Uzbekistan’s Tashkent Oblast Affirmed At ‘BB-’; Outlook Stable
Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings affirmed its ‘BB-’ long-term issuer credit rating on Uzbekistan’s Tashkent Oblast. The outlook is stable.
“The stable outlook reflects our assumption that Tashkent Oblast will maintain its strong budgetary performance to comply with the central government’s restrictions to post deficits. We also assume that the oblast will keep its debt burden low in the medium term. We also believe that, if permitted by national regulation, Tashkent Oblast’s commercial borrowings will be moderate and the region will not significantly accumulate market debt,” the agency said.
“We might lower the rating on Tashkent Oblast if we were to lower our sovereign ratings on Uzbekistan. We would also consider a negative rating action on the region if we observed rapid debt accumulation beyond management’s plans,” it added.
“We might consider a positive rating action if the institutional framework under which Tashkent Oblast operates becomes more predictable and supportive. An upgrade would also depend on us taking a similar rating action on Uzbekistan,” the agency noted.
“The rating on Tashkent Oblast reflects our view that a fast-growing economy and strong financial results help the region keep sufficient liquidity without resorting to commercial borrowing. At the same time, the volatile and unpredictable institutional framework, and low wealth levels continue to constrain credit quality,” S&P Global Ratings stated.
“Under Uzbekistan’s volatile institutional framework, Tashkent Oblast’s financial position is significantly affected by highly centralized decision-making. The central government sets up tax distribution rates, transfers, and expenditure responsibilities annually and individually for each region, which constrains the reliability of their medium-term financial planning. At the same time, the central government maintains significant LRG monitoring, requiring balanced budgets and restricting commercial borrowing. Due to ongoing institutional reforms, we expect possible developments on regulatory limits and changes to existing restrictions,” the agency said.
“We believe that the quality of financial management constrains Tashkent Oblast’s creditworthiness. We observe only emerging medium-term planning, large deviations between budgeted and actual performance, and a lack of established practice of debt and liquidity management. However, in the centralized system, the oblast can adjust its budget responsibilities in case of revenue shortfalls,” it stated.
“We expect Tashkent Oblast’s economy to continue its rapid growth mirroring Uzbekistan’s at 5.3% on average annually over 2019-2021, supported by the growth in the manufacturing, agricultural, and service sectors. At the same time, we view the region’s economy as weak by international standards, mostly due to low wealth levels and concentration in the metals and mining industry. The oblast accounts for 9% of Uzbekistan’s population and contributes for 9% of the national GDP. Tashkent Oblast’s population is young, with almost 90% at or below working age. This could lead to the labor market expanding, while presenting challenges for employment in the long term,” S&P Global Ratings added.
Capital investment will likely increase, while budgetary performance will remain strong. S&P Global Ratings expects Tashkent Oblast to continue posting a budget surplus over the next three years in line with national legislation. We anticipate that revenue sources will be volatile, given the state’s track record of revising tax shares. We also project an increase in capital expenditures in the next few years, following the central government’s goal to foster infrastructure development. Funding for capital spending will come mostly from the central budget, although we expect the oblast will also contribute.
“We believe that Tashkent Oblast’s infrastructure is poor, and will continue to constrain the region’s economic development. However, the funding backlog is not likely to lead to material debt accumulation, because national legislation currently prohibits local and regional government (LRG) commercial borrowings. In the long term, we understand, Tashkent Oblast might access capital markets with the president’s consent and discussed amendments to national regulation,” it added.
At present, the oblast’s debt is modest and consists only of a US$50 million loan from the Uzbekistan Development and Reconstruction Fund. Tashkent Oblast services this debt via its recently established development fund. The loan was granted in 2018 for capital development purposes and we expect the oblast to service it using own funds. Given that the liability is denominated in U.S. dollars, Tashkent Oblast’s debt burden might be subject to exchange rate volatility. The region has no stakes in regional enterprises, with no track record of providing subsidies, capital injections, or extraordinary support to companies in the region. Uzbekistani districts and municipalities are financially healthy thanks to central government support.
S&P Global Ratings assumes that Tashkent Oblast’s liquidity position will remain solid and comfortably cover the region’s annual debt service over the next 12 months. However, we believe that the coverage ratio might fall sharply if the oblast increases debt. Positively, Tashkent Oblast is eligible to receive short-term, interest-free budget loans to cover liquidity shortages. However, we believe that the region’s access to external funding is constrained, owing to the undeveloped domestic capital markets for LRGs and commercial borrowing restrictions.