S&P Global Ratings has affirmed Uzbekistan's long- and short-term foreign and local currency sovereign credit ratings at 'BB-/B' with a stable outlook.
Uzbekistan's Fiscal Resilience
The rating agency anticipates widening current account deficits in 2023 due to normalized remittance inflows, along with increased fiscal deficits from growing social spending. Concerns persist regarding government-related entity debt and management. Despite these challenges, Uzbekistan's net general government debt remains moderate, providing temporary room for increased social spending.
The stable outlook reflects the country's robust fiscal and external positions, low-interest burden, and the ability to withstand potential negative impacts from the Russia-Ukraine war. However, the ratings could be lowered if fiscal and external positions weaken more than expected or if government-related entities face payment delays. Conversely, economic reforms leading to stronger growth potential and improved fiscal and external metrics could result in an upgrade. The ratings are currently constrained by Uzbekistan's low economic wealth and limited monetary policy flexibility.
Navigating External Challenges
Uzbekistan is expected to maintain strong economic growth despite significant external risks, with an estimated growth of 5.6% in 2023 and around 5.0% over 2024-2026. Economic and governance reforms, including privatization plans for government-related entities (GREs), are ongoing. The country's ability to navigate the spillover effects of the Russia-Ukraine war, declining remittances, and the decrease in money transfers from Russia in 2022 demonstrates economic resilience. The decline in remittances is attributed to various factors, including a decrease in Uzbek workers in Russia, rising living costs, and currency exchange rates.
Uzbekistan's growth is investment-led, supported by government stimulus measures, and it aims to expand electricity and gas generation, as well as mineral production through public-private partnerships and foreign investment. Economic reforms, including privatization and energy subsidy reforms, are expected to contribute to longer-term growth. The credit quality is constrained by low GDP per capita, estimated at $2,400 in 2023, despite positive demographics with a predominantly young population.
The risk of significant secondary U.S. and EU sanctions on Uzbek companies dealing with Russia remains low, given Uzbekistan's compliance with Western alliance-led sanction requirements. The adoption of a new constitution in 2023 extended the presidential term limit to seven years, allowing the current president to remain in power until 2037. Despite reforms, policy responses are challenging to predict due to centralized decision-making and limited checks and balances between institutions, leading to significant uncertainty over future succession.
Monetary Policy Reforms
Uzbekistan is expected to experience a rise in government and external debt levels, with net general government debt projected to reach approximately 28.5% of GDP by 2026, compared to a net asset position in 2017. Despite a temporary dip in 2022, current account deficits are forecasted to average nearly 5.3% of GDP through 2026, funded by a combination of net FDI and debt. While there have been improvements in monetary policy, the central bank's operational independence is viewed as constrained, and loan dollarization remains high at around 43%.
To mitigate the impact of the Russia-Ukraine war and high food prices, the government has increased wages, social spending, health allocations, tax incentives, and financial resources for exporters. Fiscal deficits are expected to be 5.5% of GDP in 2023, leading to a gradual fiscal consolidation from 2024 onwards. Government and government-guaranteed debt are anticipated to increase to 42% of GDP in 2026, posing risks, especially with nonguaranteed GRE and PPP debt potentially materializing on the government's balance sheet.
The government aims to reduce external risks by increasing domestic borrowing and introducing nonresidents to local currency debt. Despite a rising debt burden, Uzbekistan maintains a net external asset position, and usable foreign exchange reserves are estimated to marginally decline through 2026. Monetary policy effectiveness has improved, but challenges persist, such as high inflation, banking sector reliance on state-owned banks, and dollarization.
The banking sector is expected to exhibit resilience, driven by economic recovery, low retail lending penetration, and stable funding profiles, despite elevated credit costs and limited access to long-term funding in the domestic market. The withdrawal of licenses from banks in 2022 underscores a less predictable and transparent regulatory approach.
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