Expert Opinion

Raex

Credit Rating of the Republic of Uzbekistan: Reasons for Upgrade and Outlook

4/2018

     Sovereign credit ratings keep being one of the most important risk assessment tools for international investors. This instrument is widely used by both large financial institutions and small private companies interested in doing business in the country. In this regard, credit ratings have gone beyond their key goal — assessing the ability of a government to pay on its debts — and have become a tool for assessing country risks in general.
     RAEX-Europe Rating Agency is the only European Rating Agency that publishes credit ratings of the Republic of Uzbekistan for more than two years. In September 2018, the Agency upgraded the rating of the Republic in foreign currency and confirmed the rating in the national currency, setting a positive outlook.
 
     The upgrade of Uzbekistan’s sovereign government credit rating in foreign currency to ‘B+’ reflects the persistent implementation of economic reforms, which allowed to improve the country’s currency risk position, prudent fiscal and monetary policies, as well as very low risk of government debt distress. The positive outlook of both ratings reflects our expectations about a gradual recovery of the economy after liberalization reforms are fully implemented, leading to a continued strong output growth, stabilizing inflation and fiscal budget figures, as well as the authorities’ commitment to further increase fiscal and monetary policy coordination.
On the negative side, the ratings continue to be constrained by the highly dollarized financial sector, distorted by the government’s direct lending, low institutional development, high corruption and still elevated inflation levels. The future development of the ratings will largely depend on how well the government implements the development strategy 2017-21.
     Monetary policy remains tight
Monetary policy was tightened prior to FX liberalization in September 2017. In order to contain credit expansion and inflationary pressures, the refinancing rate has been increased up to 14% from 9% in June 2017.. The tight monetary policy is expected to persist in 2018-2019 given continued inflationary pressures.

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