Tashkent, Uzbekistan (UzDaily.com) — S&P Global Ratings has confirmed Uzbekistan’s long-term and short-term sovereign credit ratings in foreign and national currencies at "BB-/B" levels. The outlook is stable.

The Transfer and Convertibility assessment remains at "BB-".

The stable outlook reflects Uzbekistan’s balanced growth prospects for the next 12 months, considering risks related to the continued increase in external and government debt.

Ratings could be downgraded if external and government sector deficits exceed the agency’s expectations due to less favorable trade conditions, sustained high government spending, or increased borrowing costs.

Ratings could also be lowered in the event of a significant slowdown in economic growth, for example, due to a smaller-than-expected impact from investment projects financed by debt.

The agency may upgrade the ratings if Uzbekistan successfully reduces its budget and current account deficits without significantly harming economic activity. An upgrade could also be possible if the country’s governance and institutional framework improve, such as through the reduction of management gaps in state-owned enterprises.

Uzbekistan continues its gradual modernization of the economy, which began in 2017 with the liberalization of the exchange rate. To ensure energy security, reduce fiscal costs of subsidies, and decrease gas imports, the government began increasing electricity and gas tariffs in October 2023.

It is planned that by 2027, energy prices will fully reflect costs. The reduction of subsidies and favorable gold prices should contribute to a gradual decrease in the budget deficit to 3.5% of GDP on average in the period from 2024 to 2027, compared to 5% in 2023.

The agency expects that current economic reforms, fiscal support from the government, and remittance inflows will contribute to higher real GDP growth compared to many other countries with similar ratings until 2027.

However, the implementation of this plan requires significant investments financed by debt. The agency expects this to continue increasing the net debt of the general government sector and Uzbekistan’s external debt, although the growth rate may slow down. The current account deficit reached a record 7.7% of GDP in 2023, and the agency forecasts that deficits will remain high — averaging 6.8% of GDP annually from 2024 to 2027.

Overall, Uzbekistan’s ratings are supported by a moderate level of net government debt. The agency forecasts that this indicator will reach 35% of GDP by the end of 2027. The country’s fiscal and external position has historically benefited from the policy of directing part of the revenues from commodity sales to the Reconstruction and Development Fund of Uzbekistan (FRDU; sovereign fund).

The ratings are constrained by the country’s low level of economic wealth, as measured by GDP per capita, and limited monetary policy flexibility. While the situation in this area is improving, the agency still considers policy measures difficult to predict due to the high degree of centralization in decision-making, developing accountability mechanisms, and limited checks and balances between institutions.

The agency forecasts that Uzbekistan’s economic growth will average 5.6% during the period from 2024 to 2027, after reaching 6.3% in 2023.

Economic and governance reforms, including the planned increase in energy tariffs, will support the country’s investment attractiveness.

The decision-making process will remain centralized, and despite some improvements, the perception of corruption levels is likely to remain high.

Uzbekistan’s economy grew by 6.6% year-on-year in the first nine months of 2024, driven by strong performance in sectors such as information and communication technology, construction, and trade. From 2021 to 2023, the country’s real GDP growth was high, averaging around 6.8% annually.

The agency forecasts that growth prospects will remain strong. Uzbekistan’s economic growth is largely driven by investments, with the investment-to-GDP ratio standing at around 34%, one of the highest in the world. As part of the "Uzbekistan-2030" strategy, the government and state institutions are channeling investments into energy, transport, telecommunications, agriculture, and tourism.

The government has also begun raising tariffs on electricity and gas. It plans to diversify and modernize electricity generation, particularly in the green energy sector, which will largely be implemented through public-private partnerships. For example, the Saudi company ACWA Power plans to invest US$7.5 billion (7% of GDP) in electricity generation projects by 2030.

Currently, around 20% of the energy consumed in Uzbekistan comes from renewable sources, with the goal of increasing this to 40% by 2030. The government also plans to expand the production of copper, gold, silver, and uranium to strengthen the export base.

Despite the increase in energy tariffs and high interest rates, the agency expects consumption to grow, supported by remittance inflows and rising wages, as well as government measures to stimulate the economy, including tax incentives and regulated prices on some consumer goods. The government’s efforts to strengthen the regulatory framework, privatize certain state-owned companies, and join the World Trade Organization (expected in 2026) may also support private and foreign investments.

Despite strong GDP growth, the agency estimates that GDP per capita will be US$2,900 in 2024, which remains low by global standards. This limits Uzbekistan’s sovereign ratings. A quarter of the population is employed in agriculture, which accounts for about 18% of the economy. However, the country has a favorable demographic profile — nearly 90% of Uzbekistan’s population is of working age or younger.

The young population presents an opportunity for growth driven by labor supply. However, the agency suggests that matching employment growth with demand levels will be challenging. Most permanent and seasonal emigrants from Uzbekistan work in Russia, and the weakness of the Russian economy could exacerbate this issue.

