S&P Global Ratings affirmed its long- and short-term foreign and local currency sovereign credit ratings on Uzbekistan at 'BB-/B'. The outlook remains stable. The stable outlook reflects Uzbekistan's favourable growth prospects over the next 12 months. Risks are associated with increasing external and net general government debt, albeit at moderate levels.
A potential rating downgrade could result from a continued rapid increase in external and government debt, leading to fiscal and balance of payments risks, particularly if the anticipated benefits from related projects do not materialize as planned. Conversely, the ratings could be raised if reforms lead to stronger-than-expected medium-term growth potential, with positive spillover effects for the fiscal and external positions.
Uzbekistan initiated a second phase of reforms as part of its economic modernization agenda that began in 2017. These reforms aim to address issues regarding energy security, the high fiscal cost of subsidies, and rising gas imports. The government raised electricity and gas tariffs since October 2023 and is working with international financial institutions and foreign investors to attract investment into key sectors such as electricity generation, green energy, gas production, and mining. S&P expects these reforms, along with a renewed push for more market-friendly policies, to drive strong annual growth exceeding 5% on average through 2027.
However, sizable investments under the development plans are driving up Uzbekistan's net general government and external debt. S&P forecasts still-elevated deficits of 7.6% of GDP annually on average over 2024-2027, given continued import growth. Uzbekistan's net general government debt remains moderate in a global comparison, projected to reach 31.7% of GDP by the end of 2024.
S&P forecasts economic growth in Uzbekistan to average 5.2% over 2024-2027, slightly below the 6% of 2023. Economic and governance reforms, including planned hikes to energy tariffs, will support the country's investment prospects. Decision-making in Uzbekistan will remain centralized, with a perception of corruption that is high, albeit improving.
Uzbekistan is expected to see a significant rise in its net general government debt, reaching 38% of GDP by 2027 from a net asset position in 2017. The country's current account deficits are projected to average 7.6% of GDP through 2027, primarily financed by concessional external debt and to a lesser extent by net foreign direct investment (FDI). Despite improvements in monetary policy, the central bank's operational independence is seen as limited, and loan dollarization remains high at over 40%.
To counter the effects of the Russia-Ukraine war and high food prices, Uzbekistan increased social spending and wages in 2023, leading to a fiscal deficit of 5.5% of GDP, higher than the budgeted 3%. The government plans gradual fiscal consolidation from 2024 through subsidy reforms, better-targeted social spending, and the removal of some tax exemptions. Authorities expect savings of about 1 percentage point of GDP this year from higher energy and gas tariffs, with further improvements expected as the government addresses the grey economy and improves operations at government-related entities (GREs).
Gross government and government-guaranteed debt are projected to increase to about 46% of GDP in 2027 from 40% in 2023. The state debt law sets a permanent debt ceiling at 60% of GDP, with corrective measures if it breaches 50%. Nonguaranteed GRE and public-private partnership (PPP) debt, totalling about 8% of GDP in 2023, pose a risk if they materialize on the government's balance sheet. The government is increasing domestic borrowing to reduce exposure to currency fluctuations and build domestic capital markets.
Uzbekistan's exports rely heavily on commodities, particularly gold, which constituted 42% of goods exports in 2023. The country's usable foreign exchange reserves are expected to decline through 2027 due to falling gold prices and ongoing current account deficits. High current account deficits and increasing external debt raise the balance of payment risks, with FDI inflows remaining relatively low despite a pipeline of privatization projects.
Uzbekistan's monetary policy effectiveness improved, with inflation targeted to reach 11% in 2024, falling gradually to 6.5% by 2027. The banking sector remains resilient, supported by favourable economic growth prospects and low penetration of retail lending. Dollarization, though declining, remains high at about 43% of loans and 30% of deposits as of March 31, 2024.
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