Previous Quarterly Editions
Expropriation Risk: 61 58 55 56 Political Violence Risk: 38 38 39 39 Terrorism Risk: 52 50 50 50 Exchange Transfer and Trade Sanction Risk: 58 56 58 60 Sovereign Default Risk: 54 54 54 56
TREND ▲ OUTLOOK ▲
Since coming to power in late 2016, President Shavkat Mirziyoyev has embarked on an ambitious set of economic and administrative changes. At the end of 2019, the government set out further plans for extensive capital market reforms that are intended to earn Uzbekistan the status of a frontier market for foreign investment by 2025. The emphasis was also on privatisation, with a new push to sell stakes in major state corporations. The oil and gas company Uzbekneftegas and Uzbekistan Airways were among a list of 240 state-owned enterprises for sale or preparing an IPO. The transformational change in the country’s approach to economic policy under President Mirziyoyev has been widely noted and applauded. However, despite the progress, there is a growing sense that the benefits of Uzbekistan’s renewed economic growth are not being felt at all levels of society, particularly in the provinces. Moreover, there is now concern that the economy is once again becoming dominated by oligarchic figures within and closely affiliated to the circle around the presidency. There has also been a steady growth of Russian influence in the economy, particularly in the energy sector. Moscow is keen for Uzbekistan to join the Eurasian Economic Union (EEU), the trade bloc which it dominates. While membership would potentially open new markets to Uzbek goods and ease conditions for Uzbek migrant workers, Tashkent is showing increasing caution about being beholden to Moscow on economic issues. Instead, it is maintaining its commitment to meeting the requirements for membership of the WTO. At the same time, China has grown to be its largest trade partner as well as its largest source of credit, a relationship that Tashkent has been eager to cultivate. The challenge now for President Mirziyoyev’s government is to maintain the direction towards economic liberalisation and balance its international interests while coping with the severe impact of the COVID-19 virus. After limiting cross-border and some internal travel in mid-March 2020, the government moved to full lockdown for Tashkent and other major cities from March 24 2020. This included a shutdown of public transport and a requirement to wear masks when outside. The economic challenge of the virus is made worse by the heavy reliance of households outside the main cities on remittances from the two million Uzbeks who work abroad. These are worth as much as 15% of GDP but are quickly drying up. Meanwhile, the impact of the virus in China, Russia and Kazakhstan will reduce the regional demand for Uzbek imports. In the long term, the ambitious targets set by the president at the beginning of the year, which included a doubling of GDP within five years, will have to be set aside. As the focus switches from growth to economic security, questions about the distribution of the country’s wealth will become more pointed. This, in turn, will highlight at home and abroad how far political reform has trailed economic progress in recent years. In the legislative elections at the end of 2019, the same five government-approved parties won approximately the same number of seats, and no new parties were permitted to field candidates.
TREND ▼ OUTLOOK ►
The new law covering commercial investment that came into force at the start of the year brings together a range of disparate provisions into one single piece of legislation. Together with the recent formation of a Foreign Investors’ Council, it represents further tangible progress towards the ultimate goal of a market economy. Nevertheless, investors are still likely to encounter difficulty with the implementation of these laws. Government bureaucracy remains extensive and opaque, and the judiciary cannot be considered independent. Moreover, foreign investors will increasingly find themselves competing with a growing oligarch class that enjoys strong political connections.
TREND ► OUTLOOK ▲
Minor demonstrations at a local level are now common in Uzbekistan but will invariably concern immediate issues such as abuses by local officials, regional shortages or poor provision of public services. President Mirziyoyev has built much of his positive reputation on listening to these grievances and positioning the central government as a source of assistance. This has helped to prevent local issues from cohering into a broader wave of discontent. That said, in the face of intensive measures to battle the virus, the government will have to carefully monitor the social situation as unemployment spikes and remittances collapse. The crisis is also unfolding amid a demographic boom, which is increasing the demand for employment as more young men enter the workforce.
Uzbekistan has been a source of recruits for Islamic State in recent years, and the government takes very seriously the prospect of their return as IS loses its foothold in the Middle East. In January 2020, it arrested a group of individuals on charges of spreading extremist ideology. However, Uzbekistan has not been subject to any radical violence in recent years and some of this emphasis on the risk of terrorism is still being used to justify aspects of internal security that are aimed at dissent rather than extremism. While President Mirziyoyev initially sought to relax restrictions on public expressions of religion, particularly in schools and universities, the government appears to be reversing course as part of a wider check on expression.
Following the completion of a two-year process to float the som, Uzbekistan has experienced a boom in imports, largely in the form of capital goods. This has pushed inflation into double digits and resulted in a current account deficit of 6.5%. However, the government considers the rise in inflation as a necessary consequence of the growth in capital investment that is desperately needed to secure the country’s future growth. It is prepared to wait for inflation to fall as the initial flow of imports slows, and there are no plans to limit capital flows in the near term.
In mid-March 2020, President Mirziyoyev moved fast to authorise new external borrowing of one billion USD to help the government cushion the economic impact of the COVID-19 outbreak. Although Uzbekistan is nowhere near as dependent on oil and gas exports as neighbouring Kazakhstan and Turkmenistan, it will be hurt by falling commodity demand as the global economy slows. Government debt has risen significantly in recent years as a result of currency reform, state-led capital investment and more engagement with foreign lenders, particularly China. Even so, it was only 23% of GDP at the end of 2019 and both the government and the investment community, which was enthusiastic about the country’s first sovereign and corporate bond issuances last year, are prepared to see debt levels increase considerably to ensure an effective response to the virus crisis.
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