The government, with the support of the International Monetary Fund (IMF), recently revised the methodology for assessing the shadow economy, which led to an upward revision of GDP data.

Uzbekistan’s economy continues to relatively successfully manage the consequences of the war between Russia and Ukraine. Remittance inflows grew by 35% from January to September 2024 compared to the same period last year, following a significant decline in 2023.

According to the agency, the increase in remittance inflows reflects the growing demand for labor in Russia and rising wages. It also reflects the diversification of remittance sources (including the USA, Germany, Poland, and South Korea). However, 78% of Uzbekistan’s remittances in 2024 still come from Russia.

Furthermore, the overall trade volume with Russia increased by about 26% in the first nine months of 2024. Due to sanctions imposed on Russia by Western allies, Uzbekistan has been able to increase exports to the country to meet growing demand. In October 2023, Uzbekistan signed a two-year contract with Russian Gazprom to import 9 million cubic meters of gas per day.

While the government is trying to comply with sanction requirements, the agency sees a risk that the US and the EU may impose additional secondary sanctions against Uzbek companies doing business with Russia. For example, the US and the EU have already imposed sanctions on some private Uzbek companies involved in trading electronic and telecommunications equipment, as well as defense industry goods. In response, the government is implementing enhanced verification processes, automated screening measures, and stress testing.

The new constitution, adopted in May 2023, extended the presidential term from five to seven years, allowing the incumbent President Shavkat Mirziyoyev to remain in power until 2037. The agency believes that Uzbekistan’s government policy remains difficult to predict due to the centralized decision-making process and a limited system of checks and balances between institutions. Uncertainty also persists regarding future power transitions.

The agency expects that the net government debt will reach 35% of GDP by 2027, compared to a net positive position in 2017.

Current account deficits in Uzbekistan are expected to average 6.8% of GDP until 2027, primarily financed through concessional external borrowing and, to a lesser extent, net foreign direct investments (FDI).

Despite improvements in monetary policy in recent years, the agency still believes that the operational independence of the Central Bank is limited, and dollarization of loans remains high, exceeding 40%.

In recent years, Uzbekistan has ramped up investments in the energy sector, mining capacity expansion projects, and other infrastructure projects, as well as social programs. As a result, net government debt (including government-guaranteed debt) has increased by an average of 6.3% of GDP per year from 2020 to 2023, leading to a rapid rise in government and overall external debt.

From 2024 onwards, the agency expects gradual fiscal consolidation based on subsidy reforms, more targeted social protection, and the elimination of certain tax exemptions. As the government works to reduce the shadow economy and improve the performance of state-owned enterprises (SOEs), the agency predicts a gradual expansion of the tax base.

The agency forecasts that the government will achieve the targeted budget deficit of about 4% of GDP this year, compared to 5% of GDP in 2023. The increase in gold prices, which rose by about 20% in 2024 compared to the end of 2023, is supporting government revenues through corresponding tax receipts. Authorities expect that the increase in electricity and gas tariffs will result in savings of about 1 percentage point of GDP in 2024.

The agency’s forecasts are subject to downside risks, including possible increases in social protection spending. Furthermore, Uzbekistan remains dependent on the sale of goods like gold, the prices of which can be volatile. Social spending, including wages for civil servants, accounts for about 50% of government spending and may be difficult to adjust for political reasons.

The agency forecasts that total government debt (including government-guaranteed debt) will increase to 43% of GDP by 2027 from 34% in 2023. The agency includes government-guaranteed debt in total government debt due to the close relationship between Uzbekistan and SOEs. The government debt law, signed by the president in April 2023, sets a permanent debt limit of 60% of GDP and outlines corrective measures if the ratio exceeds 50%.

The agency believes there is a risk that the non-guaranteed debt of state-owned enterprises (SOEs), which amounted to about 4.6% of GDP in 2024, may be included on the government’s balance sheet. In recent years, SOE borrowings have increased significantly, particularly in foreign currencies. This debt is mainly used to finance energy and infrastructure projects. Additionally, the share of public-private partnership (PPP) projects has grown rapidly, reaching about 20% of GDP in 2023.

The agency understands that the new PPP framework will limit future liabilities under these projects. In the agency’s view, these projects may face difficulties in debt repayment if their results are worse than expected or if management or oversight issues arise.

To reduce dependence on currency fluctuations and develop domestic capital markets, the government has been increasing domestic borrowing. The share of domestic debt in total debt reached 17% by June 30, 2024, up from 11% at the end of 2022.

Uzbekistan maintains a favorable debt profile: about 86% of its external debt is provided on concessional terms. However, commercial external debt is gradually increasing. In 2023-2024, the government issued Eurobonds in US dollars amounting to US$1.26 billion and in euros amounting to €600 million (US$652 million), as well as local currency bonds, including the first green Eurobond in Uzbek soums for 4.25 trillion UZS (US$331 million).

