Why Ratings Matter: Understanding the Importance of Uzbekistan’s Credit Ratings for Investors

Fitch Ratings expert shares his ideas about the strengths and weaknesses of the Uzbek economy

Fitch initially assigned Uzbekistan a credit rating in December 2018, placing it at BB-level with a stable outlook. This credit rating is a crucial step for the country, providing transparency to global investors and facilitating debt issuance on international capital markets. It is especially significant considering Uzbekistan’s ongoing reforms aimed at liberalising the economy and fostering economic growth since 2017.

Actual situation

Uzbekistan’s current credit rating reflects relatively stable public and external finances, as well as high economic growth.  However, in 2023, the public debt level stands at 36% of GDP, which is still below the median for similar countries — 52%. However, it has more than doubled from the start of the reform in 2017, at 15.3%. In addition, the foreign exchange component of Uzbekistan’s Fund for Reconstruction and Development assets has decreased by nearly 50% since 2017, amounting to $6.5 billion by the end of 2023. This reduction signifies the notable financial support provided by the Fund to cover budgetary expenditures.

Step by step

The political commitment to implement structural and economic reforms is clear. The first phase of electricity tariff reform was successfully implemented in 2023, but general reform performance could have been more stable, particularly in the privatisation of some state-owned banks. The privatisation may create some problems, considering business-model rescoping and market volatility.

Governance standards in Uzbekistan have shown improvement, although achieving consistent growth will require time due to institutional quality and independence challenges. Nevertheless, it is encouraging to note that the government is actively addressing these issues.

Additionally, Uzbekistan faces geopolitical risks due to its trade dependency on Russia and relatively high commodity dependence on exports in recent years.

Why actual Uzbekstan’s credit ratings matter for investors

For investors, Uzbekistan’s credit rating measures sovereign creditworthiness and offers valuable insights for their investment decisions. When determining the credit rating, Fitch considers various factors, including macroeconomic indicators, banking sector strength, political and geopolitical risks, and comparison with global peers.

Steps to improve the rating

Fitch has identified Uzbekistan’s vulnerabilities. Factors that could, combined or separately, downgrade the rating:

1. External financial assets: In the event of a notable drop in external finances, like a sustained decrease in remittances or an increasing trade deficit, foreign exchange reserves would decrease considerably.

2. Public finances: A significant rise in the ratio of public debt to GDP or a reduction of the government’s fiscal buffer due to an extended period of slow economic growth, lax fiscal policies, or the realisation of contingent commitments.

Factors that could, combined or separately, increase the rating:

1. Macroeconomics: Continuously enacting structural adjustment that fosters economic stability, bolsters promising GDP growth, and contributes to better fiscal outcome.
2. Public finances: Confidence in implementing fiscal consolidation measures that will effectively improve the public debt sustainability over the medium-term period.
3. Structural factor: Consistent and significant improvement of management standards.