Uzbekistan Virtual Trip - We Retain a Positive Outlook

Last month, we held a series of video conferences with representatives of the Uzbek Finance Ministry, the Central Bank of Uzbekistan, the European Bank for Reconstruction and Development and several Uzbek companies. One of our main takeaways was that the Uzbek economy has shown impressive resilience to the recent external shocks. In fact, after the initial hit from the pandemic in 2Q20, it returned to growth in the following quarter. This helped keep GDP growth in positive territory last year (1.6%), while the officials we spoke to project GDP growth this year at as high as 7%, followed by a slight slowdown to 5.5-6.5% next year. The government remains committed to its reform agenda, with privatization now being one of its top priorities. The budget deficit is expected to stabilize at around 3% of GDP starting next year, while the public debt-to-GDP ratio should stabilize at 40%. The country's fundamentals are also bolstered by its sizable FX reserves.> Fiscal balance to improve, CBU shifting to inflation targeting. The budget deficit is expected to reach 5.5% of GDP this year (including state guarantees), but the government plans to reduce the deficit to around 3% over 2022-24. This should help to stabilize the public debt-to-GDP ratio at around 40%. Meanwhile, the CBU continues to develop its inflation-targeting framework and expects inflation to slow to 5% in 2023.> Pandemic has been manageable for local banks. The Uzbek banking sector remained profitable in 2020-21 with an ROAE of 10% in 2020 and 9m21 and has not required state capital support. In the coming years, the ongoing transition away from what was historically been predominately state-directed lending toward untested commercial lending remains a broader risk.> We see high carry in Uzbekistan's sovereign Eurobonds. Events in neighboring Afghanistan this year have prevented Uzbekistan's bonds from joining peers in a rally. The Armenian and Uzbek 10y bonds both yield close to 4.25%, but Uzbekistan's economic outlook is brighter and its political risks are lower. We also believe a one-notch rating upgrade is in the cards for Uzbekistan. This would likely squeeze Uzbek Z-spreads 50 bps from the current 300 bps.> State company Uzbekneftegaz entered global capital markets this year. It placed a debut 7y, $700 mln Eurobond. The company, the country's largest hydrocarbon producer, is passing through a key period in its history, readying to launch its largest capital project - a gas-to-liquids plant. The facility will dramatically enhance the product mix, which is expected to significantly improve the company's financial performance.