Uzbekistan’s economy shone like a beacon during the worldwide disruption of 2020. While a majority of countries saw GDP growth turn negative, a mixture of sound policy and a strong export base put Uzbekistan in a select group that remained recession free. A comprehensive reform and privatisation strategy across major industries including metallurgy, mining, finance and energy means the country’s position as a star performer looks assured.
The government’s pandemic policy response included a stimulus equivalent to around 2% of GDP that drew approval from investors and the IMF. There was a strong public health response and a quarantine regime tailored across different industries that allowed economic production to restart. The government provided families with one-off assistance payments and hiked pensions. Landlords were told to hold off on demanding rent, and utilities paused bill payments. Banks were told to give corporate customers in hard-hit sectors a break from interest payments.
“The government provided a sizable stimulus and that was very helpful,” says Eric Livny, lead regional economist for Central Asia at the European Bank for Reconstruction and Development (EBRD). “The authorities really did put in place a full package of policy measures to ease pressure.”
One export in particular helped the country weather the economic storm during the pandemic — gold. Demand for almost every export from cereals to natural gas fell. But the export price of gold and the volume Uzbekistan produces both rose in 2020, to the extent that gold accounted for over 40% of total exports that year. The country is blessed with deep deposits of precious metals, non-ferrous metals and key ores like uranium. Considerable effort is going towards ensuring that the mining industry modernises to reach levels of efficiency that compliment its geological endowments. Yet the administration knows that relying too heavily on a handful of commodities can mean vulnerability rather than resilience.
Although Uzbekistan was one of the few countries in the world where growth remained positive, the slowdown was still severe. GDP growth fell from 5.7% in 2019 to 1.6% in 2020, according to the World Bank. The government’s policy response has paved the way for a sustained economic recovery through 2021, including sectors that had been hardest hit and initially slow to recover. After reeling from quarantine measures introduced in early 2020, the government expects the services sector growth of between 8.5% and 10% this year. This comprehensive recovery will likely lead observers including the EBRD to up their overall growth estimates for the year.
“We’re seeing expansion everywhere and the economy is running ahead of our 5.6% growth forecast so we are very likely to update,” says Livny. “For 2022 we’ve predicted 6% and we will see whether that holds.”
A sense of stability
A good chunk of the stimulus was funded through international borrowing, a source of funding the government has worked hard to cultivate. The government sold a 10-year Eurobond in November of 2020 along with 3 trillion som of local bonds ($288.9m). Not only were there plenty of investors ready to lend, but Uzbekistan’s cost of borrowing during the pandemic was largely unchanged from the country’s debut Eurobonds issue back in 2019. A less welcome result of the stimulus is that public debt is now around 40% GDP, almost double what it was just a few years ago. The vast majority of the borrowing, however, is going to projects and policy reform that will ultimately boost growth.
“There’s no real concern about the level of debt,” says Karen Srapionov, partner at the Avesta Group. “The return on these investments is expected to be much sufficiently higher than a funding cost of perhaps 3%-5% depending on the maturity.”
The government is also well aware of the repercussions from letting debt grow unchecked. There is a hard debt ceiling of 60% of GDP, and in 2022 a fiscal deficit ceiling of 2% of GDP will come into force. This gives the government headroom to provide additional social spending or economic stimulus while still capping the deficit at a sustainable level. The administration has become very judicious about what it funds through external debt. Even international financial institutions have been told politely that their proposed project will have to wait until there is room in the borrowing schedule.
Inflation, long a thorn in the central bank’s side, is no longer speeding up. In fact, it has started to slow down despite the fiscal stimulus. The figure for June this year was 10.9%, down from 14% in the same month in 2020. The government had a target of 5% by 2023, which was ambitious even before the pandemic, and an interim goal of under 10% by 2021. Regardless of whether these targets are met, there is still a sense of stability on the monetary front.
