Uzbekistan: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: D
Risk Assessment2
Strong growth supported by the government
Uzbekistan continued to enjoy strong growth in 2010. Remittances from Russia and Kazakhstan have begun to grow again and, in conjunction with the government's social policy, have spurred consumption. Exports strongly rebounded thanks to good performance in the automotive industry, particularly of sales to Russia, and soaring world prices for gold and cotton, the main export products after gas. Both public and private investment received support from the Industrial Modernisation and Infrastructure Development Programme. This six-year $43-billion programme (130% of 2009 GDP), financed by domestic and foreign funds, will underpin economic activity in 2011. The construction and services sectors are thus expected to sustain high growth. Remittances will, however, be highly unlikely to return to their pre-crisis levels and that could affect private consumption. And price stability, furthermore, will remain a major problem: Inflation is expected to exceed 15% in 2011, fuelled by the government's expansionary policy and low interest rates. A slight deceleration of real growth will thus be possible in 2011. But the opacity of official data makes it difficult, however, to accurately assess economic performance.
Persistence of foreign exchange restrictions
In 2011, the government will continue prudent management of public sector finances. Export revenues fuel the Reconstruction and Development Fund (RDF) set up in 2006 to finance major investments accounted for off the fiscal budget, which is thus presented as virtually in balance year after year. RDF assets now represent over 10% of GDP and exceed the stock of public debt. Uzbekistan enjoys moreover large foreign exchange reserves accumulated thanks to the persistence of current account surpluses. Some foreign exchange restrictions have nonetheless remained in force and complicate the execution of international transfers by companies. An unofficial exchange rate is thus in effect on the black market, fostering corruption and fraudulent accounting and ultimately resulting in re-dollarization of the economy. In 2010, the proportion of bank loans and debts denominated in foreign exchange thus increased again after several years in decline. This trend, associated with the sharp expansion of credit during the crisis, could give rise to additional risks within a banking system moreover relatively underdeveloped compared to other regional countries.
An unsecure geopolitical environment
The Uzbek regime is characterised by a high concentration of power around 72-aged President Karimov, re-elected in 2007 for a new seven-year term. Little change is likely in the domestic scene barring deterioration of the president's health, which would pose the question of his succession and could heighten political tensions. Highly exposed to mafia networks and the ascendance of radical Islamist movements, Uzbekistan suffers moreover from conflictual relations with neighbouring countries. Tensions in Kirghizstan could destabilise the Fergana Valley while the construction of a huge dam in Tajikistan threatens, according to Uzbek authorities, to disrupt their country's water supply. And the business climate, meanwhile, presents many shortcomings with the World Bank ranking Uzbekistan no higher than 190th out of 212 countries for the regulatory quality, law enforcement, and corruption.
Strengths
- Extensive natural resources (gold, cotton, and natural gas)
- Large labor pool
- Large current account surpluses and foreign exchange reserves
- Reduction of foreign debt
- Strategic position at the heart of Central Asia
- Ambitious public/private investment programme
Weaknesses
- Limited economic diversification coupled with dependence on raw material price
- Dependence on raw material prices
- Relatively undeveloped banking sector
- State interventionism
- State interventionism and difficult business environment
- High inflation