International rating agency S&P Global Ratings has affirmed Uzbekistan’s sovereign credit ratings in foreign and local currencies at “BB-/B-” with a stable outlook. This is stated in the press release of the agency.

The agency provides context by highlighting the ongoing Russia-Ukraine war, a weaker growth outlook in China and other key trade partners, and persistent inflation. Despite these challenges, the agency underscores Uzbekistan’s substantial efforts in addressing risks to both growth and social stability through the implementation of fiscal stimulus and administrative price controls.

“We estimate a fiscal deficit of 5.5% of GDP this year relative to 3.5% in our previous forecasts, because the government increased wages and social spending. We also expect fiscal consolidation will proceed more slowly since some of the social spending will be harder to reverse,” S&P explained.

Analysts believe that a portion of the debt burden borne by state-owned enterprises may transition to the government’s balance sheet. Several state-owned companies in the gas (Uzbekneftegaz) and agricultural sectors have recently experienced solvency challenges due to deficiencies in corporate governance and weakened financial profiles. This, in turn, raises concerns about potential spillover effects on the broader economy.

Nevertheless, the government has started raising electricity and gas tariffs, maintaining prices considerably lower than those observed in some neighboring countries. Liberalization of energy prices along with other economic reforms, including privatization, is anticipated to sustain economic growth at a rate exceeding 5% for the next four years, the report suggests.

As Uzbekistan addresses development needs, import and current account deficits are forecasted to rise, while commodity exports are subject to price fluctuations. The record remittance inflow of $16.9 billion in 2022, mainly from Russia, is expected to diminish.

Uzbekistan has also turned from a net exporter to a net importer of gas since domestic gas consumption has surged and production has declined.

“Uzbekistan's fiscal and external stock positions have historically benefitted from the policy of transferring some revenue from commodity sales to the sovereign wealth fund, the Uzbekistan Fund for Reconstruction and Development (UFRD). In addition, external borrowing was limited for many years under the previous regime of the former president, Islam Karimov, and it only began to rise in recent years,” the agency commented.

According to S&P, Uzbekistan’s ratings are constrained by the country’s low economic wealth, measured by GDP per capita, as well as low, though improving, monetary policy flexibility.


The agency points out that Uzbekistan’s economy continues to weather the side effects of the Russia-Ukraine war reasonably well, even though remittances from Russia have decreased since the record indicator in 2022.

In the first nine months of 2023, remittance inflows dropped by a third to $8.4 billion, following a nearly doubled figure of $17 billion (21% of GDP) for the entire 2022. This decline is likely attributed to a one-time transfer of savings post the war outbreak last year, a reduction in the number of Uzbek workers in Russia, increased living costs in Russia, and the strengthening of the Uzbek soum against the Russian ruble.

Nevertheless, remittances are still approximately 45% higher than in 2021. Russia remains the largest source of remittances in Uzbekistan, accounting for about 80% of total flow.

Government incentives, such as business tax breaks, export incentives, and social protection measures (including subsidized mortgages and free medical services for vulnerable populations), will stimulate consumption growth, even amid a slowdown in remittance inflows. Additionally, the government aims to expand electricity and gas production, along with mining activities for copper, gold, silver, and uranium. This expansion will be facilitated primarily through public-private partnerships (PPPs) and foreign investments.

In the last five years Uzbekistan’s economic growth has been largely driven by investment, with the investment-to-GDP ratio being one of the highest in the world at approximately 35%. The government has secured external loans to support projects in the electricity, oil and gas, transportation, and agricultural sectors. Foreign direct investment (FDI) inflows remain relatively low and are concentrated in the extractive industries. Even with an ambitious privatization program, analysts predict FDI inflows to rise slowly partly due to reduced investment interest from Russian companies.

Uzbekistan’s economy is estimated to grow by 5.6% by the end of 2023, followed by slightly lower GDP growth of approximately 5.2% in 2024−2026.

In October, authorities began implementing an increase in electricity and gas tariffs for businesses. Before, the long delay in executing these measures was attributed to pandemic-related challenges and external uncertainties. S&P envisions a gradual phase-in of energy price liberalization over the next several years.

According to the agency, the risk of significant secondary sanctions from the U.S. and EU targeting Uzbek companies and institutions involved in business partnerships with Russia remains relatively low — the government tries to comply with sanctions requirements. For instance, in 2022, the Russian payment system, Mir, faced partial suspension, and the purchase of UzAgroExportBank by Russia’s Sovcombank was halted due to sanctions on Russia.

The report notes the difficulty of “policy responses are difficult to predict, given the highly centralized decision-making process and less developed accountability and checks and balances between institutions.”

External debt should increase

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Analysts anticipate Uzbekistan’s net public debt to increase to approximately 28.5% of GDP by 2026 put next to net assets in 2017. Following a temporary decline in 2022, the country’s current account deficit is expected to average around 5.3% of GDP until 2026. This deficit will be funded through a combination of net FDIs and debt.

“Despite improvements in monetary policy in recent years, we still view the Central Bank’s operational independence as constrained, while loan dollarization remains elevated at about 43%,” the agency stated.

To address the consequences of the war and high food prices, the government has augmented wages and social spending this year. Authorities have boosted funding for health care, tax breaks for businesses and food importers, strengthened food price controls and financial resources for exporters.

