Fitch Ratings has affirmed Uzbekistan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' with a stable outlook. The rating is influenced by a combination of strengths, including low public debt, robust fiscal and external buffers, and high GDP growth. However, it is balanced by challenges such as low GDP per capita, governance issues, and high financial dollarisation.
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Uzbekistan's GDP data was recently revised to better capture informal economic activity, resulting in an 11.8% increase in the 2023 GDP level. This adjustment, conducted in collaboration with the IMF, particularly highlighted growth in the construction and restaurant sectors. Despite the improved fiscal deficit starting position due to this revision, the government intends to maintain its planned fiscal adjustment. The consolidated fiscal deficit for the first half of 2024 widened slightly by 0.1% of GDP y/y, with Fitch projecting an improvement in the second half, leading to a full-year deficit of 4.2% of GDP.
Fitch projects Uzbekistan's general government debt to GDP, including external guarantees, to remain stable at around 32% by 2026, significantly below the 'BB' median of 53.6%. Despite most public debt being denominated in foreign currency, the external debt carries a long average maturity of 9.2 years, with 87% being concessional. Central government deposits are projected to decrease to 10% of GDP by the end of 2026, from 13.1% at the end of 1H24.
Uzbekistan's GDP grew by 6.4% in 1H24, driven by strong investment and an increase in real wages. Fitch forecasts a full-year growth of 6.2% for 2024, with a moderate slowdown to 5.5% by 2026 due to fiscal consolidation and cooling investment. Inflation, influenced by energy price hikes, increased to 10.5% in July 2024. Fitch expects inflation to average 9.5% in 2024 and decrease gradually to 5.8% by 2026, though it will still be above the Central Bank of Uzbekistan's 5% target.
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The banking sector in Uzbekistan remains moderately profitable, with a return on equity of 11% as of June 2024, supported by a strong Tier 1 capital ratio of 13.9%. The non-performing loan ratio is reported at 4%, though Fitch estimates the actual problem loans to be higher. Credit growth has slowed due to tighter macroprudential policies, and dollarisation in the sector has also decreased.
Uzbekistan's governance improvements have been reflected in its World Bank governance percentile ranking, which has increased by 9.6 percentage points since 2020. Significant reforms, including privatisations and energy price adjustments, have been undertaken, though challenges remain in governance and corruption. Uzbekistan's ESG Relevance Scores indicate significant risks related to political stability, rule of law, and institutional quality, which continue to impact its credit profile negatively.
Fitch outlined factors that could influence future rating actions. A downgrade could result from a significant deterioration in external finances or a substantial rise in the government debt-to-GDP ratio. Conversely, an upgrade could be driven by consistent structural reforms that enhance macroeconomic stability, improve fiscal outcomes, and elevate governance standards.
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