The credit rating agency Standard & Poor’s (S&P) has expressed concerns regarding the privatization of Uzbekistan's state-owned banks, SQB and Asakabank, citing the state share in the banking sector and preferential lending programs as primary obstacles. These factors, as per to S&P, diminish the effectiveness of the Central Bank of Uzbekistan's monetary policy transmission mechanism.
Privatization Plans and Challenges
Banking Sector Sustainability
Despite these challenges, certain factors contribute to the sustainability of Uzbekistan's banking sector. Economic growth, rising disposable income, and low retail lending penetration (less than 10% of GDP) are positive indicators. However, the local market’s limited access to funding and unpredictable regulatory environment remain areas of concern.
Fiscal and Economic Outlook
Starting in 2024, S&P forecasts fiscal consolidation driven by higher energy tariffs, improved targeting of social assistance, and the elimination of some tax breaks. These measures are expected to save the government 1% of GDP from tariff reform alone. Additionally, efforts to combat the shadow economy and enhance management in state-owned companies are anticipated to boost budget revenues.
Risks and External Debt Concerns
S&P analysts also highlight risks associated with the unguaranteed debt of state-owned companies and public-private partnership (PPP) projects. Should these projects underperform, repaying borrowings, especially in foreign currency, could become problematic.
A high current account deficit and growing external debt pose additional risks to Uzbekistan's balance of payments. The surge in imports in 2023 was driven by one-time factors, but numerous ongoing investment projects necessitate a sustained high level of import supplies.
“Along with the increase in gas consumption by households, large projects such as Uzbekistan GTL, Shurtan gas chemical complex, and gas chemical complex based on MTO (Methanol to Olefin) technologies will increase gas consumption and imports during our forecast period [until 2027],” the S&P review states.
Against the backdrop of a slight decline in investment from Russian companies and a concentration of investments in the extractive industries, S&P forecasts that the current account deficit will continue to be financed by increasing external government debt. Consequently, the Central Bank of Uzbekistan's foreign exchange reserves are expected to decrease by 2027.
Earlier Daryo reported that one of the main challenges highlighted by Mamarizo Nurmuratov, Chairman of Central Bank of Uzbekistan, is the transformation of corporate governance within these banks two banks, a crucial step towards their privatization. Efforts have been ongoing over the past two years to address this with Asakabank, led by the European Bank for Reconstruction and Development (EBRD). Similarly, the International Finance Corporation (IFC) has been key in preparing SQB for privatization.
"At SQB, initial steps towards privatization have already been made, with three international financial institutions (IFC, EBRD, and ADB) providing credit lines that will eventually be converted into shares of the bank," Nurmuratov explained.
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