Previous Quarterly Editions
Expropriation Risk: 62 61 61 58 Political Violence Risk: 38 38 36 38 Terrorism Risk: 54 52 52 50 Exchange Transfer and Trade Sanction Risk: 58 58 58 56 Sovereign Default Risk: 58 54 54 54
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President Mirziyoyev’s efforts to modernise the economy are accelerating. In April, a presidential decree set the groundwork for the adoption of public–private partnerships as a means of financing new infrastructure projects, while a new privatisation programme will encompass the chemical, oil and gas, and manufacturing sectors, together with banking and insurance. In August, the government passed new legislation that, for the first time, will facilitate the private ownership of non-agricultural land. Meanwhile, Mirziyoyev, who came to power at the end of 2016, is continuing to drive a programme of structural reform that is overhauling the country’s many layers of bureaucracy in an attempt to make them more business friendly. Some of the earliest apparent improvements have been in the process for awarding exploration licences in the mineral sector. The changes are already having the desired effect of stimulating foreign direct investment, which rose from 100 million dollars to 400 million dollars between 2017 and 2018. While Russia has been the main investor, particularly in the hydrocarbons sector, companies from China, India, South Korea and Turkey have all made significant commitments. The government is continuing the steady process of showing that the country is open for business by hosting a major investment conference in Tashkent in October. At the global level, and as expected, Uzbekistan formally began the accession process to the World Trade Organisation in July. However, the president had caused some surprise a month earlier by raising the possibility of Uzbekistan joining the Russian-led Eurasian Economic Union (EEU) in order to ensure smooth market access for Uzbek products. EEU members account for some 70% of Uzbekistan’s foreign trade and Tashkent has already removed tariff barriers for these countries to encourage reciprocity. While the result has been cheaper goods for consumers, this liberalisation has exposed local firms to new levels of competition and the government has been getting some polite but definite pushback, most recently at a national chamber of commerce meeting in August. The president has gone much further than his predecessor in tolerating discussion of his policies, but he intervened personally to end a series of demonstrations held during July and August to highlight the continuing dissatisfaction with unaccountable officials at the local level. His economic changes continue to bring him up against the entrenched interests of the country’s political elite, and his sensitivity to criticism still reflects a degree of personal insecurity. While he was widely praised abroad recently for closing the infamous Jaslyk prison, the site of regular torture and human rights abuses in the Karimov era, the country’s judiciary, legislature and media all remain under tight regime control.
The influx of foreign direct investment during the last 18 months indicates growing international confidence in the reforms instigated by President Mirziyoyev. With the current privatisation drive and embracing of public–private partnerships, this should continue. More mundane improvements, such as a simpler export certification process, are also significant. Nevertheless, investors continue to face critical structural challenges in Uzbekistan. These include the absence of judicial independence, a regulatory environment that still remains opaque, and endemic corruption that is especially pervasive at the local level.
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In July, protests developed in the southern region of Kashkadarya when local authorities attempted to demolish a number of local businesses as part of a land clearance scheme. This appears to have triggered other demonstrations against local government action around the country, the most significant of which saw roads temporarily blocked in the western city of Urgench. President Mirziyoyev intervened in early August, using the central government to reprimand several governors for their actions while also ensuring that the protests ended. The events showed the extent of frustration with the lack of local government accountability, a newfound willingness to express that anger, and the central government’s ability to present itself as hearing these concerns while also drawing a line on what activities will be tolerated. As a result, the outcome of the summer protests has been to strengthen rather than weaken Mirziyoyev.
Uzbekistan, like elsewhere in Central Asia, has been used by terrorist groups including Islamic State as a recruiting ground in the past. While there have been no recent incidents of terrorism in the country, the government remains concerned about the potential threat as jihadi fighters continue to return from Syria and Iraq. Since coming to power, President Mirziyoyev has stepped up the country’s engagement with regional anti-terrorism initiatives. In June, Tashkent was a co-signatory to a declaration from the Shanghai Cooperation Organisation pledging a new level of coordination in anti-terror efforts. Uzbekistan also actively participates in capacity-building initiatives, such as the training offered by the OSCE on ways to prevent terrorist financing.
In August, the government removed the final 5% cap on exchange rate fluctuations and ended the limits on the amount of foreign currency that individuals can purchase. These measures complete the process of floating the som, which responded with a slight downward correction against the dollar. While the measure weakens purchasing power domestically, it will be welcomed by investors and should increase the country’s macroeconomic stability. Inflation should ease back to 15% by the end of this year from a high above 20% in 2018. While inflationary pressures remain, now that the som is floating the central bank is able to concentrate on an inflation targeting regime. New legislation is being drafted to give the bank greater independence in making policy.
TREND ► OUTLOOK ▼
Thanks to foreign exchange liberalisation, renewed stability in commodity prices, and improvements in the tax yield, Uzbekistan managed a small budget surplus last year. While recent tax reforms may result in a minor fiscal deficit this year, a surplus looks likely again in 2020. Public debt for 2019 is projected to be 23.2% of GDP. This is a level with which investors appear comfortable, and the government enjoyed a successful debut on the international bond market in February with an issue worth one billion dollars. While the more permissive credit environment could see a rise in external debt, this should be of little concern in the short or medium term.
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