TASHKENT, Uzbekistan, December 10. Standard & Poor's (S&P Global Ratings) forecasts Uzbekistan’s inflation to remain near 11 percent in 2023, then average 7.7 percent in 2024-2026, Trend reports.
“In 2020, the Central Bank of Uzbekistan (CBU) adopted measures to transition to an inflation-targeting mechanism. Inflation remains high due to elevated energy and food prices, averaging 10.4 percent in the first nine months of 2023. The CBU expects it to fall to about 5 percent by second-half 2025, a delay from its earlier projection of 2024. We forecast inflation will remain near 11 percent in 2023, then average 7.7 percent in 2024-2026,” the latest report by S&P Global Ratings says.
As per S&P Global Ratings, the large footprint of Uzbekistan’s state-owned banks in the sector, at about 70 percent of total assets, and preferential government lending programs reduce the effectiveness of the monetary transmission mechanism.
“However, we note that directed lending at preferential rates has been gradually diminishing. Dollarization, although declining, also remains high at about 45 percent of loans and 32 percent of deposits as of October 2023. We expect local currency deposit growth will outpace that in foreign currency because of interest rate variances and differences in the reserve requirement for banks,” the agency’s analysts noted.
Standard & Poor's believes that Uzbekistan's banking sector will continue to show resilience, as the economic recovery and low penetration of retail lending in Uzbekistan (with household debt to GDP at below 10 percent) will remain among the key factors contributing to lending demand growth in the next few years.
“However, we think credit costs will remain elevated at about 2-2.2 percent in 2023-2024. The funding profiles of Uzbek banks are largely stable, supported by sizable funding from the state and international financial institutions and growth in corporate and retail deposits. Nevertheless, access to long-term funding remains scarce in the domestic market. While the license withdrawals affecting Turkiston Bank and Hi-Tech Bank in 2022 suggest a clean-up of weaker institutions, they also underpin our view of a less predictable and transparent approach to regulatory actions,” S&P said.
Earlier this year, Mamarizo Nurmuratov, Chairman of Uzbekistan's Central Bank, stated that the CBU will work to reduce inflation expectations among enterprises and the general public through a new inflation targeting system.
"In the past few years, fiscal policy and ensuring financial stability have become key aspects of the economic development of all countries. When regulating the monetary policy of a country, it is important to determine the strategy of economic policy and its potential consequences. In addition to price stability, the Central Bank should pay attention to financial stability and financial consolidation," he said.
According to him, the main challenges to financial stability are increased foreign exchange demand supported by fiscal policy measures and limited credit policy transmission.