• General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

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