Politics

Uzbekistan is coming in from the cold, and foreign investors will keep a keen eye on opportunities that might be opening up in 2019, the third year of the country’s new era. In January, reform-minded President Shavkat Mirziyoyev, who replaced the late long-time autocrat Islam Karimov in late 2016, made a highly symbolic move. He sacked National Security Service (SNB) chief Rustam Inoyatov, a feared and powerful veteran who held his post for 23 years. Inoyatov became known both as Uzbekistan's “last Stalinist politician" and as the “kingmaker” for playing a decisive role in ensuring Mirziyoyev succeeded Karimov.

When Mirziyoyev took the helm he was unofficially part of a ruling trio, namely himself, Finance Minister Rustam Azimov, who was subsequently sidelined in 2017, and Inoyatov.
It is thought that political infighting became a real problem—analysts saw the situation as akin to the power struggle that ensued following Stalin’s death in the USSR between Beria, Malenkov and Khrushchev. As such, the sacking of Inoyatov and the reforming of the Uzbek security services has apparently put an end to any risks of political instability that could blow the ex-Soviet nation off its new course.

Reports that members of the SNB were conspiring to assassinate reformist Mirziyoyev surfaced in September 2017 on the opposition People's Movement of Uzbekistan website. There were even claims that the president escaped a plot to murder him during a visit to Kyrgyzstan.

But of late, Mirziyoyev appears to be ruling uninterrupted. The past year saw him very actively touring the region, visiting European states including France and meeting Donald Trump at the White House. He seems to get the message out: Uzbekistan is open for business.

On the current evidence, with the vast majority of former officials who served under Karimov no longer in place, 2019 could bring the political calm and security that both domestic and foreign traders and investors enjoy while taking part in firing up a previously slumbering economy.

Of key importance was Tashkent’s decision not long after Mirziyoyev came to power to lift its strict currency controls. The controls long fed the Uzbek som black market, scaring away potential foreign investors who could not, for instance, arrange to easily repatriate profits.

Macroeconomics

Real GDP growth
Uzbekistan (red) vs Kazakhstan (blue)
Source: World Economic Outlook, IMF.

“While Uzbekistan’s reform push lays the ground for solid growth in the years to come, the price and exchange rate liberalisation and the reduction of subsidies has led to the adjustment of relative prices and double-digit inflation,” the European Bank for Reconstruction and Development (EBRD) observed in its latest forecast on Uzbekistan. The development bank expects growth to slow to 5% in 2018 from 5.3% in 2017 and come in at 4.5% in 2019 due to a deceleration in real income growth stemming from inflation and a further widening of the trade deficit.

The IMF sees Central Asia’s most populous nation continuing to see elevated consumer price inflation, primarily due to corrections in relative prices and wages distorted by the wrong-headed economic structures kept in place while Karimov was president. CPI inflation peaked at 20.5% y/y at the beginning of 2018, but fell to 16.5% y/y by October.

“The GDP deflator—a broader measure of prices of goods and services produced in Uzbekistan—reached 31.5 percent through the first nine months of 2018, primarily reflecting higher prices of export goods following the depreciation of the exchange rate in September 2017,” the IMF said in its latest World Economic Outlook.

The IMF attributes expectations for elevated inflation in 2019 to increases in regulated energy prices; additional wage increases for education and health care personnel; a 10% hike in public wages awarded in November; higher indirect taxes; and upward pressures on prices of exportable consumer goods, including fruit and vegetables. As such, CPI inflation could rise to 17-18% by the end of 2019, the IMF anticipated

Fiscal dynamics

“From January to September, the consolidated fiscal balance registered a surplus of 3.4 percent of GDP, relative to a [previously projected] budgeted surplus of 0.9 percent of GDP for the full year,” according to the IMF. “The over-performance of the consolidated budget reflected better-than-expected revenue collections across all revenue categories as nominal GDP grew faster than projected, improvements in tax administration, and increased financial autonomy of local governments.”

“The overall fiscal deficit in 2018 is projected to reach 2.5 percent of GDP” the IMF said, adding that it should remain on the same level in 2019.

Monetary policy

Uzbekistan’s key refinancing rate stood unchanged at 14% for most of 2018 until the Central Bank of Uzbekistan raised the rate by 2 percentage points to 16% in September. The decision was aimed at reducing inflationary pressures due to rising inflation expectations and rising exchange rate pressures on prices, the regulator noted. The exchange rate pressures were likely caused by the weakening of the ruble in August and September. The ruble’s travails have a direct effect on Uzbekistan due to its reliance on remittances from Russia, which stands as a major source of foreign exchange earnings for Uzbeks. Toughening monetary policy will help reduce inflation expectations and other inflationary risks, the regulator believes.

The central bank forecasts that annual inflation will stand within the range of 11.5-13.5% following the results of 2018.

Borrowing

Uzbekistan has been working towards obtaining a sovereign credit rating before the end of 2018 to enable it to issue its first ever eurobond in 2019. The process might spill over into 2019.

The country plans to sell between $200mn-300mn of the paper in 2019 to create a benchmark for Uzbek corporate borrowers—Raiffeisen Bank International AG has been named by officials as a potential issuer.

Uzbekistan last year began preparations to obtain a sovereign credit rating by signing a memorandum with Citigroup, noting that Citibank will become the country’s consultant. JPMorgan Chase reportedly might also play a role as an additional consultant. Uzbekistan is aiming to go on a eurobond roadshow in the first quarter of 2019.

Uzbekistan is hoping that a sovereign credit rating will allow the country’s banks and enterprises to receive foreign loans at lower interest rates.