The financial landscape of Uzbekistan has been undergoing significant changes in recent years, with a particular focus on the dynamics of the interbank money market, interest rates, government operations, and liquidity regulation. Recent report posted by Central Bank delved into the data and numbers associated with these areas, providing a detailed overview of Uzbekistan's financial market activity in the third quarter of 2023.
Interbank Money Market and Interest Rates
The third quarter of 2023 witnessed substantial activity in Uzbekistan's interbank money market. The total operations within this market amounted to an impressive UZS 103.8 trillion (around $8.5 bn), marking a substantial 29.2% increase from the previous quarter. These numbers indicate a vibrant and growing financial market.
Perhaps one of the most closely watched aspects of the interbank money market is the interest rates. Throughout Q3 2023, these rates fluctuated within the full interest corridor. The weighted average interest rate on money market operations increased from 13.9% in June to 14.3% in September. This upward trend suggests a tightening of monetary policy and the growing significance of the money market in Uzbekistan.
Investment Banking Director at Alkes Research, Bekhruzbek Ochilov gave exclusive comments for Daryo on Uzbekistan's financial market activity in third quarter. He added that,
"The increase in the average rates in the money market operations from below the key rate of 14% to above the key rate might be linked to the overall rise of cost of debt globally, with Uzbekistan recently placing its eurobonds at 16.25% in UZS and 8.125% in USD. IN 2021 Uzbekistan placed its Eurobonds at 14% in UZS and 3.9% in USD."
Further insight can be gleaned from the "UZONIA" benchmark rate, which closely mirrored the main rate. Although subject to certain fluctuations, this alignment signifies the effectiveness of the Uzbek financial system in maintaining monetary stability.
It is important to note that while there was a slight increase in the volume of relatively longer-term operations in the money market during the quarter, the majority of operations (77.2%) were overnight operations. This points to a preference for shorter-term transactions in the interbank money market.
Real interest rates in the money market, calculated based on inflation forecasts for the next period, averaged around 4%. These figures indicate that Uzbekistan's financial market is characterized by "relatively stable" monetary and credit conditions, a promising sign for the country's economic stability.
Activity, Segmentation, and the REPO Market
In the third quarter of 2023, the average monthly volume of operations in the interbank money market reached UZS 34.6 trillion (over $2.8 bn), a substantial increase from UZS 26.8 trillion (around $2.2 bn) in the previous quarter. This growth is indicative of heightened activity within the market.
The vast majority of these transactions (77.2%) comprised overnight operations. Additionally, 14.7% were 2-7-day deposit operations, highlighting a preference for short-term financial instruments among market participants.
Given the increasing volume of operations in the money market, the balance of interbank deposits in the national currency grew by 14.2% during this period, reaching UZS 11.2 trillion (over $917 mn). This significant increase reflects the growing confidence in the Uzbekistan financial market.
The REPO market, on the other hand, saw a remarkable surge in activity, experiencing a 1.6-fold increase compared to the previous quarter. The total value of REPO operations reached UZS 25.9 trillion ( over $2.1 bn), accounting for 20% of the money market. This significant rise suggests that the demand for collateral property in mutual transactions is increasing as banks aim to reduce credit risk.
Interest rates on REPO transactions were closely aligned with money market interest rates, with a quarterly weighted average interest rate of 14.2%. This convergence underlines the efficiency and transparency of the financial system in Uzbekistan.
Ochilov reported that,
"Abundance of liquidity in the banking sector remains to be a problem as the banks have an opportunity to use their financial resources more effectively - when not being able to buy the treasuries at the full volume than originally planned they are still able to open REPOs on these treeasuries. This would make the money in the banking sector work more effectively, and in turn, make REPOs cheaper and treasury yields lower, reducing the overall cost of financing in Uzbekistan."
Analysis of Banking System Liquidity
The third quarter of 2023 witnessed a decrease in the effective liquidity position of Uzbekistan's banking system. In September, the balance of total liquidity was UZS 15.5 trillion (around $1.3 bn) marking a 24% decrease compared to June.
The main factors contributing to the reduction of liquidity were the increased volume of demand in the domestic currency market and the issuance of government securities. However, this decrease was partially offset by the increase in budget expenditures, the purchase of precious metals by the Central Bank, and the reduction in the total volume of monetary and credit operations.
Ochilov also commented on other factors that contributed to the reduction of liquidity.
"This was also caused by the state's budget losses in the first two quarters of 2023 being larger than predicted, which resulted in the government pulling money out of the bank deposits, effectively decreasing the liquidity in the banking sector. However, the banking sector remains overly liquid, which can be seen in the recent treasuries auctions - they were mostly oversubscribed by banks,"he said.
Of note is the increasing impact of government operations on the liquidity of the banking system in Q3. These operations resulted in an UZS 18.8 trillion (over $1.5 bn) increase in liquidity, a significant uptick compared to the previous quarter.
Cash transactions had a smaller effect on the overall liquidity, contributing just UZS 0.7 trillion (over $57 mn) to the total liquidity increase. This data suggests a shifting focus away from cash transactions and toward more substantial financial instruments.
Total Liquidity Forecast for Q4 2023
Looking ahead, it is predicted that the total liquidity in the next quarter will be slightly lower than the corresponding period of previous years. The effective liquidity position of banks in the fourth quarter of last year balanced around UZS 32-33 trillion (over $2.6-$2.7 bn) on average. A similar balance is expected in the coming quarter.
Interventions in the domestic currency market in the next quarter are anticipated to be carried out on the basis of the "principle of neutrality of gold-currency reserves." This approach takes into account foreign currency funds used by the Ministry of Economy and Finance, providing a balanced approach to liquidity management.
The seasonal increase in government spending is projected to maintain an increasing effect on overall liquidity. However, it is anticipated that the issuance of government securities, alongside external debt funds raised in October, will be the primary means of financing the budget deficit.
Liquidity Regulation Operations
In the third quarter of 2023, liquidity attraction operations of the Central Bank decreased. The demand for these operations dropped due to the return of funds from the maturity of Central Bank bonds, significantly reducing the daily average balance of overnight REPO transactions from UZS 2.5 trillion (around $205 mn) in July to UZS 0.8 trillion (over $65 mn) in September.
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Deposit auctions played a prominent role in managing liquidity. Their daily average balance amounted to 18.9% of total liquidity attraction operations. Meanwhile, overnight deposit operations were consistently available to ensure the lower limit of the interest corridor.
As the balance of Central Bank bonds diminished, deposit auctions emerged as the primary instrument for managing additional liquidity available in the banking system. The government's issuance of bonds, particularly those of the Ministry of Economy and Finance, has expanded the opportunities for banks to attract short-term resources by using these securities as collateral.
The country's financial landscape is characterized by relative stability, as evident in the real interest rates, which averaged around 4%. The surge in activity within the interbank money market and the REPO market reflects a growing confidence in the financial system.
Written by Khadicha Abdurashidova
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