Investors attracted by lure of Uzbek capital markets
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Investors attracted by lure of Uzbek capital markets

Four decades after declaring independence, a successful Eurobond issue and major reforms show Uzbekistan is finally growing up and engaging with the world on its own terms

When the Republic of Uzbekistan sold $1bn of Eurobonds in February 2019 — its first foray into the international debt markets since declaring independence from the Soviet Union — global investors jumped all over the sale.

And for good reason. The inaugural print by the Central Asian state was well timed, shrewdly managed, and marketed directly at global money managers on a desperate quest for yield, arriving less than 18 months after neighbour Tajikistan printed its own $500m inaugural bond.

The deal was telegraphed long in advance, with JP Morgan hired the previous year as global co-ordinator, joined on the books by Citi and Gazprombank. The dual-tranche trade raised $500m worth of five year bonds priced at 4.75%, and $500m worth of 10 year bonds, priced at 5.375%. The sale drew $3.8bn in orders, ensuring the books were comfortably oversubscribed.

Alkis Vryenios Drakinos, head of the resident office in Uzbekistan at the EBRD, says the sale was an “important and very successful venture” for the country. “The Eurobonds helped place Uzbekistan on the map, confirmed the recently obtained international rating, and provided an affordable benchmark for further international borrowings.”

Officials in Tashkent hope this is just the start. The print, notes Gunter Deuber, head of economics, fixed income and foreign exchange research at Raiffeisen Bank International, was priced “relatively tight, and lost a bit in secondary trading”. But it was, he added, a big hit among emerging market investors who bought into “the clarity on the [country’s] macro-economy, statistics, and resources story”. 

Investor friendly

These are key points worth exploring. While other regional economies, including Tajikistan’s, rely heavily on earnings from inward remittances from labour migrants, Uzbekistan’s tale is clear, consistent and avowedly investor-friendly. After becoming president in 2016, and replacing hardline leader Islam Karimov, Shavkat Mirziyoyev set out to transition the economy from closed shop to open market.

Currency controls were eased, along with some travel restrictions. Slowly, investors began to take notice of a market whose credit profile was, Moody’s Investors Service noted in February 2019, “supported by robust growth potential, underpinned by positive demographic trends, and relatively low government debt, which is currently financed at a low cost”.

Yes, there are inherent weaknesses, many likely to persist for decades. There is scant competition in an economy still dominated by a powerful and overweening state. It is poor — nominal per capita income was less than $1,300 in 2018, according to IMF data, ranking it 156th worldwide. And while there is strong support for the reform programme, Moody’s questions the government’s “institutional capacity to deal with significant and challenging reforms” if growth slows, prices rise, and political stability makes a unwelcome return.

For the time being, though, the outlook is bright. In February this year, Moody’s assigned Uzbekistan its first ever long-term issuer rating: B1 with a stable outlook, based on low government debt and positive demographic trends. While an upgrade was unlikely in the near-term, its credit profile would, the ratings agency said, be enhanced by “a sustained increase in productivity growth and competitiveness”. 

Like so many countries in the region, Uzbekistan, cut off from the world for so long, is also a beneficiary of simple circumstance. Yes, a reform programme driven by President Mirziyoyev has helped to put the country on the investment map. But it also has a story — actually, several of them — to tell investors.

For one thing, it stands to benefit from China’s desire to link Beijing with Europe overland by road and rail, putting Uzbekistan at the heart of the Belt and Road Initiative. For another, it is blessed with an abundance of natural resources, including oil and gas, coal, copper, uranium, gold, and cotton. In 2018, the State Committee for Geology put the sum value of all of the country’s mineral and energy resources at $5.7tr. Global exploration giants are regular visitors these days to Tashkent, while an Uzbek-German investment summit, held in Berlin in January 2019, saw €4bn ($4.5bn) worth of deals inked on day one.

Flush with cash

Yield-hungry emerging market investors who covet diversity and variety in their portfolios will continue to eye the country with interest. It boasts a budget surplus, a large sovereign wealth fund, and around $27bn worth of foreign reserves. In its latest World Economic Outlook, published April 2019, the IMF tipped economic output to expand by 5% in 2019 and 5.5% in 2020, rising to 6% by the mid-2020s.

This year’s sovereign bond sale is likely to be the first of many, with the government hoping to return to the market on an annual basis. In February, Odilbek Isakov, head of the country’s debt management office, said pointedly that issuing bonds offered “diversification of funding. It is an opportunity to establish a relationship with the capital markets, and it anchors reform progress. This will help companies to improve in terms of corporate governance, such as getting credit ratings. These are important steps as companies become more resilient and better governed.”

A host of corporates are keen to issue bonds in the wake of the sovereign print, led by Uzbekneftegas. In January 2019, Ulugbek Sayidov, deputy chairman of the state-run energy group, said the first order of business was to secure an international credit rating, allowing it to “expand co-operation… with foreign partners [and to] attract credit funds from world financial markets”. He said Uzbekneftegas was “conducting a systematic review for the preparation of a debut issue of Eurobonds this year”.

The EBRD’s Uzbekistan head Drakinos says upcoming IPOs and bonds sales by local firms will “boost corporate sector valuations and capital markets by introducing international international reporting standards, better governance and transparent decision making”. It is another sign that, four decades after declaring independence, Uzbekistan is finally growing up and engaging with the world on its own terms.

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