In the two years leading up to 2020, a tremendous increase in credit to the economy had raised the danger of overheating. Banks were issuing loans at eye-watering rates as high as 30%, reminding some observers of Kazakhstan’s problems with retail lending almost a decade ago. Uzbekistan’s financial regulator, the central bank, began trying to bring down lending rates in mid-2020. The pandemic, although hugely disruptive and damaging, resulted in a sharp drop in credit growth, which slowed from around 50% down to a more manageable 23%.
Meanwhile, a high level of state-ownership and regulatory control in the financial sector meant the authorities were able to provide fresh funding and debt relief through banks very efficiently. This took the form of new crisis loans and deferring the repayment of existing loans for some borrowers for up to six months. Inevitably non-performing loans have jumped — from just over 2% at the end of 2020 to reach 4.7% in May 2021. But this is only a minor cause for concern.
The industries that were hardest hit — including tourism, logistics and SMEs — borrow mainly from Uzbekistan’s private sector lenders. In recent years, these private sector lenders have received large volumes of funding and technical assistance from international financial institutions, who are eager to see more cash flow to small businesses. This has left private sector banks with stricter credit policies than their state-owned peers, and most are in a position to either restructure loans or begin recovering underlying collateral. On the other hand, the state-owned lenders, whose customers include huge utilities and strategic enterprises, benefit from state guarantees. Should any of these big clients struggle, the government is obligated to step-in.
State-ownership of the banking sector stands at 85%, but there is an ambitious strategy to reduce this to 40% by 2025. The government recognises that state-control has led to weak competition, interest rate distortion and reduced the incentive for risk management. With the help of international financial institutions, Uzbekistan has started on the long road towards transformation. The IFC will take a $35m stake in Ipoteka Bank, the state-owned mortgage lender, and provide a convertible loan to Uzpromstroybank, which lends mainly to the industrial and construction sectors. The EBRD is helping the government prepare to privatise two other lenders — Asaka Bank and Aloqabank. Even lenders that will not be privatised are undergoing dramatic internal reform. State-owned banks are no longer allowed to issue loans at preferential interest rates and are increasingly funding themselves in part through the international bond market.
Pushing on with privatisation
The government’s wider privatisation strategy covers the entire economy. As the IMF noted in April, the pandemic’s impact in both economic and humanitarian terms and has slowed the transition to a market economy. But once the government had the outbreak under control and its policy measures in place, it returned to the task in earnest. A new presidential decree published in October 2020 listed over 500 state-owned entities scheduled for at least partial privatisation. The decree also includes 32 large state-owned enterprises (SOE) to be transformed through privatisation. In order to create a solid foundation for the process, the authorities are working on a new privatisation law. The expectation is that the new law will be enacted after elections in October this year, but the country has already completed its first large privatisation deal. Turkey’s Coca-Cola Içecek (CCI) agreed to pay $252.2m for the Uzbek government’s 57% stake in Coca-Cola Bottlers Uzbekistan — a joint venture with Coca-Cola.
“It’s a very good deal,” says Srapionov. “The valuation was good, there were international advisers working on the sale and I think this will give the government a better understanding of how the process should work. That improves the outlook for future deals, and we hope that the next privatisations will be done in a similar manner.”
A perhaps unrealistic enthusiasm for headline-grabbing IPOs in London and New York has been replaced by a more judicious strategy of smaller placements on the local exchange, with international listings coming later on. For instance, oil and gas companies such as Uzbekneftegaz and Uztransgaz are expected to list on the Tashkent Stock Exchange in 2022-2023. Several of the mining and metal production giants have primary or secondary offerings scheduled for the same period. State-firms need to get their house in order long before a prospective share sale, and even firms that may never be privatised or are further back in queue are undergoing huge reform. There is no sector or industry unaffected by the government’s drive for modernisation.
“One of the most important tasks of the Ministry of Finance is to implement measures for the restructuring and financing —enhancing the financial stability — of state-owned enterprises” says Khurshed Mustafoyev, director of the department at the Ministry of Finance. “This includes integration of international financial reporting standards, creating a modern corporate governance system, compliance standards, and medium and long term business plans.”