“We expect the fiscal deficit will reach 5.5% of GDP in 2023, significantly higher than the budgeted 3.0%. From 2024, we foresee gradual fiscal consolidation on the back of electricity and gas tariff reforms, moderating capital expenditure, and better targeted social spending, along with improvements in tax collection. As the government works to reduce the gray economy and improve operations at GREs (government-related entities), we expect the tax base will gradually increase,” the document says.

The government anticipates the budget deficit to fall to 4% in 2024 and 3% in 2025. However, S&P forecasts a slower fiscal consolidation in the coming years, projecting the deficit to reach 3.7% of GDP by 2026. This is attributed to potentially higher spending on social protection such as health services, pensions and targeted support for vulnerable groups.

There are additional risks to the fiscal outlook, such as dependence on the sale of commodities such as gold, which has volatile prices. The report highlights that social expenditures might be challenging to adjust due to political reasons. Those expenditures include wages and account for approximately 50% of government spending.

Because of the higher-than-expected fiscal deficit, it is anticipated that gross public and publicly guaranteed debt will rise from 37% in 2022 to 42% of GDP in 2026. There is also a risk that the relatively large non-guaranteed debt of state-owned enterprises and joint projects in PPPs may appear on the government’s balance sheet. In recent years, state-owned enterprises have significantly increased borrowing, particularly in foreign currency, for financing energy and infrastructure projects. Despite limitations on new external debt, companies may face challenges in repaying this debt if the performance of certain projects falls below expectations or if any deficiencies in management or oversight occur.

To minimize external risks and vulnerability to exchange rate fluctuations, the government is increasing domestic borrowing. The proportion of domestic debt in the overall debt portfolio has surged to 18% as of June 30, 2023, compared to 11% at the close of 2022. Simultaneously, the government intends to persist in securing concessional debt from the World Bank, Asian Infrastructure Investment Bank (AIIB), and Asian Development Bank (ADB) to meet its development requirements.

The government’s liquid assets, estimated at 17% of GDP in 2023, are mainly held in the UFRD. Established in 2006 and initially funded by government capital injections, the UFRD receives income from the sale of gold, copper, and gas exceeding specific cut-off prices. The agency counts only the external portion of the fund’s assets into its calculation of the government’s net assets. This is because it considers the internal part, comprising loans to state enterprises and capital injections to banks, as “largely illiquid” and “unlikely to be used for debt service if needed.”

Uzbekistan’s exports remain dependent on commodities, constituting approximately 40% of merchandise exports, with gold being a significant contributor, reads the document. The current account deficit has expanded to 7.7% of GDP in the first half of 2023, mainly due to decreasing remittances and strong import growth. Higher global commodity prices and gold sales fueled a significant increase in exports in 2022.

“However, we expect gold prices to decline gradually over our forecast period from $1,850 per ounce (/oz) in 2023, to $1,500/oz in 2024 and $1,400 in 2025. Conversely, increasing copper prices could offset part of the decline,” the report claimed.

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Analysts forecast that the current account deficit will average 5.3% from 2023 to 2026, driven by imports of capital and high-tech goods.

Uzbekistan’s foreign exchange reserves are expected to experience a modest decline until 2026. This is attributed to lower gold prices and the persistent current account deficit. The Central Bank’s monetary gold reserves contribute to nearly 80% of total usable reserves. The bank is the only buyer of gold mined in Uzbekistan. The Central Bank acquires gold using local currency and subsequently sells dollars in the local market to mitigate the impact of its intervention on the Uzbek soum.

“We exclude UFRD assets from the CBU’s reserve assets because we consider them as fiscal assets. Our view is supported by the budgetary use of external UFRD assets in the domestic economy over the past four years. The UFRD’s total assets were $16.7 billion as of Oct. 31, 2023, with the liquid portion at $6.5 billion,” the agency stated.

The Central Bank of Uzbekistan anticipates inflation to fall to approximately 5% by the second half of 2025, shifting from the earlier projection for 2024. Meanwhile, S&P holds a less optimistic view, forecasting inflation at 11% for this year and an average of 7.7% from 2024 to 2026.

The agency mentioned a significant presence of state-owned banks in the sector, comprising approximately 70% of total assets. In turn, this fact coupled with concessional government lending compromises the effectiveness of the monetary and transmission mechanism.

“However, we note that directed lending at preferential rates has been gradually diminishing. Dollarization, although declining, also remains high at about 45% of loans and 32% of deposits as of October 2023. We expect local currency deposit growth will outpace that in foreign currency because of interest rate variances and differences in the reserve requirement for banks,” the review described.

Analysts predict stability in Uzbekistan’s banking sector. The factors supporting this include economic recovery and relatively low penetration of retail lending, with household debt to GDP below 10%. These conditions are expected to drive demand for loans in the coming years.

Banks get stable funding from the government, global financial institutions, and growing corporate and retail deposits. However, access to long-term credit in the domestic market remains limited. Revoking licenses for Turkiston Bank and Hi-Tech Bank in 2022 indicates efforts to clean up weaker institutions. At the same time, according to the agency, this also shows a less predictable and transparent regulatory approach.