The agency classifies Uzbekistan’s banking sector in group ‘8’ under its Banking Industry Country Risk Assessment (BICRA). The sector’s peers are in Russia, Kazakhstan, Georgia, Armenia, Azerbaijan, Kenya, Tunisia and Argentina.
“Our bank criteria use our BICRA economic risk and industry risk scores to determine a bank’s anchor, the starting point in assigning an issuer credit rating. The anchor for banks operating only in Uzbekistan is ‘b+’”, it added.
“On Jan. 16, 2019, we revised our economic risk assessment to ‘7’ from ‘8’ and moved Uzbekistan to BICRA group ‘8’ from group ‘9’ (see "Uzbekistan BICRA Group Revised To ‘8’ On Improved Economic Risk Assessment; No Ratings Affected," published on RatingsDirect). The revision stemmed from our view of a modest risk of economic imbalances or asset price bubbles in the country, sustainable economic growth, and the government’s solid fiscal and external position,” the agency added.
“Uzbekistan has infrastructure deficiencies and low wealth relative to peers’, with GDP per capita we estimate at about $1,200 in 2018. We think, however, that disposable income per capita might be higher, given the country’s sizable shadow economy. In our opinion, policy decision-making is highly centralized, undermining the predictability of government policy. We view as positive the foreign exchange liberalization in 2017 and the Central Bank of Uzbekistan’s (CBU’s) efforts to limit inflationary pressure and reduce dollarization,” S&P Global Ratings noted.
“We expect real GDP growth will average 5% through 2021-2022, supported by growth in the services, manufacturing, and natural resources sectors. The economy remains dependent on state-owned enterprises (SOEs). However, significant economic and social reforms are under way, aiming at opening up the economy, creating jobs, and improving competitiveness. We think it might take three to five years for the reforms to have a tangible impact on economic growth,” it underlined.
“The government tightly controls the economy and banking system, which reduces spillover of volatility from global markets and limits the buildup of asset price bubbles in cyclical sectors such as real estate. Lending growth remains high and we expect it will average 35%-40% over 2019-2020, mainly due to government-led projects. Retail sector growth is from a low base and household debt remains low. Nevertheless, we think that low wealth, relaxed underwriting practices, and the vulnerability of the legal system could result in substantial credit risk for the banking sector,” S&P Global Ratings said.
“The CBU’s initiatives to improve the banking sector’s capitalization and enforce regulation via close scrutiny of lending activities have been moderately successful, but largely offset by its selective approach and political influence. State-owned banks dominate the industry, having almost 84% of systemwide assets with a large amount of directed lending. This distorts competition and weighs on private banks’ creditworthiness. In addition, the government uses most state-owned banks to provide financial support to key economic sectors, which squeezes banks’ margins,” it noted.
“In our view, the trend for economic risks in Uzbekistan is stable. We expect that the government will maintain its strong fiscal and external position despite the projected current account and fiscal deficit, while general government debt will likely remain low. We expect sustainable real economic growth of around 5% over the next two to three years due to material government investment, rising consumption, and high lending growth, which we forecast at close to 40% in 2019, much higher than for peers in the region. Nevertheless, the banking system has lower exposure to real estate and construction and retail lending growth mainly reflects the low base. We therefore see a limited risk of asset bubbles,” the agency said.
“We assess the trend for Uzbekistan’s industry risk as stable. More advanced regulatory standards and the CBU’s initiatives to improve governance and tighten capital requirements are offset by ongoing government intervention in the banking system, in our view. We think that the dominance of state-related banks hampers competition. The funding profiles of Uzbek banks are largely stable, supported by the growth of government funding and corporate deposits,” S&P Global Ratings concluded.
