RAEX-Europe confirms Uzbekistan’s ratings at BB-

Baku, Azerbaijan, Sept. 11

By Fakhri Vakilov - Trend:

German rating agency Rating-Agentur Expert RA GmbH (RAEX-Europe) confirmed Uzbekistan's ratings at ‘BB-’ with a stable outlook is driven by the country's strong economic growth, prudent government finances with moderate levels of public debt and improved transparency and governance in fiscal and monetary policies, Trend reports with reference to the report of RAEX.

The ratings are also supported by the fast-growing banking sector, which maintains a favorable level of capitalization, asset quality and profit, read the message.

"Investments and reforms accelerate economic growth, whereas unemployment persists at high levels," the experts stated.

RAEX experts expect GDP growth in the range between 5,5 and 6 percent in 2019, with continuing growth in investment and increased domestic demand, further fostered by a series of tax cuts and wage hikes.

Meanwhile, the risks of export deterioration amid the global economic slowdown and volatility in agriculture remain.

Over the long term, economic growth will depend on the consistency and effectiveness of reforms aimed at modernizing the massive sector of state-owned companies, increasing the country's investment attractiveness through reducing the level of corruption and legislative barriers to business.

The public debt of Uzbekistan (direct and state-guaranteed) at the end of 2018 amounted to $10 billion, or 20, 5 percent of GDP, and in August 2019, the public debt increased to $11,7 billion.

In general, the current government indebtedness level is acceptable and one of the lowest among CIS countries, considering also its favorable terms and maturity structure, as it consists mainly of long-term and concessional borrowings from international organizations and foreign governments.

The only downside risk in terms of public debt is the fact that almost 100 percent of total public debt is denominated in foreign currency, making it highly sensitive to changes in the exchange rate.

The impact of this risk will gradually decrease if the issue of government UZS-denominated bonds in the domestic market, the share of which is still low, continues.

Experts stated that, considering a further depreciation of the national currency and the ongoing policy of external borrowing, the public debt to GDP ratio will reach 23,5-24 percent in 2019.

“We expect annual inflation to slightly exceed the CBU forecast interval between 13,55 percent and 15,5 percent in 2019, pushed by heightened inflationary expectations, strong domestic demand and further liberalization of energy prices,” experts of RAEX noted.

Regardless of the progress made by the monetary authorities in implementing inflation targeting and improving liquidity, we note that the efficiency of the transmission mechanism remains low, which is still limited by the credit market regulation, low independence of the CBU and underdeveloped domestic capital markets.

"Besides, the level of financial dollarization remains elevated due to the high demand for foreign currency loans and still insufficient confidence in the national currency," they said.

Fueled by the liberalization of foreign exchange operations, increased demand for fixed capital investments, and reduced import duties on a number of goods, the import rose by more than a third in 2018, read the message.

Although the export grew slightly by 11 percent and stable contribution of remittances amounted to $5,7 billion, the current account shifted from a surplus of 2,5 percent in 2017 to a deficit of 7,1 percent in 2018.

“We expect that in 2019, the current account deficit to remain broad, as imports continue to grow through higher investments in modernization, outperforming commodity exports, which represent about 80 percent of total exports, with gold and gas accounting for more than half,” RAEX reported.

Nevertheless, the risks of deterioration of the external position are offset by the moderate level of external debt with a favorable maturity and buffer in the form of significant international reserves which amounted to $27 billion as of August 2019, covering almost 13 months of imports, said the message.

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Follow author on Twitter:@vakilovfaxri

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