Uzbekistan Update - Diversification Helps Shield from Shocks

Uzbekistan's economy has shown resilience during the pandemic and has managed to continue expanding. The government ramped up spending to support the economy, which could push the budget deficit to 4.5% of GDP. Still, that would be below the deficit of neighboring countries and should return to more sustainable levels after the pandemic subsides. Uzbekistan also enjoys large fiscal reserves and support from international organizations. Some risks do remain, however. First and foremost, the strong growth in investment activity in previous years was driven by government-subsidized lending. With the government planning to reduce this, slower lending could put some pressure on banks. Public debt has been growing fast, surging from 10% of GDP in 2015 to 37% this year. > GDP to grow 0.8% this year and 5.5% next. The economy took a hit from the pandemic, with GDP down by 2.5% y-o-y in 2Q20. Remittances, FDI, foreign trade and consumer spending all declined. Still, there are signs of recovery, as preliminary estimates suggest growth of 0.4% y-o-y over 9m20 (in 1H20 the economy grew 0.2%). We expect 0.8% growth for the year, followed by a rebound to 5.5% in 2021, as the pandemic and its effects should fade and external demand should rebound.> Government spending boosted to support economy, 2020 deficit could reach 4.5% of GDP. The government created a $1 bln crisis fund, which is financed by international organizations. It could also tap its reserves, including the $2 bln it has in cash, which is part of the $17.2 bln in assets held in the national fund. The higher expenditures have driven a rising budget deficit, which could reach 5.4% of GDP next year, according to official projections. In order to finance these deficits, the government has increased borrowing, mostly from external sources. This, coupled with a weaker currency, has led to fast growth of the public debt-to-GDP ratio, which jumped from just 10% in 2015 and is projected to reach almost 37% by year-end.> Higher lending was strong driver of growth in recent years. Bank loans have risen 171% since 2016 (adjusted for FX), up from 22% of GDP in 2016 to almost 44% last year. But we expect credit growth to gradually slow due to the pandemic and the coming reduction of government support, thus making less of a contribution to growth. However, the government plans to lend directly from the Uzbekistan FRD to the real sector, which should partly offset the credit slowdown.> Bond placement. Last Thursday, Uzbekistan placed a new 10y, $555 mln Eurobond at 3.7% and a 3y, UZS2 trln bond (equivalent to $192 mln) at 14.5%, which revealed good demand for Uzbek risk. We think the long end of the Uzbek dollar curve looks attractive versus regional peers and has potential for spread tightening in the current market.