Rating-Agentur Expert RA GmbH confirmed the country credit environment rating (CCE) of Uzbekistan at ‘CCC+’ (low quality of credit environment of the country) in national currency and at ‘CCC’ (low quality of credit environment of the country) in foreign currency.

“The ratings of Uzbekistan remain constrained by the underdeveloped SOB-dominated financial sector, low institutional development and high corruption. The country’s fiscal and monetary figures have been negatively affected, as Uzbekistan entered a transition period due to the ongoing liberalization of the economy. However, we expect the economy to stabilize, as the government is engaged in coordinating the fiscal and monetary policy. On the positive ground, short- and long-term debt levels continue to be rather low and well covered by the FX-reserves. This provides sufficient room for further indebtedness without harming the country’s creditworthiness. The future development of the ratings will largely depend on how effectively the government implements the 2017-2021 policy reforms.” – clarified Ilya Makunin, Rating Analyst of Rating-Agentur Expert RA GmbH.

The agency said that Uzbekistan’s countercyclical fiscal policy largely offset the impact of the unfavorable external environment, mainly characterized by declining world commodity prices through 2013-2016 and weaker performance of Russia and China (two of the country’s main trade partners). This contributed to create buffers, which prevented a sharp contraction of output as GDP growth rate remained positive in 2016 at 7,8%, only 0,1p.p. below the 2015 figure.

“Growth is likely to be weaker at around 5,3% in 2017 following the adjustments to the recent UZS devaluation and we expect this figure to stay at around 5% in 2018 in spite of a solid domestic demand and the economic recovery of Uzbekistan’s main trading partners,” it added.

Rating-Agentur Expert RA GmbH underlined that fiscal deficit has increased further by 2,7p.p. y-o-y up to 3,3% of GDP in 2017 mainly due to increased fiscal expenditure associated with the FX liberalization reform, as significant additional lending and bank recapitalization was required. In 2018, the fiscal deficit is set to narrow to around 1,3% of GDP as the government is planning to restrain fiscal expenditure and collect additional revenue from improved tax administration and increased commodity prices in the course of the year.

“In 2018, a number of deep structural reforms are likely to take place as the government is urged by international organizations to improve the institutional stance of the country. One of the major revisions would be done in the tax legislation which impedes the creation of specialized businesses (important for the value chain of production) as a result of turnover taxation1 rather than VAT deductibility for smaller businesses. Additionally, the tax system tends to hinder larger businesses, thus discouraging companies from growing beyond a certain size. We anticipate that, if such reforms are instrumented, they could have a positive impact in the rating assessment of the country,” the agency stated.

“Debt figures have substantially worsened, however remained favorable with gross government debt standing at around 24,5% of GDP and 77,5% of budget revenues in 2017 (see graph 3). Short-term debt remains historically low at around 1% of GDP and 3,2% of budget revenues. This, combined with a substantial amount of FX reserves at more than 90x of short-term debt, reflects the reduced credit risks of the country,” the agency said.

The recent FX liberalization resulted in a sharp increase in bank’s assets and private credit volumes relative to GDP by around 24,6p.p. and 17,9p.p. to around 70% and 44% in 2017 respectively. However, the financial system, dominated by low-in-scale banking sector, remains underdeveloped, failing to facilitate sufficient intermediation in the economy, Rating-Agentur Expert RA GmbH said.

State owned banks, dominating the sector, and effectively serving as an active public spending tool, channel state funds to large export-oriented and manufacturing firms and generally fail to reach small and medium-sized enterprises, the agency said.

Rating-Agentur Expert RA GmbH underlined that resulted high concentration of bank’s assets and persistent receipt of public funding by major SOBs remain a concern and may lead to vulnerabilities. Nevertheless, according the CBU, the sector stays solid and well-buffered with NPLs at 1,2% of total loans and capital to assets ratio at 12,4% in 2017. Banks have received liquidity and capitalization support prior to the FX liberalization reform in the mid-2017 and are expected to be supported further if difficulties arise.