A high current account deficit and rising external debt could increase risks for Uzbekistan’s balance of payments. However, the agency assesses that the external imbalance will decrease to 6.2% of GDP in 2024, due to a surge in remittance inflows and a reduction in large one-time imports.

The government’s liquid assets, according to the agency, are expected to reach 11% of GDP in 2024, down from 33% in 2017. Most of these assets are managed by the Fund for Reconstruction and Development of Uzbekistan (FRDU), established in 2006. Initially, the FRDU was funded by capital investments from the government and revenues from the sale of gold, copper, and gas exceeding established thresholds, until 2019.

When calculating the government’s liquid assets, only the external portion of the FRDU’s assets is considered. The internal portion, which includes loans to state-owned enterprises (SOEs) and investments in banks, is considered largely illiquid and unlikely to be available for debt servicing if needed.

High current account deficits and growing external debt, in the agency’s view, could increase risks for Uzbekistan’s balance of payments. However, the agency forecasts that the external imbalance will reduce to 6.2% of GDP in 2024 from a peak of 7.7% in 2023, thanks to high remittance inflows and large one-time imports (such as aircraft and cars) last year. To slow the growth of imports, the authorities have removed tax exemptions on the import of cars and nearly 40 essential foodstuffs, introduced in 2023. Despite this, the agency expects import growth to remain high due to numerous investment projects. Additionally, Uzbekistan became a net importer of gas in October 2023 after beginning imports of Russian gas through Kazakhstan.

A significant portion of Uzbekistan’s exports consists of raw materials, especially gold, which accounted for 43% of merchandise exports in the first half of 2024. Favorable gold prices will support exports in 2024, but according to the agency’s forecast, prices will drop to US$1,800 per ounce by 2027 from the current high level near US$2,400 this year.

Against the backdrop of significant current account deficits, the country’s gross external debt has increased in recent years across all sectors: government, corporate, and financial. A substantial portion of future financing for the current account deficit is likely to come from debt. The agency expects a gradual increase in foreign direct investment (FDI) inflows as the government implements its privatization program, although the timing will depend on market conditions.

The agency forecasts a decline in Uzbekistan’s usable foreign exchange reserves by 2027, partly due to asset revaluation linked to the expected decline in gold prices. However, the usable reserves should still cover around five months of current account payments by 2027. About 90% of Uzbekistan’s usable reserves are held in monetary gold by the Central Bank of Uzbekistan (CBU). The CBU has a priority right to purchase domestically mined gold. The gold is purchased in local currency, after which the CBU sells US dollars on the domestic market to offset the impact of its interventions on the Uzbek soum.

The agency excludes the FRDU’s external assets from the Central Bank of Uzbekistan (CBU) reserves, as it believes these assets are primarily used for fiscal purposes rather than for supporting monetary policy or the balance of payments. This view is supported by the use of FRDU assets for budgetary purposes in the national economy over the past four years.

Uzbekistan’s monetary policy effectiveness has improved in recent years. One of the most significant measures, in the agency’s view, was the liberalization of the exchange rate in September 2017, which led to a shift to a crawling peg system. The CBU periodically intervenes in the foreign exchange market to smooth volatility and reduce the appreciation of the local currency through large gold purchases.

In the near term, the agency expects that continued energy price increases will sustain high inflation levels. In 2024, the agency forecasts inflation at 9.8%, down from 10.4% in 2023, but expects it to gradually decrease to 6.5% by 2027. In 2020, the CBU took steps toward adopting an inflation targeting mechanism with the goal of reducing inflation to 5%.

State-owned banks dominate the sector, controlling 67% of total assets. This, along with ongoing subsidized lending programs from the government (though their volume is decreasing), reduces the effectiveness of the monetary transmission mechanism. After the sale of the Mortgage Bank in 2023, the authorities plan to privatize two more banks: SQB and Asaka. To cope with the very strong growth of consumer loans in recent years, the CBU has introduced stricter lending requirements, including limits on auto loans for banks and tightening debt-to-income ratio requirements for borrowers. Although dollarization is decreasing due to the CBU’s policies, it remains high: as of September 2024, about 42% of loans and 27% of deposits were denominated in US dollars.

Uzbekistan’s banking sector is likely to continue demonstrating resilience. The agency believes that favorable economic growth prospects, rising disposable incomes, and low retail credit penetration (household debt amounts to less than 10% of GDP) will remain key factors driving high loan demand in the coming years. Most Uzbek banks have stable funding profiles, supported by substantial government and international financial institution financing, as well as growing corporate and retail deposits.

At the same time, access to long-term financing in the domestic market remains limited. The agency continues to view banking regulation in Uzbekistan as reactive rather than proactive. Regulatory actions are not always predictable and transparent. However, regulation is gradually improving.