Fast social and economic change rings in a new era for Uzbekistan

After decades in the economic wilderness, Uzbekistan wants to reintegrate itself into the global value chain. A Eurobond is on the way and regional integration has become a key priority

  • By Virginia Furness
  • 08 May 2018
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In the year and a half since the death of Islam Karimov, the first leader of Uzbekistan, former prime minister and now president Shavkat Mirziyoyev has embarked on an ambitious reform agenda that has been welcomed by the international community, as well as Uzbeks themselves. 

"There is new air blowing in Uzbekistan society," said Alkis Vryenios Drakinos, the EBRD's country head for Uzbekistan. "There is a lot of optimism. The president is clearly supported by the vast majority of the population, and people do enjoy more freedom of expression and more access to social media. They can now talk directly to politicians via social media and post critiques and make suggestions. These are real signs of social evolution and social progress."

Centred around its Development Strategy for 2017-2021, the new government is working hard to boost economic growth by reforming governance, improving the rule of law and improving the business climate to attract foreign investment, promote exports, and encourage regional co-operation. 

In September last year, Uzbekistan liberalised its exchange rate regime, marking a "watershed in the history of post-independence Uzbekistan" and has "begun to remove obstacles for the development of Uzbekistan's economy", according to Hans Holzhacker, lead economist at the EBRD.

"This reform, along with others, is aimed at improving the business climate, facilitating foreign trade, overhauling the tax system, and will free the private sector, crucial for both sustaining growth and the diversification of the economy," Holzhacker says.

The government's progress has received endorsements from many international bodies after decades of condemnation of Karimov's authoritarian leadership and poor human rights record. The EBRD returned to Uzbekistan in 2017 after a decade, opening an office in Tashkent in November. As of February 28, its cumulative investment in the country stood at €860m and it has worked on 60 projects. It is running a current portfolio of projects worth €72m.   

At a meeting at the Uzbekistan Embassy in London, Alisher Shaykhov, ambassador to the UK, told GlobalMarkets the next step for Uzbekistan was to be integrated into the world economy, and to be in the global value chain. 

The government has set its sights on issuing its first Eurobond, having been emboldened by neighbour Tajikistan's $500m trade last September. Successful completion is seen as a key step towards international integration. 

Uzbekistan has a lot to offer global investors: a strong credit profile, low public debt, strong FX reserves of $28bn and an enviable rate of economic growth which is predicted to be 5.6% for this year, and 5.7% for next year, following the devaluation of the som and even after the official statistics have been redefined to meet global standards.

While Uzbekistan certainly has a lot to offer the world, the challenge for the government after so many years in isolation is fine tuning its message, understanding global market needs, and adapting its offering accordingly, says Alisher Djumanov, founder and president of New York-based asset manager A100 Financial and one of the founders of Silk Capital, a Tashkent-based investment bank. 

He says the Eurobond would enable the country to showcase its wares on a global stage, and crucially in a language which will bring it into line with the global financial community.  Putting Uzbekistan on the Eurobond map is also expected to prompt further inflows of foreign direct investment. Shaykhov says the target is to attract $4bn-$10bn a year. Foreign investment will also be key to the development of Uzbekistan, and Djumanov says the country is already seeing faster flows of foreign investment, both direct and portfolio.

CAPITAL MARKETS

With private businesses underinvested for many years, attractive valuations are already attracting interest from foreign investors, says Silk Capital's Djumanov.  He says his firm is already seeing increased activity by foreign investors who have been approaching local businesses and making investment proposals. Uzbekistan's State Statistics Committee reports $3.2bn in foreign investments and loans, including $2.42bn of FDI in 2017. 
However, Drakinos says more legislation is needed, particularly regarding how foreign investors could participate in local companies, and what sort of partnerships would be formed. "Better governance is a must-have for corporates," he says.

"Some clearer signalling and political will for privatisation would make a difference for large private sector investments including more FDI to take place. Reforms are happening, the environment is becoming more conducive for business, but compared to Kazakhstan, it is not as ready. There may be more time needed until we see a steady flow of genuine FDI."  

It is also early days for Uzbekistan's capital markets, but attractive valuations and an expected re-rating of Uzbek stocks are expected to generate inbound demand, according to Djumanov. The Tashkent Stock Exchange, which is managed by the Korea Exchange, has a market capitalisation of only $1.6bn but has no restrictions on foreign investment, apart from needing to gain permission from the central bank to invest in publicly listed banks. 

While Uzbekistan's economy is dominated by the state, there are many small to medium size enterprises that have plenty of potential for growth, many of which Djumanov says he expects to list locally. 

