Uzbekistan: Playing catch-up is neither a sprint nor a marathon

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Off the blocks quickly. Uzbekistan is playing catch-up with the rest of the CIS and Eurasia after 25 years of isolation. President Mirziyoyev and his team have moved surprisingly quickly with some key changes that should yield a positive knee-jerk reaction from investors. But the “to-do” list remains long and daunting.

Currency reform is the biggest move. The change with the biggest impact is the ending of the dual exchange rate system. The official rate immediately fell to the street rate but at least investors now have a transparent system with which to work.

Inflation and rates spiked higher. The result of the move is to reveal double-digit inflation. The risk is that a real devaluation would push inflation higher and keep interest rates higher for longer. But, it is important to bear in mind that the double-digit inflation has been part of the economy and is only now exposed. It is not a new factor.

Growth rates are declining. Uzbekistan’s macro indicators have always raised suspicions about methodology and that is also now changing. Expect more volatility in the future. GDP may fall to 6.5%, or lower, this year and next as a result of the currency move, and other changes; but, if handled correctly, faster growth may resume from 2019.

Focus on SMEs. Amongst the reforms announced this year, the government is providing support for SMEs, which already account for almost 60% of GDP. This is a very positive move.

Administrative reforms. In this note we list all the major reform initiatives announced so far this year, including an ambitious program to make the bureaucracy more efficient and accountable.

Improved regional relations boosts power projects. President Mirziyoyev has also moved quickly to improve relations with both Kyrgyzstan and Tajikistan. The result is an end to border disputes, with freer access to improve trade, and the long-overdue start to muchneeded hydroelectric power projects.

Highlighting best investment opportunities. In this note, we highlight the sectors with the greatest potential and interest for investors. FCMG clearly stands out. Agriculture and food processing sectors have considerable potential and, along with other export-orientated sectors, will greatly benefit from the expanding Chinese-led Belt & Road rail network.

Clear areas of concern. But it would be a mistake to assume that the country has a clear path forward. We highlight some of the obvious risks, both economic, social and political, in this report. Not least of which, based on what has been seen in other countries of the former Soviet Union, is the risk of a backlash from those resistant to, or reluctant to embrace, quick change.

Visa reform. Uzbekistan is now “visa-free” for 27 nations (available at entry for US$50) and the government will abolish exit visas from 2019. The danger from that is if job creation is not successful then more workers will migrate to better-paying jobs in labor-short Russia.