KEY RATING DRIVERS
Credit Fundamentals: Uzbekistan’s ratings balance robust external and fiscal buffers, low government debt and a record of high growth relative to ‘BB’ rated peers, against high commodity dependence and structural weaknesses in terms of low GDP per capita, an uncompetitive and large, albeit reducing, state presence in the economy, and weak but improving governance levels.
Reforms Enter Next Phase: Uzbekistan’s government is progressing with key structural economic reforms, most notably a marked reduction in energy subsidies for households that will be implemented in May 2024, following liberalisation of tariffs for industries in October 2023. Fitch believes the successful implementation will benefit long-term public finances and reduce contingent liability risks from state-owned electricity distribution companies.
However, plans to phase out subsidised lending are proceeding at a slower pace, likely due to social considerations. Also, following the successful privatisation of Ipoteka Bank in 1H23, authorities have extended deadlines for selling controlling stakes in two other large lenders. This reinforces Fitch’s expectation that the original timeframe for bank privatisations would be challenging as business model transformations are still being implemented. Investor sentiment may also be affected by ongoing geopolitical uncertainty in the region, which could delay privatisation.
Fiscal Slippage in 2023: The headline budget deficit (which includes balances of extrabudgetary accounts and the Uzbekistan Fund for Reconstruction and Development; UFRD) widened by 1.4pp to 5.5% of GDP in 2023, significantly overshooting the original budgeted target of 3%, reflecting delays to energy tariff liberalisation, as well as a slower than expected fall in subsidised lending, and lower than expected corporate profit tax following short-term energy shortages in 1Q23.
Fitch expects the deficit to contract to 4.3% of GDP in 2024 and 3.9% in 2025, as cuts to energy subsidies will permanently reduce expenditure by an estimated 1.5pp of GDP from 2024. Risks to our outlook arise from higher inflation, which may necessitate greater provision of offsetting support measures to the population.
Low Public Debt Levels: Gross general government debt (GGGD; including external state guarantees) stood at 36% of GDP as of end-2023 (current ‘BB’ median: 52%). Authorities issued USD660 million (0.7% of GDP) in a Eurobond and UZS4.25 trillion (0.4% of GDP) in soum-denominated green bonds in external markets in October 2023, as a revised, larger deficit increased financing requirements. Fitch expects GGGD to remain largely flat in 2024-25, averaging 34.3%
As of end-2023, 92.6% of government debt was foreign-currency-denominated, although risks are mitigated by the high share of concessional debt (88% of external public debt) and fairly long maturities (2023: 9.1 years) for external debt. The large stock of government deposits and the assets of the UFRD (2023: 18.4% of GDP) will keep net government debt levels low. While the UFRD is an important buffer, the proportion of foreign-currency-denominated assets has nearly halved since 2017 (when economic reforms began) to USD6.5 billion (7.2% of GDP) as of end-2023.
Economic Resilience: Uzbekistan’s economy is continuing to prove its resilience to spillovers from the Ukraine war and Russian sanctions, with the economy recording growth rates among the highest in the CIS region (2023: 6%; 2024F: 6%). Within the banking sector, Uzbek authorities appear to have increased enforcement of Western sanctions on pertinent Russian individuals and institutions.
Trade reliance on Russia is high, with Russia accounting for 13.5% of exports and 17.2% of imports in 2023 (although this represents a decline from 16% and 20.3%, respectively, in 2022). In October, Uzbekistan started receiving natural gas under a two-year import agreement with Russia for 2.8 billion cubic metres per year, further deepening economic dependence. Remittances from Russia – which amounted to 9% of GDP and 74% of total remittances in 2023- are critical for Uzbekistan’s external finances as well as economic growth, and while steps are being taken on diversification of the labour market, they will take time to meaningfully reduce the dependence.