However, Uzbekistan still has some way to go in terms of bringing governance in line with international standards and creating the regulatory environment which would allow for the creation of a secondary market for government securities, for example. Illiquidity as well as a lack of transparency are likely to hold back investment. There are only $325m of daily trades, despite 186 listed companies, according to analysis by Silk Capital. 

"The government is looking into developing the country's capital markets and the EBRD is availing its expertise to help. Other international players are also willing to chip in this effort as there is a lot to do," Drakinos says. The EBRD also has an important role to play in developing Uzbekistan's local bond markets and is working towards lending in sum to support non-hard currency earning SMEs. 

GLOBAL TRADE

Ambassador Shaykhov says Uzbekistan is in a strong position to negotiate with its global trader partners, and that it will not let politics get in the way of sound economic policy. Uzbekistan has an abundance of natural resources with gold its top export as of 2016. It also has supplies of oil and gas, and is one of the world's biggest cotton producers.  

Shaykhov says that even in the midst of great divisions in global trade, with threats of further trade conflicts between the US and China never far away, Uzbekistan does not feel the need to choose sides. "We are capable of using any advantage the world is giving us," he says. "Any changes in global trade gives advantages and disadvantages and if you are smart enough you will be able to profit. If you are too politically driven, you will lose a lot. This is why we make very strong divisions between politics and economics.

"We would like to co-operate with Afghan-istan, Iran, Middle Eastern countries, the United States, Israel and others [and] that is based on economic sense." President Mirziyoyev has already signed more than  $57bn deals and memorandums of understanding with many of the largest global economies. At the first UK-Uzbekistan Energy Forum in London at the end of April, Uzbekistan signed a memorandum of understanding with the UK government worth $1.8bn.   

Given its location, Russia and China are natural trading partners. In April 2017, the government signed $16bn worth of deals with Russia and in May last year, it signed $23bn worth of deals with China. Uzbekistan is also set to benefit from China's vast Belt and Road initiative but while Shaykhov acknowledges this is a "very important opportunity," he reiterates his country's desire to keep an independent stance. "China is a strategic partner," he says. "But you should not forget about your sovereign rights and interests, your national interests so you should be strong enough to defend your interests."

 Perhaps more important than Uzbekistan's larger partners is its commitment to regional integration. Alongside enhancing the competitiveness of Uzbekistan's economy and promoting green energy and resource solutions, supporting regional integration and economic co-operation is one of the EBRD's three focus areas for Uzbekistan. 

"Uzbekistan has a relatively small GDP," Drakinos says. "It cannot be a major player in global trade right now. It is a double landlocked country and its closest port takes many days to reach. It will have to prioritise neighbourhood trade first. China and Russia are obvious trade partners but Kazakhstan is closer with more potential, and much less guilt."

Uzbekistan is the most populous country in Central Asia, home to nearly half of the region's population. Though the country has historically been distrustful of its neighbours, Mirziyoyev has made multiple visits to his Kazakh counterpart Nursultan Nazarbayev and signed $1bn of deals in March last year. He is also focussing on improving relations with Kyrgystan, Turkmenistan and Tajikistan. 

The president wants to work towards a strong and unified Central Asia with the countries working together, rather than competing, Shaykhov says. Leaders of the five countries came together on March 15 for a Central Asian summit in Astana, the first of its kind and a major step forward for the region, he says. 

Regional integration is key not only to trade, but also to improve the stability of the entire region, according to Drakinos. "Having a stable Central Asia resolves a number of problems - one being possible manifestations of religious extremism," he says. "The underlying thinking is that stability and economic success will work as a buffer to lots of social and other pressures in the region. It is important that the international community including the EBRD, the World Bank and other IFIs support the country's international integration."
  • By Virginia Furness
  • 08 May 2018

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 272,848.08 1048 8.12%
2 JPMorgan 265,005.45 1158 7.89%
3 Bank of America Merrill Lynch 247,670.24 827 7.37%
4 Barclays 202,639.20 746 6.03%
5 Goldman Sachs 181,377.67 593 5.40%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
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1 BNP Paribas 34,133.57 140 6.41%
2 JPMorgan 32,550.71 62 6.11%
3 UniCredit 28,539.82 130 5.36%
4 SG Corporate & Investment Banking 28,297.17 109 5.32%
5 Deutsche Bank 26,254.12 90 4.93%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 11,195.88 46 9.11%
2 Goldman Sachs 10,193.27 47 8.29%
3 Citi 9,056.44 50 7.37%
4 Morgan Stanley 6,336.77 41 5.16%
5 UBS 6,098.17 23 4.96%