2021 December-January Analysis Featured

TBC Capital: Uzbekistan proving to be a resilient, emerging market

Uzbekistan embarked on an ambitious reform path in 2017 that liberalized the economy and signaled to the world that the country was open for business. TBC Capital’s recent report titled Uzbekistan: The Three Pillars explores three noteworthy macroeconomic phenomena that are distinguishing the country from other emerging markets.

Diversification of exports

TBC Capital’s analysis shows a resilient emerging market that has weathered the worldwide COVID-19 economic crisis and boasts a strong outlook for the coming years. Uzbekistan’s economy sustained positive growth of 1.7% in 2020 while other countries saw GDP growth rates plummet below zero. The increase of just half a percent-age point in its budget deficit to GDP ratio in 2020 is a feat enviable by developed and emerging markets alike.

Uzbekistan’s export market is dominated by gold, indus-trial metals, natural gas, cotton, textiles, and fruits and vegetables. TBC Group’s Chief Economist Otar Nadaraia notes that the country’s diverse range of exports has made it particularly resilient during global economic downturns. “It is not surprising for those familiar with Uzbekistan’s economy that it registered positive growth during the pandemic. While on one hand the minimal exposure of HORECA industries resulted in less revenue loss during the pandemic, this resilience can be largely attributed to the country’s diversification of exports.”

Although still heavily reliant on commodities, Uzbekistan benefits from the fact that the prices of its exports are not correlated with each other. “This is why the country did well during COVID-19. When the pandemic hit and the price of some metals and gas dropped, the price of gold, which made up 38.6% of the country’s exports, increased. As the world started to recover and gold prices fell, the price of metals and gas began to grow, leading to broadly balanced net revenues,” says Nadaraia.

While this diversification has created a resilient market, TBC’s analysis warns that the Uzbek economy is still vulnerable to certain global scenarios. In a period of strong USD, such as the appreciation of the dollar seen from 2014 to 2016 and the subsequent price decrease in both pro-cyclical commodities and gold, the country’s economy could potentially suffer. In order to combat this vulnerability, TBC analysts recommend that Uzbekistan consider maintaining high levels of national reserves in USD rather than gold and consider borrowing more in EUR. They also note that the country’s major trade partners practice monetary policies with considerably lower interest rates, making the use of a multicurrency portfolio a risk mitigation policy worth considering.

Liberal reforms and foreign savings

Uzbekistan’s liberalization in recent years has extended to all parts of the economy, including privatization, a digitalized tax code, trade liberalization, and central bank reform. These reforms, while still in their early phases, are paying off, having increased the country’s rank in The World Bank’s Ease of Doing Business index from 141 in 2015 to 69 in 2020. TBC’s Nadaraia views these efforts as genuine, noting that he sees “a real desire from the government to position itself as a hub for foreign inves-tors. The current reforms indicate that the government of Uzbekistan cares about its reputation with the interna-tional financial community.”

In addition to reforms, the country recently debuted in the international markets and has seen reasonable yields. The expanding presence of IFIs and a public debt to GDP ratio below 40% both indicate that the government is increasingly focusing on external savings to fund its record high investment to GDP ratio.

Industrial policy

Reforms have paved the way for the private sector to have an increasing role in driving innovation and growth in Uzbekistan; however, TBC Capital’s analysis emphasiz-es the essential part that the government must play in addressing market failures and funding the discovery of new viable industries.

Acknowledging the debate among economists over the effectiveness of industrial policy, Nadaraia offers a positive review of Uzbek practices: “While we have seen the failure of many governments that intervene in certain sectors of the economy without long-term plans for sustainability, the government of Uzbekistan has done well in this regard and built a strong track record of developing new industries.”

Commodities like cotton previously dominated the country’s export market, but recent years have witnessed the development of new higher value-added industries like textiles, cars, and fertilizers. The tourism sector, which was previously underdeveloped due to the insular nature of the country before 2017, also represents a significant potential market.