Uzbekistan Primer
As Uzbekistan heads into the Sun Preseidential Elections, we have taken this as an opportunity to provide a deep dive into the country. These are our key takeaways:
Uzbekistan seems to find itself in a sweet spot as the opening of the commodity-exporting country in 2016/17 has started to bear fruit while the typical risks associated with the transition from a Soviet type of economic management to more market-oriented policymaking are being usefully cushioned by still plentiful FX reserves, low levels of indebtedness and a deeply rooted historical attraction to fiscal conservatism.
GDP growth rates in the medium term should be structurally supported by a combination of low per-capita GDP levels (3rd lowest in the CIS space) and government’s expressed desire to press ahead with reforms aimed at enhancing Uzbekistan’s production possibility frontier. Consensus forecasts see medium-term growth rates at about 5 percent, but the risks are to the upside should reform fatigue not set in.
Favorable demographics present both opportunities and risks. Half of the population is under 30 years of age, and the working-age population, which has increased from about 50 percent of the entire population in the 2000s to 65-70 percent now, will remain at the latter levels for the next 30 years or so. While the demographic boon should provide a powerful fillip to potential GDP, robust investments in education and jobs will be critically needed to harness this potential and create enough working opportunities for the young.
It is now been broadly accepted that Uzbekistan has successfully plucked the low-hanging fruit of initial reforms, including foreign exchange liberalization, tax reform and vastly improved quality of statistics. The next stage of reforms, including reforming SOEs via privatization and IPOs, reducing cost of business, improving governance and, critically, relaxing constraints related to the availability of skilled labor, land and energy may be slower to implement if reform momentum loses steam. These are the key challenges for President Mirziyoyev, who is expected to sail to victory in the Jul 9th presidential elections. To be sure, the 2030 Development Strategy sets ambitious goals, including doubling the share of the private sector in GDP creation to 80 percent and increasing ESG standards.
The most immediate macro risk relates to the sharp transition from robust current account (CA) surpluses to persistent projected deficits. While this transition has been cushioned recently by excess monetary inflows from Russia, the trend return to CA deficits is already underway in 1Q23. At the same time, CA deficits are justified by the opening of the country and the sharp increase of formerly repressed intermediate-good imports. FX reserves, covering about 11 months of imports of goods and services, provide plentiful foreign financing, and public debt levels at around 30% of GDP create, for now, a useful buffer to finance future CA and fiscal deficits without incurring unduly burdensome foreign and public indebtedness relative to GDP.
As always, the CCA Weekly ends with the key data releases/news for the week.
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