Fitch Ratings – London – 23 Aug 2024: Fitch Ratings has affirmed Uzbekistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB-‘ with a Stable Outlook.
KEY RATING DRIVERS
Fundamental Rating Strengths and Weaknesses: The rating is supported by Uzbekistan’s relatively low public debt, sizeable fiscal and external buffers, high trend GDP growth, and reform progress to liberalise the economy. These factors are balanced by low GDP per capita, weak but improving governance, high commodity dependence and financial dollarisation, and a large and uncompetitive, albeit declining, state presence in the economy.
Statistical Revisions to GDP Data: The official GDP series was revised earlier this month to better capture informal economic activity, with the 2023 level increasing by 11.8%. This survey-based exercise was conducted jointly with the IMF, and higher recorded construction and restaurant activity accounted for the biggest revisions. Fitch understands the government does not intend to weaken its planned fiscal adjustment, despite the starting position for the 2023 fiscal deficit improving by 0.5% of GDP due to the higher nominal GDP.
Fiscal Slippage: The consolidated fiscal deficit (including extrabudgetary accounts, the Uzbekistan Fund for Reconstruction and Development, and externally financed expenditure) widened 0.1% of GDP yoy in 1H24, following a 2.5pp underperformance against target in 2023. Fitch forecasts the fiscal balance improves in 2H24 with a full-year deficit of 4.2% of GDP, from 4.9% in 2023, but 0.7pp above target (excluding the recent GDP revision). We project the deficit narrows to 3.4% of GDP in 2025, partly reflecting the effect of energy tariff liberalisation in May 2024 offsetting a further increase in debt interest costs, and to 3.0% in 2026, still above the ‘BB’ median of 2.4%.
Low Public Debt: Fitch forecasts general government debt/GDP (including external guarantees), which rose 2pp in 2023 to 32.5%, to be broadly stable, ending 2026 at 32.1%, well below the ‘BB’ median of 53.6%. Around 90% of public debt is foreign-currency denominated, but external debt has a fairly long average maturity of 9.2 years and 87% is concessional.
Central government deposits are sizeable, at 13.1% of GDP at end-1H24, albeit down from 26.5% of GDP at end-2020 and we project them to fall to 10% at end-2026. There has been progress in strengthening public financial management including monitoring of risks from public-private partnerships, where committed projects rose to 20% of GDP at end-2023, and from non-guaranteed state-owned enterprise debt (25.6% of GDP, including private external debt of state-owned banks).
Favourable Trend Growth: GDP rose 6.4% in 1H24, helped by surging investment and an 8.6% increase in real wages, and we project full-year growth of 6.2% (6.3% in 2023). Fitch forecasts GDP growth to moderate to 5.5% in 2026 as fiscal consolidation and cooling investment offset support from lower inflation. This is close to the trend rate, which is boosted by 2% annual population growth, and above the ‘BB’ median of 3.5% in 2026. There is significant economic dependence on Russia, which accounts for 13% of exports and 21% of imports, compounded by last year’s deal to commence natural gas imports, but Uzbekistan continues to cooperate on enforcement of Western sanctions.
Foreign–Exchange Reserve Buffer: The current account deficit (CAD) widened in 2023 to a multi-year high of 7.7% of GDP, partly due to one-off equipment investment and fiscal loosening. Fitch projects the CAD narrows to 6.2% in 2024, helped by 32% growth in remittances in 7M24, and to 4.7% in 2026. We assume net FDI rises to 2.5% of GDP, reflecting a strong investment pipeline, particularly in the energy sector. Fitch projects FX reserves to decline to 7.8 months of current external payments in 2026, from 8.8 in 2023, still well above the ‘BB’ median of 4.5 months, and the net external creditor position weakens 15pp in 2023-2026 to 3.6% of GDP.
Progress in Reform and Governance: There has been substantial economic reform progress in recent years, including last year’s privatisation of Ipoteka Bank, and energy price hikes for firms in October 2023 and for households in May 2024. Plans to privatise two other large banks, Asaka and SQB, have advanced albeit more slowly than envisaged. Uzbekistan’s overall World Bank governance percentile ranking has improved 9.6pp since 2020, and WTO accession negotiations have accelerated. The share of state-subsidised policy lending has fallen further to 12% of new lending in June, from 17% at end-2023, but is still 28% of the stock, impairing monetary policy transmission.
Relatively High Inflation: Inflation picked up to 10.5% in July, from 8.1% in April, on energy price hikes, but core inflation has trended down (2.6pp this year), and household inflation expectations also fell from 13.6% at end-2023 to a still elevated 12%. Fitch forecasts inflation averages 9.5% in 2024, 8% in 2025 and 5.8% in 2026, above the Central Bank of Uzbekistan’s (CBU) 5% inflation target and the projected ‘BB’ median rate of 3.5% in 2026. CBU cut the policy rate in July for the first time since March 2023, by 50bp to 13.5%, and Fitch anticipates further easing consistent with a neutral real interest rate of around 3%.
Stable Banking Sector: The sector is moderately profitable, with a return on equity of 11% in June 2024, has a solid Tier 1 capital/risk-weighted assets ratio of 13.9%, and fairly low regulatory non-performing loan ratio of 4%, although Fitch considers actual problem loans to be significantly higher (in excess of 10% of sector loans at end-2023). A tightening of macroprudential policy helped cool credit growth, to 18.5% in June, from a peak of 27% in August 2023, which was driven by surging household loans. The deposit dollarisation ratio has fallen by 9pp since 2021 to 30% in June, still above the ‘BB’ median of 27%, while loan dollarisation has reduced more gradually to 42.1%.
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, sharp currency depreciation, 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.
Source: Fitch Ratings