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    Economics

    Interest rates, inflation, and financial dynamics: Uzbekistan's economic landscape

    Interest rates, inflation, and financial dynamics: Uzbekistan's economic landscape

    Bakhtiyorjon Yokubjonov, an Investment Banking Analyst working for Alkes Research, commented on global and Uzbekistan's interest rates.

    A man walks past the Federal Reserve Bank in Washington, D.C., U.S. December 16, 2015.
    Source: Reuters

    As the Fed has been tightening its monetary policy by increasing the policy rate, the mortgage, and the housing market has been declining in terms of the sales of those houses in the U.S. as the sales of new homes are in the decline of 25% in 2022. This ‘dramatic change’ in the housing market sales is comparatively steeper in terms of its trend to other historical period housing market declines.

    Despite the case of the U.S. of America, the policy rate tightening by the world central banks is triggering the cost of living, borrowing, growth, and increasing economic activity of the financial market participants in order to fight back inflation. By June 2023, the Federal Reserve of the U.S. had halted the policy rate increases for a while, despite the fact that certain developed economies’ central banks, the Central Banks of Australia, England, Canada, and Europe have remained in the increase of the interest rates.

    Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016.
    Source: Reuters

    As can be seen in the case of developed world economies, as their credit markets are increasing the regulatory environments, and legal standards of obtaining the debt capital, which eventually squeezing the supply of the credit.

    That as it turns out, decreases the flexibility of the businesses in terms of approaching the capital markets to raise credit financing, while the term structures of those financing are becoming a ‘double dagger’ for those businesses, so the way to avoid the high-interest rates or the decreased flexibility toward the financing of the working capital, fixed asset bases, which are eventually blocking the capital distribution to the equity securities holders.

    As those equity investment holders become concerned regarding the financial health of the business while increasing the agency problems between them and the credit securities holders.

    Uzbekistan

    Design by Nigora Umarova

    Coming to the current case of Uzbekistan, credit financing is historically a heavily concentrated means of financing for both business enterprises and the individual participants in industries and the overall financial market of Uzbekistan.

    Over the period of 2018 till now, the Central Bank of Uzbekistan (CBU) policy rate has been set relatively stable between 14% to 17% considering the overall economic profile of the country over those mentioned time periods.

    As it above-mentioned, the current geopolitical interconnectedness of the countries, Uzbekistan is considerably connected to one of its leading partners, Russia, in terms of international trade, foreign direct investments, and economic migration.

    Despite that reliance of Uzbekistan and Russia’s exposure to external sanctions, Uzbekistan is still keeping its policy rate relatively stable, while the core inflation is still the major concern for CBU across the country.

    Central Bank of Uzbekistan.
    Source: Daryo /Madina Nurman

    The real interest rates are staying positive in the country, which is eventually resulting in significant improvement of the domestic lending activities, especially households and retail.

    Nevertheless, the considerable reliance of business on the credit financing of the commercial banks, will eventually decrease the opportunity of leveraging the current available capital market of Uzbekistan, due to the fact that there is a high-risk aversion attitude of retail and most likely institutional investors.

    It is evident by the fact that the average lending rate in the country, as of August 2023 was 22.7%. Obviously, the average investor or the borrower in the country would likely consider that rate significantly high. That is why the capital that is supposed to be flowing to the investors throughout the financial market, would be directed to the commercial banks.

    Source: UZS 100,000, 50,000 and 5,000.
    Source: Daryo /Madina Nurman

    Considering those factors, key economic industries, let's take an example of medicine and healthcare industry participants are to be stuck in terms of raising the capital for growing or newly established businesses, since it is quite complicated or limited access to the capital market, while getting a credit financing from the commercial banks is heavily expensive in a sense that those financing is large in size and used for the illiquid fixed assets.

    That eventually can possibly lead those companies and businesses to bankruptcy or at least below-average growth of the core operations as a whole.

    Illustration with a line graph showing growth of interest rate.
    Source: Government news of Vietnam

    Although the current globalization and volatile interconnectedness influences of the regions are causing gaps in terms of the inflationary environments in both developed and emerging markets, again, it is eventually important to stay resilient against the effects of those events and intercontinental tensions to close the gaps in terms of the monetary environment, whether it would be contractionary or expansionary as an example of Uzbekistan.

    While there are issues that are necessary to address, in the long-run overall economic growth and the stable change of interest rates, raising capital environment would eventually lead to economic prosperity, at least to decrease the exposure coming from different regions.

    At the end of the day, as it is mentioned already, reforms to transform interest rates, and the lending environment will eventually be the key part of the financial market of Uzbekistan to step toward self-sufficiency in terms of public of private financing processes.

     

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    17.10.2023, 22:29   Comments (0)   1336
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