Fitch Ratings, the international credit rating agency, has reaffirmed Uzbekistan's long-term credit rating in foreign currency at "BB-" with a stable outlook. This rating evaluation takes into account various aspects of Uzbekistan's economic and fiscal landscape:
Positive aspects:
Robust external and fiscal buffers: Uzbekistan's ratings benefit from strong external and fiscal buffers, including low public debt levels and substantial foreign exchange reserves. These reserves are equivalent to 9.4 months of current payments as of July.
Historical GDP growth: Uzbekistan has a history of high GDP growth compared to other countries with similar ratings.
Commitment to structural reforms: The Uzbek government is actively implementing key structural economic reforms, such as privatizing state-owned enterprises and reducing concessional lending to stimulate competition in the economy.
Electricity tariff reform: The government plans to restart the electricity tariff reform, which, if successfully implemented, will have a favorable impact on long-term public finances and reduce risks associated with state-owned electricity distribution companies.
Challenges and risks:
Commodity sector dependence: Uzbekistan faces a high dependence on the commodity sector, which can leave the economy vulnerable to fluctuations in commodity prices.
Low GDP per capita: The country's low GDP per capita highlights structural weaknesses in the economy.
State participation in the economy: Uzbekistan continues to grapple with significant state participation in the economy, though it is gradually declining.
Governance standards: The country's governance standards are improving but remain weak in comparison to peers.
Political and geopolitical risks: The extension of the presidential term from five to seven years following a snap election held under a new constitution introduces political and geopolitical risks.
Economic resilience and balance sheet:
- Uzbekistan has demonstrated resilience to external challenges, including the aftermath of military action in Ukraine and sanctions against Russia.
- The country's external balance sheet is a significant credit positive, with foreign exchange reserves covering 9.4 months of current payments as of July. Uzbekistan is also a net external creditor.
- The economy has benefited from a substantial increase in remittances from citizens working abroad, coupled with robust export growth, primarily to Russia.
Current account and debt:
- Fitch expects the current account deficit to widen to 4.8% in 2023, mainly due to normalized remittances and a deteriorating trade deficit. This is above the projected 'BB' median of 2.8% and worse than previous forecasts.
- General government gross debt, including government external guarantees, is projected to stabilize at just above 37% of GDP in 2023-2025.
Inflation and monetary policy:
- Inflation in Uzbekistan has historically been high compared to peers, indicating weak monetary policy transmission channels.
- The report anticipates an increase in inflation in 2024 to an average of 13%, primarily due to higher electricity tariffs, followed by a decrease to 6.5% in 2025, targeting a 5% inflation rate. Positive real interest rates are expected.
Factors for rating improvement:
- Consistent implementation of structural reforms aimed at enhancing GDP growth and macroeconomic stability.
- Fiscal consolidation through expenditure and revenue optimization, increasing the state's resilience to the debt burden.
- A marked and sustained improvement in governance standards and a reduction in political risk.
Risks for rating downgrade:
- Significant deterioration in external finances, such as a substantial decrease in remittances or an increase in the trade deficit, leading to a significant reduction in foreign exchange reserves.
- A marked increase in the public debt-to-GDP ratio or a decrease in the government's fiscal buffers, potentially resulting from an extended period of low growth or contingent liabilities materializing.
The assessment provides a comprehensive overview of Uzbekistan's economic strengths and challenges, highlighting its commitment to reform and growth potential.
Earlier Daryo reported that Fitch Ratings' report issued on August 25, 2023, reaffirms Uzbekistan's stable 'BB-' Long-Term Foreign-Currency Issuer Default Rating (IDR) with a Stable Outlook.
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