Previous Quarterly Editions
Expropriation Risk: 61 61 58 55 Political Violence Risk: 38 38 38 39 Terrorism Risk: 52 52 50 50 Exchange Transfer and Trade Sanction Risk: 58 58 56 58 Sovereign Default Risk: 54 54 54 54
TREND ► OUTLOOK ▼
With President Mirziyoyev having consolidated his position, Uzbekistan has continued to pursue the ambitious economic reforms that he set out on taking office in 2017. The government has started 2020 with a series of new five- and ten-year plans for areas such as agriculture, banking, and capital market development. The plan for the banking sector will concentrate state lending within one state bank and transfer non-performing loans to a state fund. The government is also making the overhauling of state-owned enterprises a priority. State oil and gas company Uzbekneftegaz recently completed a reorganisation that saw various functions of the company spun out into different commercial business units. It plans a bond issue at some point during 2020 before privatisation in 2024. Despite the progress, however, there is also an underlying realisation that the major reforms that have now been completed, which include currency liberalisation, tax reform and resetting relations with neighbours, are largely one-off measures whose economic impetus cannot be repeated. Moreover, the extent of domestic entrenched economic interests is now becoming clearer, while Moscow is also beginning to exert its interests. Russia is a key investor in the Uzbek economy, particularly the energy sector, and is increasingly keen for Uzbekistan to join its Eurasian Economic Union (EEU), partly to strengthen the bloc but also to check Tashkent’s growing trade with China. While EEU membership would improve conditions for its expatriate Uzbek workers in Russia, and Uzbekistan has substantial trade with EEU members, the political elite in Tashkent is reluctant to be bound to Russia’s economic fortunes and foreign policy agenda. As one response, Uzbekistan is now heading a separate initiative to create an exclusively Central Asian forum that delineates a stronger regional identity, with Mirziyoyev leading cooperation efforts in crucial areas such as water usage. China has also grown to be a key player in Uzbekistan, overtaking Russia in recent years to be the key trade partner and quickly outstripping all other creditors in the Uzbek economy. By the end of 2019, the Uzbek government owed China three billion dollars, a figure that has more than doubled since 2016. To facilitate further trade, China has issued RMB-denominated debt to the Uzbek central bank for the first time. Political reforms continue to the lag economic progress, however. Journalists still engage in self-censorship and remain victims of administrative pressure. Against this background, the legislative elections in December 2019 produced few surprises. The same five government-approved parties won approximately the same number of seats, and no new contestants were permitted to field candidates. Even so, the Organisation for Security and Cooperation in Europe sent election monitors as a cautious message of support and reported that it saw greater evidence of freedom of expression. However, fundamental liberties continue to be constrained and the legislature will remain deferential to the president and his agenda. That said, increasing low-level obstruction in the regions of policies set in Tashkent will remain a problem for Mirziyoyev.
TREND ► OUTLOOK ▲
Now that Uzbekistan’s commitment to reform has captured the attention of foreign investors, Tashkent is following up with a capital markets strategy for 2020–2025 that includes plans for IPOs of state-owned enterprises. Nevertheless, investors face a range of challenges, including a lack of judicial independence and the country’s extensive and opaque bureaucracy. Investors may also find themselves competing with a growing oligarch class that has strong political connections. The resumption of tariffs, notably on cement, suggests that the government will continue to support particular industries.
TREND ▲ OUTLOOK ▼
Uzbekistan is now used to demonstrations at the local level. These are often directed at corruption or abuses of power by local officials and provide an important outlet for frustration. In 2017, President Mirziyoyev increased the role of sub-regional councils in an attempt to improve oversight of city and regional officials. However, several protests during the summer of 2019 against the demolition of local businesses spread across the country and could only be resolved by Mirziyoyev’s direct intervention. With Uzbekistan now at the start of a major population bulge, the government is aware not only of the need to grow the economy but to ensure better distribution of economic benefits in the coming years.
Uzbekistan has been the source of recruits to the Islamic State in recent years. Currently, the government is in the process of repatriating Uzbek citizens from Syria and Iraq. However, despite these links and regular terror attacks in neighbouring Tajikistan, most recently on the Tajik-Uzbek border in November, Uzbekistan has not been subject to any radical violence in recent years. This is largely due to the heavy internal security apparatus created by the late President Islam Karimov. Following a slight relaxation on taking office, President Mirziyoyev has again begun to tighten controls on public expressions of religion, especially in schools and colleges.
TREND ▲ OUTLOOK ►
The government has now completed a two-year process to float the som, and citizens can take up to 10,000 dollars out of the country when travelling, more than doubling the previous level. For portfolio investors, a major milestone was reached in March when capital controls were lifted. However, the currency liberalisation and a subsequent boom in imports has pushed inflation to double digits and produced a current account deficit of 6.5%. The government argues that this is largely due to decades of underinvestment and that both the currency and the inflation rate should stabilise relatively quickly. As such, it is unlikely to limit capital flows in the near term.
Uzbekistan’s currency reforms saw government debt spike to 23% of GDP in 2019. The government’s obligations have also accelerated as a result of state lending to mostly state-owned enterprises and credits from foreign partners, most notably China. Despite this, investors remain undeterred and the country’s first sovereign bond issue of one billion dollars in February 2019 was followed with equal success in November by the first bond issuance, for 300 million dollars, from an Uzbek bank. In the long term, however, the government will have to lower the amount of state capital in the economy and increase private capital in order to ensure that the debts of state-owned banks and enterprises do not become unmanageable.
Return to contents Next Chapter