Uzbekistan: Negative outlook for the ST political risk amid a sharp drop in foreign exchange reserves

Strong economic growth

Following a strong economic growth performance of 5.7% in 2022, real GDP growth is expected to remain robust this year (above 5%), despite the electricity and heating disruptions witnessed during the extremely cold winter. While the current account balance improved in 2022, boosted notably by a surge in remittances and inflows from Russian migrants and the relocation of Russian companies, the current account deficit is widening again (see graph), in particular  because of a decrease in remittances and a rise in trade deficit.

Along with the deterioration of the current account balance, the foreign exchange reserves have been under pressure and the exchange rate has depreciated (see graphs below).

Looking ahead, President Mirziyoyev – who was re-elected in July 2023, following a change in the constitution that allows him to stay in power until 2037– will face multiple challenges. Indeed, the country is vulnerable to climate change, which is presumed to greatly affect water supplies (and therefore agriculture production). Besides, the energy disruptions during the winter have shown that some infrastructures are ageing. Whereas the country used to be a gas and oil exporter, it has been a net energy importer since 2019. The very complex and tense geopolitical situation also has a spillover impact on Uzbekistan as Russia, China and Turkey are its main trade partners. Since the onset of the war in Ukraine, Uzbek good exports to Russia have more than tripled. This exposes the country to the risk of secondary sanctions in case the USA and the EU find that the country helps to circumvent Western sanctions on Russia. On the positive side, given its location, Uzbekistan could benefit from the expansion of the “Middle Corridor”, a trade route between China and the EU that aims to avoid the Russian territory.

In this context, the business environment risk rating has a stable outlook in category E/G. It is supported by strong real GDP growth and large nominal credit growth, but impeded by a high borrowing cost, depreciation of the exchange rate, moderate inflation (at 9% in August 2023) as well as the still weak institutional framework despite noticeable improvement since Mirziyoyev became president in December 2016. The ST political risk, which represents the liquidity, is currently classified in category 3/7 and has a negative outlook amid pressures on foreign exchange reserves (excluding gold), the widening of the current account deficit and the risk of secondary sanctions amid rising bilateral trade with Russia. The MLT political risk, representing the solvency of a country, is classified in category 5/7 with a stable outlook. The external debt is moderate and public finances are sound.

Analyst: Pascaline della Faille - P.dellaFaille@credendo.com