Uzbekistan: Long-term prospect remains positive despite recent downgrade of ST political risk rating

Resilient and strong economic growth

The Uzbek economy has been very resilient to external shocks as real GDP grew strongly over the past two years. This is largely explained by the large inflow of Russian migrants and money as well as rising export revenues. These export revenues are notably resulting from increased bilateral trade between Uzbekistan and Russia. However, the higher bilateral trade is not without risk as it heightens the possibility that the West imposes secondary sanctions on companies that help to circumvent Western sanctions on Russia.  

ST political risk rating downgraded to category 4/7

Credendo takes into account the risk of secondary sanctions when assessing the ST political risk. The latter has been downgraded recently as Uzbekistan’s gross foreign exchange reserves have been on a downward path since their peak in 2020, despite a recent rebound (see graph). Moreover, the current account deficit widened in 2023 as current account receipts increased less rapidly than current account payments. This happened amid notably a decrease in remittances and lower growth in China, one of Uzbekistan’s main trade partners along with Russia.

Stable business environment

Supported by strong and resilient growth and large access to credit, the business environment risk is classified in category E/G. The main risks arise from structurally large but decreasing inflation (at 8.2% in February 2024), the high lending rate and the relatively weak but improving institutional framework. Indeed, over the past decade, World Bank governance indicators have improved vastly as shown on the graph. These major improvements are largely explained by the structural reforms put in place since 2016. These reforms have also vastly improved many other factors such as the access to foreign exchange reserves, publication of macroeconomic figures, ties with neighbouring countries, conditions for foreign investors, governance in state-owned enterprises and alignment of legislation with World Trade Organization (WTO) rules and regulation as the country aims to join the WTO.  Looking forward, a key challenge lies in the improvement of the water and energy infrastructure as highlighted notably by the heating and energy shortages witnessed during the winter of 2022–2023. 

Stable outlook for MLT political risk

Along with the opening of the economy, the current account balance deteriorated and external debt increased. That being said, Uzbekistan’s external debt remains at a moderate level of less than 65% of GDP in 2022 and 150% of current account receipts. Public debt is also moderate (at less than 40% of GDP in 2023) despite the large fiscal deficit of 5.5% of GDP posted last year. Due to the complex geopolitical environment and fallout from climate change, the MLT political risk of Uzbekistan is classified in category 5/7 with a stable outlook. Still, MLT prospects are positively supported by the continued implementation of significant structural reforms. 

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