Economy is slowing down amid negative dynamics in the real sector. Economic growth in 6M2020 amounted to 0.2% yoy (6.0% yoy in 6M2019) Construction (+ 7.3%) and agriculture (2.8%) evidenced the highest growth rates. Investments decreased by 12.8% yoy in 1H2020. Industrial production fell 1.9% yoy. Such a slowdown in the real sector of the economy will affect the country's annual GDP growth, which, according to the IMF projections, in 2020 will slow down to 1.8% yoy from 5.6% in 2019.
The CBU is easing credit conditions in response to a slowdown in business activity. The Central Bank of Uzbekistan (CBU) softened its monetary conditions for the first time since 2018 by lowering the base rate from 16% to 15% amidst a slowdown in inflation resulting from a drop in economic activity in Uzbekistan and abroad. Respective to this the CBU shifted from the initial inflation projection 12-13.5% to 11-12.5%. In June, consumer inflation amounted to 14.2% yoy, accelerating from 13.6% in March due to the rise in food prices to 18.8% yoy. The rise in prices for non-food products and services was less pronounced due to the decline in business activity. According to the June forecasts of analysts, the inflation in 2020 in Uzbekistan will amount to 12.5%. At the end of June 2019, the FX rate of the national currency weakened by 7.0% YTD and amounted to 10,173.4 sums per US dollar. The FX rate of the Uzbek sum at the end of this year is projected at 10,419 sums per US dollar (9.6% yoy).
Growth of IRs due to the growth in the value of gold. As of 1 July 2020, international reserves increased by 10.8% YTD and they reached $32.3 bn (+ 16.5% yoy). FX currency reserves increased by 0.1% (8.9% yoy) and amounted to $12.5 bn. Assets of the CBU in gold increased by 16.4% (25.9% yoy) and amounted to $19.0 bn. The share of gold in the structure of gold and foreign exchange reserves has increased since the beginning of the year from 56.0% to a record high of 60.3%. The growth in reserves was mainly due to the revaluation of assets in gold since the price of one troy ounce of gold in 1H2020 increased by 18.2% to $ 1,800.
Current improvement of external accounts. According to preliminary data from the CBU, in 1Q2020, the current account deficit decreased by 22.6% yoy to $812 mn. This was facilitated by a decrease in the trade account deficit by 6.9% yoy to $1.6 bn and on the services account by 17.1% yoy to $459 mn. Along with this, there was also a decrease in the primary income account by 38.6% yoy to $208 mn. The only item in the current account that evidenced an increase was the secondary income account, the surplus of which increased by 18% yoy to $1.0 bn. According to forecasts, the current account deficit in 2020 will expand to $5.0 bn, which will reach circa 9.5% of GDP. The IMF forecast for Uzbekistan's current account deficit is 9.4% of GDP for 2020 and 6.4% for 2021.
Slowdown of the average annual dynamics of lending to the economy. Lending to the economy by the commercial banks is gradually slowing down due to the decline in business activity and domestic and foreign demand as well. Thus, if the loan portfolio expansion in 1H2019 was 24.9% in 1H2020 the loan portfolio grew by only 15.7%. The total return on the banking sector (ROE) is 16.7%.
State assets privatization in the economy and the banking sector is staggering. The share of state-owned enterprises is currently 55% of the country's GDP. On behalf of the President of the Republic of Uzbekistan, a new strategy for the privatization of state enterprises for 2020-2025 was developed, according to which more than a thousand enterprises will be privatized. It is noteworthy that the new strategy is intended to replace the previous one, planned for implementation in 2019-2021. The banking sector has adopted an individual strategy for large-scale privatization from 2020 to 2025. In our previous report on Uzbekistan, we doubted the implementation of such large-scale reforms within the specified timeframe. The revision of plans for privatization with an increase in terms of execution only confirmed this. As a result, despite the leadership's focus on gradual liberalization of society and implementation of reforms, the economy of Uzbekistan is likely to remain in the medium term an economy with a significant share of state-owned enterprises, which will create significant structural distortions in the economy.
