Uzbekistan upgraded to BB by Fitch on reform progress

Fitch Ratings has upgraded Uzbekistan’s Long-Term Foreign-Currency Issuer Default Rating to 'BB' from 'BB-' with a Stable outlook, citing accelerated reform progress and favorable medium-term growth prospects. This upgrade reflects stronger-than-expected fiscal performance, with the 2024 budget deficit at just over 3% of GDP, and projected government debt-to-GDP remaining low at around 32% for 2025-26, well below the 'BB' median. Robust economic growth, forecast at 6.3% for 2025-26, alongside increasing foreign exchange reserves and declining financial dollarization, underpin the improved rating, though Fitch notes balancing factors such as relatively low GDP per capita and commodity dependence.

Analysis

Fitch's upgrade of Uzbekistan's sovereign rating to 'BB' with a Stable outlook is a direct result of tangible progress in structural reforms and a robust macroeconomic profile. The upgrade is underpinned by fiscal discipline, evidenced by a 2024 consolidated budget deficit of just over 3% of GDP, outperforming official targets, and a projected government debt-to-GDP ratio of approximately 32% for 2025-2026, which is significantly below the 'BB' peer median of 54%. Economic growth remains a key strength, with forecasts of 6.3% for 2025-2026 surpassing the peer average of 3.8%, and Q1 2025 real GDP already expanding by 6.8% year-on-year. The country's external buffers have strengthened, with foreign exchange reserves rising to $49.7 billion; however, a heavy reliance on gold, which constitutes nearly 77% of these reserves, introduces a notable sensitivity to metal price fluctuations. While the banking sector exhibits stability with a capital adequacy ratio of 17% and financial de-dollarization is advancing, several risks temper the outlook. These include inflation that remains above the central bank's target despite monetary tightening, a high dependence on commodities, and significant exposure to currency risk, as nearly 89% of government debt is denominated in foreign currency.

Key Decisions for Investors

• The sovereign rating upgrade and favorable debt metrics suggest potential for spread compression on Uzbekistan's foreign-currency bonds, warranting consideration of an overweight position relative to 'BB' rated peers.
• Investors should closely monitor gold prices, given their significant impact on FX reserve valuations, and track inflation data, as persistent price pressures could necessitate further monetary tightening and weigh on the economic outlook.
• The strong growth forecast of 6.3% and ongoing privatization reforms may present selective opportunities in the domestic equity market or via direct investment, particularly in sectors like services that are driving the expansion.