Uzbekistan: Risk Assessment
Country Risk Rating
Business Climate Rating
- More resilient economy than the rest of Central Asia (more diversified, less sensitive to external shocks)
- Abundant natural resources (gas, gold, copper, hydroelectric potential)
- Young population (50% under the age of 30)
- International financial support, net credit position of the State
- Economic reforms (liberalization, privatization, diversification), credit development (42% of GDP, 30% to the private sector), and public investments (electricity, transport, health) encouraging FDI
- Increasingly dynamic bilateral relations and negotiations to conclude preferential trade agreements with key partners (Turkey, Singapore, South Korea, etc.) and an Enhanced Partnership and Cooperation Agreement with the European Union (EU)
- Negotiation process to join the World Trade Organisation (WTO) and an observer member of the Eurasian Economic Union (EAEU) since 2020
- Improved relations with Central Asian countries, good diplomatic relations, and strategic position between Europe, Russia, and China
- Strong dependence on Russia and China (leading trading partners, recipients of 80% of gas exports)
- Dependence on commodities, climate conditions for agriculture (28% of GDP) and expatriate remittances (15% of GDP)
- Manufacturing activity still limited (16% of GDP)
- Market structures still weakly competitive (highly concentrated in key sectors) and, although on the rise, low share of the private sector in the economy (50% of GDP)
- High unemployment, low living standards, large rural population and still widespread informality (58% of employment)
- Slow institutional progress (corruption, weakness of parliament, lack of real opposition) that constrains the business environment
Recovery driven by domestic demand and investment
In 2020, Uzbekistan recorded its worst economic performance since 1995. Its growth remained positive and is expected to accelerate in 2021. Restrictions from mid-March to mid-May 2020 and from mid-July to mid-August, including border closures and the closing of non-essential businesses, increased unemployment, and poverty, depressing domestic demand. Private consumption (54% of GDP) and services (44% of GDP) were also impacted by the decline in tourism (6% of GDP) and, due to the recessions in Russia and Kazakhstan, in remittances. The rebound in these remittances since May 2020 and the increase in social spending could boost domestic demand in 2021. It is with this in mind that an anti-crisis fund (2% of GDP) has been created to finance transfers to households, with the aim of sustaining them so that the share of households receiving social benefits doubles (to 15%). They are expected to increase the income of the rural population (50% of the total), which will also benefit from the good health of the agricultural sector which, like in 2020, is expected to contribute to growth. Investment (39.5% of GDP) is also expected to drive growth, benefiting from credit and the return of FDI in fossil and renewable energies. These are expected to be sensitive to the reform of the energy sector initiated in 2020 to make it more competitive, as well as to the public investment plan in infrastructure (6% of GDP) over 2020-2022, including energy and transport, which will boost the construction sector (10% of GDP).
Together with the slow but continued depreciation of the som and the rise in food and energy prices, the recovery of domestic demand is expected to keep inflation high. However, the postponement of the increase in utility tariffs is expected to continue bringing it down, in order to reach the target of 5% by 2023, allowing for a decline in the policy rate (14% in September 2020, target of 10% in 2021 and 5% in 2023). Although the average lending rate remains high (18%), growth of credit to the private sector is expected to continue, but it is expected to continue to decelerate after its strong growth in 2018-2019. This will ensure the stability of banks, which are mostly public and exposed to foreign exchange risks, state-owned enterprises (60% of loans), and deterioration of assets (2.6% of non-performing loans).
While the recovery in external demand would benefit the industry, the contribution of trade would remain negative and the trade deficit would widen. The increase in imports (37% of GDP), particularly of machinery and equipment (31% of the total) and oil (4%), is expected to be greater than that of exports (24% of GDP). However, the good performance of gold (27.5% of the total) is expected to continue and exports of gas (23%) to Russia and China and cotton (9%), are expected to rebound in value and volume.
Stable public finances, soon to be alleviated by privatization
Support measures in 2020 have widened the deficit, which is expected to reduce in 2021. It was largely financed by concessional borrowing, including USD 1.4 billion (2.4% of GDP) from the Asian Development Bank, the International Monetary Fund (IMF), and the World Bank. It was also financed, after the first issue in 2019, by the issuance of bonds (USD 750 million) denominated in som and in USD in November 2020. The government is expected to issue a Eurobond (USD 700 million) in 2021 and some bonds on the domestic market, serving as a benchmark for state-owned enterprises and banks entering the markets with an objective of privatization by 2025. The principle of the sale of government holdings (25% to 100% in 612 state-owned enterprises, including 32 of the largest) was adopted at the end of 2020. Another plan was adopted in mid-2020 to reduce the State's control over banking assets from 85% to 40% by selling its holdings in six banks, including two of the three largest. These plans are expected to reduce the quasi-sovereign risk to the government debt-to-GDP ratio, which, although rising and denominated in foreign currency, is medium- to long-term and concessional.
The current account deficit, which deteriorated due to the decline in remittances and a trade deficit driven by purchases of capital goods to diversify the economy, is expected to deteriorate further in 2021 with the rebound in imports. It will be financed by concessional borrowing, the return of FDI, and bond issuances. Foreign exchange reserves remain comfortable (USD 13.9 billion in October 2020, 6.7 months’ worth of import coverage), as do gold reserves (USD 19.6 billion). External debt, at 46.3% of GDP, 74% of which is owed to the public sector, is medium- to long-term.
Major economic reforms but small political reforms
President Mirziyoyev, for thirteen years prime minister to President Karimov who had ruled the country since 1991, and elected in September 2016 after the death of the latter, dominates the political scene. The mid-2020 announcement of electoral reform, including the introduction of a dose of proportional representation in Parliament or the possible advancement of presidential elections from December 2021 to March, is not expected to result in free and fair elections. Power remains concentrated in the hands of the president and the parliament consists of parties in his favor. These cosmetic reforms contrast with the many economic reforms to attract investors. This is the case of the one adopted in mid-2020, creating a panel of judges within the Supreme Court to examine disputes with large investors and to provide them with greater legal security.