Uzbekistan’s prospective bond issues come with high risks


Jeremy Weltman
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Changing attitudes are tempting investors, but assured political reforms are likely to go unaddressed.

Uzbekistan is championing its cause, but will it bring in the crowds?

Uzbekistan, run as a repressive autocracy and a highly regulated economy for almost three decades, has hardly enticed investors requiring greater assurances on the economy and an improving business environment.

However, neither have there been any bond issues to pile into with the state remaining largely closed to inward investment.

And it shows. Foreign direct investment inflows into Uzbekistan have been vastly overshadowed by the capital winding its way into Azerbaijan and Kazakhstan in recent years.

These are countries which have far smaller populations, but also less authoritarian regimes, more liberal economies and the experience of sovereign bond issues and privatization.

Replacing the old guard

The election of Shavkat Mirziyoyev to replace Islam Karimov as president after his death in 2016 has provided an opportunity for a fresh start, which the new leader has embraced.

Lifting foreign-exchange restrictions last year was a notable step in that regard, allowing an overvalued currency to depreciate to a more competitive level, while making it fully convertible to create jobs, attract back migrant workers and bring in investment from overseas.

European Bank for Reconstruction and Development (EBRD) economists taking part in Euromoney’s survey say the steps taken to liberalize the FX regime “represent the most important economic reform for the country to date”.

The official som rate was devalued by 48% to UZS8,100 per US dollar from 4,210/$ on September 5, and it has marginally appreciated since, with the central bank intervening only to smooth volatility.

“Real GDP growth will increase moderately to 6.2% in 2018 (from 5.4% in 2017), supported by continued robust domestic investment and the stepwise implementation of reforms,” say the EBRD economists.

“Export growth will be supported by the improved economic relations with neighbouring countries … with better economic prospects for Russia and Kazakhstan, the main destinations for Uzbek migrant workers, supporting remittance inflows.”

Uzbekistan’s risk score has responded in kind, climbing 2.7 points and pushing the country 10 places higher in the global rankings to put it among the top-five most-improved credit risks worldwide in 2017.


Trade reforms are progressing, special economic zones have been set up offering lower taxes for investors and unscheduled business inspections halted.

Plans to diversify the economy, privatize state assets – eventually – and restart talks to join the World Trade Organization signal the direction of intent.

In November, the IMF noted in its discussions with the authorities there is “determination to follow up on the foreign-exchange reform by liberalizing most prices, restructuring state-owned enterprises, and removing remaining bottlenecks to international trade and foreign direct investment”.

A more efficient state bureaucracy, lowering the time taken and the cost of conducting business, has greatly improved Uzbekistan’s ranking in the World Bank’s Doing Business guide.

Pause for thought

However, while these changes are encouraging and will likely kick-start an economy that has been growing at nowhere near the 7% to 8% rates official, massaged statistics claim, slower progress on administrative, legal and political reforms will hold back the country.

And that should make investors cautious.

The new government officials appointed, the release of political prisoners and steps towards a freer media are likely to be little more than a glossy public relations exercise than a genuine attempt at reform.

Repression still is practised wantonly by the powerful security services, and economic reforms are just a tool for reinforcing the regime’s legitimacy – replicating the strategy employed by other countries in the region to achieve greater prosperity, and stability, than allowing western democracy to take hold.

This is still reflected in Uzbekistan’s low ranking of 132nd out of 180 countries in Euromoney’s survey, leaving the country languishing in tier five, the worst of Euromoney’s survey categories containing the world’s highest risks.

Scores for political risk indicators were upgraded last year, but apart from the government-stability criterion, all other political factors score considerably less than half the 10 marks accredited by the survey’s contributing experts.

The same is true of all economic and structural indicators, although in each case scores were upgraded last year to account for the reforms, and invariably with high risks come potentially very rewarding returns.

Uzbekistan is conveniently placed geographically to benefit from improving transport links and increased regional trade. It has ample natural resources too, including oil, gas and gold reserves, and exports cotton, machinery and food.

And if these reforms continue, and fiscal policy is kept sufficiently tight to keep the debt in check, Uzbekistan will be most likely further upgraded by analysts this year.

The question is by how much, and whether the corruption, the connections to the elite and contractual uncertainties will be sufficiently addressed.

With the sovereign planning to tap the market, investors must soon decide.