The average growth rate of 5% in recent years. Historically (2000-2015), the economy of Uzbekistan has been characterized by high growth rates of more than 7%, that were the result of industrial production growth due to extraction and export of energy resources and agricultural production. The nominal GDP in 2018 amounted to 407.5trln sum ($50.5bn). Current economic growth rates are noticeably lower than historical ones and average 5.1%-5.7%, but the data is supported by a large amount of statistical data. The main contribution to real GDP growth in 2018 was made by industrial production (2.7pp), other services (1.0pp) and construction (0.6pp). According to the results of 9 months of the current year, the growth rate of real GDP amounted to 5.7% yoy. Large state-owned enterprises continue to play the dominant role in the structure of the economy and it is planned to achieve a noticeable reduction by 2022. Current plans implies sale of a government stake in at least 20 enterprises through an IPO (SPO), the issuance of bonds of 50 state-owned enterprises, as well as reduction non-core assets of state-owned enterprises by 50% by the end of 2022.
The increase in investment inflows. In December 2018, S&P for the first time ever assigned the Republic of Uzbekistan a long-term rating of BB- with a stable outlook. In June of this year, the ratings were affirmed unchanged. In May 2019, the Fitch Ratings rating agency also affirmed Uzbekistan's long-term ratings of BB with a stable outlook, which were assigned in 2018. Obtaining ratings of international rating agencies preceded Uzbekistan's placement of its first sovereign 5-year and 10-year Eurobonds in February this year for a total of $1bn. In addition, a few days ago the first issue of Eurobonds in the recent history of Uzbekistan was made by a corporate issuer – UzPromStroybank that placed international bonds on MTN in the amount of $300mn. In addition to capital inflows in the form of sovereign debt and attracting corporate debt there is observed a high rate of foreign direct investment (FDI) in the country, as well as investments from the state development institutions. In 2018, investments in Uzbekistan were carried out mainly through commercial loans within the country, loans and investments against state guarantees that increase the debt burden on the economy, as well as through development funds that expand government support and presence in the economy. In the current year, there are changes in investment areas. If in 2018 a significant part of investments was directed to the development of the country's raw materials sector (22% of all investments), then this year over the past 9 months there has been a significant investment inflow in the manufacturing industry (27.2% of all investments), in housing construction ( 11.6%) and in agriculture (8.4%). In total, over 9M2019, investments in fixed assets amounted to 134.0 trillion sum ($14.3bn), an increase of 46.0% yoy.
Liberalization of the currency regime. In September 2017, the liberalization of the exchange rate regime took place in Uzbekistan, as a result of it was possible to unify the exchange rate instead of several exchange rates that previously existed for various reasons (official rate, black market rate and stock exchange clearing rate). Since 2017, the liberalization of monetary policy implies the exclusive use of market mechanisms for the exchange rate of the national currency against foreign currencies (free float). By the end of 2017, the national currency rate decreased by 93% from the pre-devaluation level. In 2018, the national currency of Uzbekistan strengthened from 8 160 at the beginning of the year to 7 794 sum per US dollar at the end of the year (+ 4.5%). This strengthening of the national currency was facilitated by the inflow of foreign currency through foreign economic channels in the form of investments and the growth of remittances from the Russian Federation. The depreciation of the national currency in August of this year was accompanied by further liberalization of the currency regime, under which the population of the republic was allowed to purchase foreign currency from August 20 after 6 years of the ban. Also, the Central Bank of the Republic of Uzbekistan abandoned the target currency corridor of 5%, arguing this decision by a notable depreciation of the currencies of the countries of trading partners. As a result, the national currency of Uzbekistan depreciated by the end of August by 8.1% to 9 369 sum per US dollar, and as of the end of the 3rd quarter it reached the level of 9 435 sum per US dollar, having depreciated by 12.3% since the beginning of the year.
