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Uzbekistan to increase portion of official financing in debt portfolio through 2023-2024, continues divestment from Russian banks – Deputy Minister of Finance

The Government of Uzbekistan is expected to increase the portion of official bilateral and multilateral financing in its funding mix, Deputy Minister of Finance Odilbek Isakov told Debtwire during an interview at the Uzbekistan Economic Forum, which took place on 3-4 November.

The country’s outstanding debt is already mostly held by official creditors and consists of long maturities at concessional rates, according to a June 2022 International Monetary Fund Staff Report.

Amid a high interest rate environment, a number of emerging market economies are turning to official financing, after missing out on good issuing conditions last year.

"There is definitely going to be more of a skew towards the multilateral and bilateral components in the country's financing mix in the coming year, and it is likely that this will continue throughout 2024," said Isakov.

Uzbekistan cannot afford to finance its public spending and infrastructure projects through the public markets, Jamshid Kuchkarov, Deputy Prime Minister of Uzbekistan, said during a plenary session at the Economic Forum, compelling the country to use official financing and private funding respectively, in order to service needs.

The Central Asian state's USD 500m 4.75% 2024 bonds are yielding 8.37%, corresponding to a 360bps spread over the comparative two-year US Treasury Rate.

However, Uzbekistan is not looking at drawing down on its 2021 IMF Special Drawing Rights (SDR) allocation in order to replace funding that would have come through the primary markets, according to Isakov.

The country currently has two fully-drawn IMF facilities outstanding.

A reduction in the volume of remittances due to the war in Ukraine has been a concern for Uzbekistan's government. Such transfers came in at around 10% of gross domestic product in 2021, with almost three quarters of the volume originating from Russia.

However, as reported by Debtwire, neighbouring countries have not yet seen a contraction in remittances take place this year.

"The level of remittances doubled during the course of this year. We thought that there would be a drop, instead, we have had USD 12.7bn in remittances solely in the first nine months of 2022, fully covering our balance of payments deficit," said Isakov.

He noted that small businesses' increase in the use of formal remittance channels, instead of informal mediums such as cash-in-hand over the period, was a substantial factor contributing to the increase.

Sanctioned Russian banks

Russia-based banks, which have been placed under sanctions, have historically formed a substantial part of the financing in Uzbekistan's larger energy and mining projects, according to the IMF's Staff Report.

However, following Russia's invasion of Ukraine, Uzbekistan has made efforts to diversify the funding mix of some of its larger state-owned entities (SOEs).

"We had access to diversified financing even before [the war in Ukraine started]. After sanctions were imposed, we severed our relationships with a number of banks, including VTB Bank OAO," said Isakov.

An example of this effort, according to Isakov, is Navoi Mining and Metallurgical Combinat, Uzbekistan's uranium and gold producer, which has successfully attracted a USD 1.2bn syndicated loan financing from a group of international banks.

But executing a similar changeover could be more difficult in the case of companies whose sales are not directly correlated to commodity prices.

"It is not that difficult to change the funding mix for a natural resources company. There is interest coming from international banks," Isakov noted.

VTB was initially planning to finance Navoi's investment programme; however, once the war in Ukraine had started, the mining company settled its outstanding credit line with the bank and cancelled plans to attract new investment from it, according to Isakov.

IPO drive

The Government of Uzbekistan currently has a large footprint in the Uzbek economy, with nearly half of total budget revenues coming from the activities of SOEs.

In recent years the government has attempted to reduce its stake by preparing a number of companies for Initial Public Offerings (IPOs). However, this plan has recently been impeded by the global equity market downturn, in addition to local market idiosyncrasies.

"We are still planning an IPO for UzAuto Motors, but [the key issue] right now is that there is basically zero liquidity in the domestic market," said Isakov.

He noted that although liquidity has improved substantially over the past few years, he did not know whether this would translate into further such offerings.

A number of SOEs have had their IPOs postponed indefinitely due to the market downturn, such as Uzbekneftgaz's sale of 49% of its shares, according to Isakov.

The government could consider partial IPOs if market conditions do not allow for a higher volume of shares to be sold.

"It will be based on the demand we receive, which can even be as little as five or one percent of the company," said Isakov.