Uzbekistan Economics - Government Prepares for Shock

The Uzbek government will ramp up expenditures to support the country's economy, creating a $1 bln crisis fund. It will also seek financing from international organizations. Both the budget and current account deficits will widen this year, though government officials still see the economy growing, albeit at a slower pace of 3-4%. While borrowing conditions on the capital markets could remain unfavorable for some time, the government can tap its reserves, including $2 bln of cash and $12 bln in national fund assets. On a conference call with investors, officials were optimistic that the country is well prepared to withstand the current shock.To fight the spread of Covid-19, on March 15 the government introduced travel restrictions (including on international flights, public transportation and car travel), closed its borders (except for trade), shut down schools, universities and stores (all except for grocery stores and pharmacies), and cancelled public events and religious gatherings. Still, important sectors of the economy continued operating, including agriculture and metals and mining, as well as some manufacturing and construction segments. These measures will negatively affect growth this year, but officials still expect the economy to grow, albeit at a pace of 3-4% versus the previous projection of 5.5%. To support the economy, the government has created a $1 bln crisis fund, including additional funding for health care (for medicine, the cost of quarantines and medical workers' salaries), social benefits for low-income families and interest subsidies for affected businesses. The higher budget spending and lower revenues will widen the deficit, which could reach 4.7-5.7% of GDP, on the government's numbers, up from an initially planned 0.5% deficit. The government plans to plug the gap with help from IFIs (it has penciled in $1 bln of support) together with its own reserves - it has around $2 bln of cash on Finance Ministry accounts and $12 bln in a national fund, part of the $30 bln FX reserves. Borrowing conditions on the capital markets currently look unattractive, but the government could consider going to the market once they improve in four to six months, it says.Uzbek officials have said that at this stage the liquidity situation in the financial sector remains manageable, with no deposit outflows from banks seen so far, while the central bank has provided liquidity to banks through repo and swaps. To ensure that corporates have sufficient liquidity for working capital, it has launched a UZS30 trln revolving credit facility. Uzbekistan has also introduced loan payment holidays for both individual and corporate borrowers, including the deferral of both principal and interest payments until October. They will cover a total of UZS20 trln in loans (UZS15 trln corporate and UZS5 trln retail). Banks have been allowed to not increase loan loss provisions on these restructured loans, but elsewhere they continue operating within the usual capital requirements.Uzbek officials sound quite confident that the country has enough resources and is well prepared to withstand the current shock. We are updating our own forecasts for the Uzbek economy this year and will provide an update soon.