These reforms are lengthening the list of SOEs that are able to secure a credit rating and are allowed to raise capital (funding) directly through the international capital markets. “UzAuto Motors issued a debut $300m bond this year, and the plan is for companies in the mining and metals sector to issue $1bn worth of Eurobonds in 2022,” says Mustafoyev. Uzbekhydroenergo received a B+ rating from Fitch in 2020 and Almalyk Mining and Metallurgical Complex received the same rating from S&P Global. It is expected that Uzbekneftegaz and Uzbektelecom will receive their credit ratings this year. Uzbekistan’s SOEs will not just be rated, they will need to better perform.
“We understand that better corporate governance means more successful companies,” says Bobur Abdinazarov, Deputy Minister of Economy and Poverty Reduction. “We know that the role of the supervisory board and board of directors at these firms needs to be expanded and skilled personnel brought in. Hiring consultants are helping us staff these boards with international experts.”
The drive for reform and modernisation is equally visible in the government’s push for transparency as it opens up new areas of the economy up to the private sector. In January 2022, the government aims to have in place an asset and income declaration scheme for public officials. Mining rights will go to qualified firms through transparent online bids. Well-connected individuals can no longer quickly and quietly snap up large chunks of prime real estate.
“Now everything goes through an online auction,” says Srapionov. “It’s not just real estate either, this is across the whole economy.”
This continues all the way down to things like traffic cameras. Private companies can now buy licences at auction to place cameras and receive a proportion of fines levied on careless drivers. The licence for one prime location recently went for the equivalent of several hundred thousand US dollars.
An optimistic outlook
The message is that Uzbekistan wants economic growth that is not only rapid - but also inclusive and sustainable. At present, the country does not create enough jobs to keep pace with population demand. Unemployment rose several percentage points during the pandemic to hit 13% in 2020, according to government figures. Plans to shrink the public sector only make private sector job creation more of an imperative. Even before the covid shock Uzbekistan’s government - well aware that only a small proportion of the working population pays tax - had started on a policy path to legalise the long neglected informal economy.
This included making it far easier for small businesses to pay a set amount of tax and legally register, allowing them to access formal sources of finance. The microfinance sector is being revitalised to provide small-scale financing at sustainable interest rates to a new generation of entrepreneurs in growth sectors like tourism.
Uzbekistan boasts incredible culture and cuisine. There are mountains, desert and the ancient cities of Samarkand and Bukhara. Although tourism is still only 3% of the economy, it is a sector that offers a new source of revenue for ordinary households. The industry was badly damaged by covid, and will take years to recover. But there is huge optimism at the potential for tourism to become a major economic driver and provide employment.
Similarly, for a country heavily reliant upon energy-intensive sectors like metals, mining, oil and gas, the commitment to a green economy signals a commitment to sustainability that should reassure domestic and international investors. The overall increase in energy use because of sectors like metals and mining and population growth is going to be significant. With help from the EBRD Uzbekistan has adopted a strategy for transitioning to a low-carbon economy with a target of net-zero by 2060. This will involve an energy mix that includes new nuclear power stations and a big push on renewables.
As international investors shake off the covid shock and begin to put capital to work once again, Uzbekistan remains as attractive a proposition as it did before the pandemic. Inflation has slowed and debt is under control. The som has stabilised and by most metrics the currency still looks cheap given the potential for rapid economic development. Companies doing business in Uzbekistan can enjoy exceptionally low costs while a modern legal environment builds up around them. The path ahead is by no means without hurdles. Uzbekistan’s privatisation project is immense, and in a country with strong vested interests reforms in some areas may yet falter. But there are far more reasons to believe the government’s ambitions will be realised.
“Uzbekistan stands out as a star in the region,” says Livny. “Where in other economies you feel a fatigue, a lack of new ideas and dynamism, in Uzbekistan there are many reasons to be optimistic about the outlook.”