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Fitch expects Uzbekistan to be among few sovereigns to avoid economic contraction in 2020

10 October 2020

Fitch Ratings has affirmed Uzbekistan's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook.

Uzbekistan's ratings balance a robust sovereign balance sheet, low government debt and a record of high growth relative to rated peers against high commodity dependence, high inflation and structural weaknesses in terms of low GDP per capita and weak institutional and governance levels relative to rated peers.

The resilience of Uzbekistan's ratings to the global pandemic reflects the sovereign's robust external and fiscal buffers, access to external financing and a diversified commodity export base. High gold prices have benefitted exports, public finances and international reserves. The strength of the fiscal and external balance sheets mitigates risks related to a wide current account deficit, which Fitch expects to persist, and a continued rise in the government debt ratio.

Fitch expects Uzbekistan to be among the few sovereigns to avoid an economic contraction in 2020. After dropping to 0.2% in 1H20, Fitch forecasts growth to reach 0.5% in 2020, reflecting weaker household consumption and investment, due partly to containment measures against the COVID-19 pandemic, and lower external demand. Fiscal and monetary anti-crisis measures, a sharp increase in gold prices and lower-than-anticipated decline in remittances have supported economic activity.

Under baseline scenario, growth will accelerate to 5% in 2021 and 5.5% in 2022, whereas World Bank has been expecting gowth in 2021 between 4.8 and 5.0%. The forecast of EBRD is even less – 4.5. The April report compiled by Fitch expected Uzbekistan`s economy to grow 6.8% in 2021.

Fitch forecasts the overall deficit to narrow gradually to 5% of GDP (4.6% consolidated) in 2021, and 4.4% (4% consolidated) in 2022, as revenue growth will partly accommodate the government's plans to support the recovery through social spending and investment.

The government debt set to reach 36% of GDP (including 11.2% of GDP in external guarantees) in 2020, up from 28.6% (including 8.7% in external guarantees) in 2019. Fitch projects Uzbekistan's general government debt at 42% of GDP in 2022, still below the forecast 57% for the 'BB' median. However, the debt ratio would have doubled since 2018, highlighting the fast pace of borrowing even prior to the COVID-19 crisis. The debt burden is also exposed to exchange-rate depreciation, as it is almost entirely foreign currency-denominated, closely linking macroeconomic stability and debt sustainability.

Higher gold prices have cushioned the impact of the crisis on external finances. Fitch forecasts international reserves to reach $33.4bn (15.4 months of current external payments (CXP)) by end-2020. Gold currently accounts for 54% of gross international reserves, while UFRD cash holdings represent 32%. As import demand recovers, Fitch expects international reserve coverage to decline but remain more than double the forecast 'BB' median in 2021-2022. Sovereign net foreign assets will reach 22.8% of GDP in 2020, still strong relative to 'BB' peers', but Fitch expects this to deteriorate over 2021-2022 due to increased external borrowing.

The current account deficit will widen to 6.3% of GDP in 2020, almost double the projected 3.2% 'BB' median. Increased gold exports (56% of total) have only partly compensated for the decline in other exports and remittances, while imports of goods and services have fallen significantly (-19% yoy in January-August). Fitch projects the current account deficit to widen to 7.9% of GDP in 2021 and 7.3% in 2022, significantly higher than 'BB' peers; as the recovery in import demand will outpace that of external demand.

Uzbekistan's net external creditor position is forecast at 36% of GDP in 2020, significantly stronger than that of peers (net debt of 24%), but external liabilities have increased rapidly not only due to government borrowing but higher external debt from the banking sector. Net foreign direct investments (FDI) set to almost halve to 2.1% of GDP in 2020 (3.9% in 2019) and average 3.1% in 2021-2022, directed to energy sectors like hydrocarbons and renewables.

The banking sector has preserved stability, supported by the policy response from the CBU, including liquidity injections. Capitalisation levels (capital adequacy ratio of 19.4% at end-August) remain above regulatory requirements after a significant capital increase in 2019. Although non-performing loans (NPLs) remain low (2.4% in July), asset quality will likely deteriorate due to a weaker macroeconomic outlook, and continued exposure to state-owned enterprises (SOEs) and foreign-currency risks.

Presidential elections are scheduled for 2021, and Fitch's base case is that President Mirziyoyev will seek and obtain a new term. Fitch also considers that the government remains committed to the reform programme initiated in 2017 to improve macroeconomic stability and growth prospects, decrease the state's role in the economy and address institutional and governance weaknesses.

The autumn edition of the World Bank’s Economic Update released on October 7 also forecasts that Uzbekistan is one of only two countries in Europe and Central Asia that will see positive economic growth this year as.