On October 26, the Central Bank of Uzbekistan (CBU) decided to keep its policy rate unchanged at 14%. This decision took into account inflation rate expectations and the reaction of small and medium-sized enterprises (SMEs) to the policy rate change.
Uzbekistan's economic drivers bear some resemblance to Russia's current situation, primarily driven by demand. Uzbekistan's population size and growth rate make it the leading Central Asian country in these aspects.
However, unlike Russia's limitations in international trade and supply chain disruptions, Uzbekistan has been consistently increasing its trade turnover, not only within the CIS and Central Asia but also with Middle Eastern, European, and other Western countries.
While leaving the policy rate unchanged can lead to increased credit availability and spending power among citizens, it can also result in higher demand for imported goods and services, rather than promoting internal SME production. This dynamic can be sustainable in the short term but may negatively impact SMEs in the long run.
In Uzbekistan's case, the population's strong preference for imported goods may further boost demand for foreign products, potentially extending the CBU's efforts to combat inflationary pressures, despite its targeted inflation rates.
As demand continues to outpace supply and trade deficits increase, Uzbekistan becomes more exposed to geopolitical shifts in both Western and Eastern regions. While Uzbekistan's growing population, GDP, and demand are appealing, maintaining a balanced supply side is essential in the long term to prevent increased foreign borrowing and debt levels as a percentage of GDP.
In a similar move, on October 27, the Central Bank of Russia (CBR) implemented a policy rate increase of 15% in response to the country's significant military and defense expenditure.
While the primary reason cited for the CBR's policy rate adjustment is the defense reforms, it is widely believed that the underlying cause of this rate hike is the growing demand in the economy outpacing available supply.
The Russia-Ukraine conflict, which has been ongoing for nearly two years, has disrupted supply chains throughout the Russian Federation, impacting the broader economy. Although the effects of these disruptions have been diminishing, the overall economy is showing signs of growth, with the European Bank for Reconstruction and Development (EBRD) projecting a 1.5% economic growth in Russia for 2023.
Despite supply chain shocks affecting major international companies based in Russia, the demand side of the economy remains robust and continues to support growth, especially during and after the Russia-Ukraine conflict. This is partly due to the reduced flexibility of the Russian population in choosing goods and services, leading to a reliance on "Made in Russia" products and regional trade partnerships with the Commonwealth of Independent States (CIS) and Central Asian countries.
Given the historical ties and economic interactions between Uzbekistan and Russia, the contractionary monetary policy of the Russian government could impact Uzbekistan's exports. While short-term effects may not be pronounced, long-term trade turnover between the two countries and neighboring CIS and Central Asian nations could be affected.
From a financial market perspective in Uzbekistan, investment projects and companies raising equity capital may experience increased opportunities as the policy rate remains stable at 14%. However, market participants may observe a rising equity risk premium due to increased investment opportunities which eventually translate into higher returns in the market, represented by higher dividend yields and share price appreciation.
Interestingly that pattern makes the case of Uzbekistan quite unique, as it can be compared to the current and recent case in the USA's financial market, where the equity risk premium turned to its ‘lowest level’ since the Dot Com crash in the 2000s, as the current T-bill yields are outpacing the S&P 500 earnings yields.
While comparing Uzbekistan to the U.S. market may not be an exact match, monitoring developments in these two different regions is crucial to forming informed conclusions and anticipating future trends.
As both the Central Banks of Russia and Uzbekistan are set to hold their next meetings in December 2023 (CBR on December 15th and CBU on December 14th), it is essential to keep a close watch on their monetary policy interventions and their potential impact on the economies of these nations.
About the author
Bakhtiyorjon (Ben) Yokubjonov is an Investment Banking Analyst at Alkes Research, passed his August 2023, CFA level I exam, currently pursuing his BSc degree at Queen Margaret University, UK, and British Management University in Tashkent, concentrating in Corporate Finance and Security Analysis.
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