Uzbekistan: Risk Assessment
Country Risk Rating
Business Climate Rating
- Plentiful and diversified natural resources (gas, gold, cotton, copper, fruits, and vegetables, plus hydroelectric potential)
- Low public and external debt, comfortable official and private foreign exchange reserves
- Ambitious economic reform and public investment program
- Population of 34 million inhabitants, half of whom are under 30 years of age
- Strategically positioned on the New Silk Road between China and Europe
- Limited manufacturing activity
- Dependent on commodity prices, rainfall and expatriate remittances
- High unemployment, lack of jobs/high labor force growth, low standard of living and widespread informal sector (41% of jobs in 2018)
- Low competitiveness due to lack of competition
- Low productivity at many state-owned companies
- State interventionism (credit, prices, administrative and customs harassment)
- Slow institutional progress: weak parliament and lack of real opposition
Growth supported by domestic demand
Uzbekistan’s economy is expected to continue growing briskly in 2020. Investment (31% of GDP) in the gas, hydroelectric and road sectors and in housing will continue to drive activity. The State will be able to count on foreign investors, who have been encouraged by measures taken since September 2017 to open up the economy, including liberalizing the exchange rate, easing price controls and reducing customs duties. Household consumption (more than 50% of GDP) will also increase, but at a slower pace, as the positive impact of remittances from the two million or so expatriates in Russia and Kazakhstan is offset by the negative effect of higher prices on real incomes. Inflation is poised to remain high, fuelled by the slow but steady depreciation of the sum, as well as by rising food prices, which are being driven by shortcomings in trading and distribution. That being said, inflation may decline at the end of the year as the effects of the sum’s 50% devaluation in September 2017 fade and as the increase in utility prices (water, gas, electricity) to bring them into line with market prices tapers off. Even when freed from exchange rate management, monetary policy is limited in its effectiveness by the practice of directed credit, which is subsidized by the State through publicly-owned banks. This explains why, despite a key interest rate of 16% and an average lending rate of 22%, credit growth should remain strong (20% vs. 40% in 2019). Services (45% of GDP), with transport and trade, manufacturing industry (16%), with machinery, automotive equipment, and the agro-food industry, construction (9%) and mining (4%) should all benefit. Agriculture (27%) may be the least vigorous sector. With gold prices heading up, but gas, copper and cotton prices under pressure, exports (20%) are set to cool, especially since external demand may be affected by the Chinese slowdown. However, since imports may decelerate by even more owing to the slowdown in the construction of infrastructure and industrial facilities, trade’s contribution to growth could go from negative to neutral.
Opening up the economy has been accompanied by a current account deficit
In 2019, the authorities embarked on major tax reforms, raising the number of companies subject to tax from 7,000 to 35,000, cutting the VAT rate from 20% to 15% and lowering labor-based taxation to combat the informal economy. The estimated cost of 2.5% of GDP has been more than offset by the surplus revenue generated by growth and the country’s already low deficit has been reduced. Uzbekistan’s debt, which is entirely external and mainly contracted with public creditors, is small, reflecting prudent management. The country issued its first bond in February 2019 at a rate of 5.4%. This solid fiscal situation could prove useful when it comes to modernizing the nation’s 1,800 state-owned companies, which employ 800,000 people or 18% of the working population. In addition, the banking system is closely controlled by the State, particularly regarding its lending policy, with 60% of loans linked to state-owned companies. Some of these firms have been weakened by the depreciation of the sum. Note that state-owned institutions account for 85% of the banking system’s assets, with the largest three accounting for one-half of all the assets.
The surge in domestic demand, triggered by the opening-up of the economy and the credit boom, has led to a sharp increase in the goods and services deficit (18% of GDP in 2018) and to the emergence of a current account deficit that cannot be offset by expatriate remittances (15%). This deficit is largely financed by concessional public loans, FDI and bond issues, making it possible to maintain reserves at a good level, equivalent to 12 months of imports, half of which are held by the Reconstruction and Development Fund. The deficit should stop widening as investment-related imports slow and investment-related exports go up. External debt has risen significantly since 2017, reaching 38% of GDP in 2019, but presents a low risk, with the State accounting for a 64% share.
A strong regime that is still keen to attract foreign investors
Following the death of Islam Karimov, who had been President since the country's independence in 1991, his prime minister, Shavkat Mirziyoyev, took over as head of state after winning a comfortable election (89% of the vote) in December 2016. Like his predecessor, he is maintaining a strong regime. The legislative elections of December 2019 were unsurprisingly won by the parties close to the government. However, Uzbekistan’s strategic plan for 2017/2021 includes measures to reform the administration, establish the rule of law, liberalize and open up the economy and develop education, health, and infrastructure. The aim is to build investor confidence and reduce unemployment and poverty. However, restrictions on freedoms will act as a breeding ground for unrest among the country’s youthful population, which the government will do its utmost to control. Ending a decade of isolationism, it has renewed ties to its neighbors, including Kyrgyzstan and Tajikistan, with which agreements on water management, transport links, the electricity grid, and border disputes have been concluded or are being negotiated. A rapprochement with Russia has taken place, resulting in possible membership of the Eurasian Economic Union, which should not interfere with good relations with China and the West.