The Central Bank of the Republic of Uzbekistan expects a slowdown in consumer inflation. The effect of the devaluation of the national currency translated at the inflation, which spiked 20% yoy in March 2018 and by the end of 2018 amounted to 14.3%. Over 9M2019, inflation accelerated to 16.0% yoy. At the same time, the Central Bank forecast for inflation in the framework of the MCP at the end of 2019 is 13.5-15.5% yoy. In 2020, the regulator predicts a decrease in inflation to 10-12% yoy, and in 2021 expects inflation to slow to less than 10%. In 2018, the Central Bank of the Republic of Uzbekistan tightened monetary conditions by increasing the refinancing rate from 14% to 16% to limit the inflationary “overheating” of the economy from consumption. Despite the slowdown in inflation, lending growth rates remain high, which increase the likelihood of further tightening of the monetary conditions in the country. Inconsistency of fiscal and monetary policies (stimulating fiscal policy), the influx of investments and cash income from abroad, and the expected liberalization of energy prices will support a two-digit inflation rate.
The expansion of the trade account deficit. The trade balance of Uzbekistan in 2018 amounted to $5.3bn (-10.5% of GDP). According to the results of 9M2019, the trade balance was also negative at $4.3bn. The growth rate of imports for 9M2019 at + 31.5% yoy ($18.0bn) is determined by the expansion of production due to the transfer of technology and the import of cars and equipment that is not produced in the territory of the republic, as well as a consequence of increasing the volume of production of automotive equipment. Export of goods from Uzbekistan increased by + 45.5% yoy and amounted to $13.7bn. We believe that the trade deficit at the level of 2018 will remain until 2022 with a subsequent slight reduction. The current account deficit will also remain in the horizon 2019-2023 at an average of 3.0bn.
Export opportunities are limited. The main export commodities of Uzbekistan are gold, natural gas and metals. In 2012-2018 Uzbekistan exported 348 tons of gold to Switzerland (according to ITC according to statistics on mutual trade of countries of trade partners), during the same period Kyrgyzstan sold 78 tons of gold to Switzerland. Other countries in the region carry out their own gold mining and processing. Significant competition for the supply of natural gas to China from Uzbekistan is observed by natural gas from Turkmenistan, whose export volume in 2018 amounted to 25 million tons compared to 4.8 million tons. The export of copper from Kazakhstan to China significantly competes with the Uzbek export of copper. So, in 2018, Kazakhstan shipped 220.1 thousand tons of copper to China against 22.6 thousand tons. The export of Uzbek copper to Turkey amounts to 44.7 thousand tons against 113.5 thousand tons of export of this metal from Kazakhstan. Another point of export of the Republic of Uzbekistan can be called the export of labor. According to the official figures, the unemployment rate is 9.3% of the economically active population, or about 1.4mn people. Such a volume of unused workers in the economy will continue to serve as the basis for the export of labor resources to neighboring countries.
The banking sector is expanding its participation in the economy. As of October 1, the banking sector of the Republic of Uzbekistan is represented by 30 credit organizations, of which 13 are state-owned banks. Banking assets to GDP as of October 1 of this year, in our estimation, make up about 55.4% of GDP (290.9trln sum or $30.8bn according to the Central Bank of the Republic of Uzbekistan), while the ratio of loans to GDP is 44.7% (234.7 trillion sum or $24.8bn). The growth dynamics of banking assets in Uzbekistan remains high. So, in 2017, the growth of banking assets amounted to 98.2% yoy, and in 2018 already 28.7%. In 2017, lending to the economy grew 2.1 times (taking into account the effect of devaluation), and in 2018 its growth amounted to 51.4%. As of October 1 of this year, the capital adequacy ratio is 15.6%, and the total capital of 30 banks is 34.0 trln sum (+ 49.4% yoy) or $3.6bn. The return on bank assets is 2.2% with a combined profit of 3.2trln sum, while the return on equity is 18.2%. The loan portfolio as of October 1 of this year grew by 55.1% yoy and amounted to 234.7trln sum ($24.8bn).