Return to Large CADs: The current account is estimated to have recorded a deficit of 6.9% of GDP in 2023 (current ‘BB’ median: deficit of 2.5%) following a near-balance in 2022 (which was due to a historical surge in remittances from Russia and strong gold prices). Fitch expects the current account deficit (CAD) to average 4.5% in 2024-25, as significant investment needs will keep the trade deficit large. FDI prospects, particularly in the renewable energy industry appear solid, and SOE privatisation should further enlarge the pipeline of investments.
Fitch expects the external balance sheet to remain a key credit strength, with foreign-exchange (FX) reserves equivalent to nine months of current account payables as of 2023, and the economy in a net external creditor position (projected average of 11.3% of GDP in 2024-25).
Stable Banking Sector: Uzbekistan has had solid credit growth across all retail segments since 2H22 (2023: 47% yoy in retail loans) with a particularly sharp spike in auto loans (36% of all retail loans issued in 2023) and mortgages. Household leverage levels are still relatively low, and banks’ retail loan quality still appears solid, with the regulatory non-performing loan (NPL) ratio at 3.5% as of end-2023 (4% for state-owned banks). However, in our view the NPL ratio does not fully capture crystallising asset-quality risks as we see risks from the seasoning of loans issued at the start of the reform period (from 2017).
Subsidised lending fell to 17.5% of new loans issued in 1Q-3Q23, and 29.5% of the outstanding loan stock as of end-3Q23 (2019: 56%) although it may pick up given new subsidised lending programmes in SME and agricultural segments outlined by the government. Dollarisation of bank deposits and loans is fairly high in Uzbekistan, at 30% and 45%, respectively as of end-2023, although on a declining trend.
Inflationary Pressures: Inflation has historically been high relative to peers, highlighting weak monetary policy transmission. Fitch has factored in a boost of up to 3pp to inflation from higher energy tariffs in 2024, which will result in annual average inflation of 13% this year. Further phases of tariff increases, as authorities seek to achieve full market pricing by 2027-28, will pose upside risks to inflation. In 2023, the Central Bank of Uzbekistan decided to postpone adopting the 5% formal inflation target from end-2024 to 2H25, in large part due to inflationary pressures, and Fitch expects the monetary policy stance to remain tight.
ESG – Governance: Uzbekistan has an ESG Relevance Score (RS) of ‘5’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Uzbekistan has a low WBGI ranking at the 28th percentile, reflecting relatively weak rights for participation in the political process, weak institutional capacity, uneven application of the rule of law and a high level of corruption.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
External Finances: A marked worsening of external finances, for example, via a large and sustained drop in remittances, or a widening in the trade deficit, leading to a significant decline in FX reserves.
Public Finances: A marked rise in the government debt-to-GDP ratio or an erosion of sovereign fiscal buffers, for example, due to an extended period of low growth, loose fiscal stance or crystallisation of contingent liabilities.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Macro: Consistent implementation of structural reforms that promote macroeconomic stability, sustain strong GDP growth prospects and support better fiscal outturns.
Public Finances: Confidence in a durable fiscal consolidation that enhances medium-term public debt sustainability.
Structural: A marked and sustained improvement in governance standards.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Uzbekistan a score equivalent to a rating of ‘BB-‘ on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch’s sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
COUNTRY CEILING
The Country Ceiling for Uzbekistan is ‘BB-‘, in line with the LT FC IDR. This reflects the absence of material constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.
Fitch’s Country Ceiling Model produced a starting point uplift of 0 notches above the IDR. Fitch’s rating committee did not apply a qualitative adjustment to the model result.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Uzbekistan has an ESG Relevance Score of ‘5’ for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Uzbekistan has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
Uzbekistan has an ESG Relevance Score of ‘5’ for Rule of Law, Inst. & Regulatory Quality, Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Uzbekistan has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
Uzbekistan has an ESG Relevance Score of ‘4’ for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Uzbekistan has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
Uzbekistan has an ESG Relevance Score of ‘4’[+] for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Uzbekistan, as for all sovereigns. As Uzbekistan has a track record of 20+ years without a restructuring of public debt and captured in Fitch’s SRM variable, this has a positive impact on the credit profile.
The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Sourse: Fitch Ratings