Uzbekistan is easing into openness. Its latest step? The international debt market.
Uzbekistan celebrated Valentine’s Day by stepping out into the international debt market—the first time the country has done so. The former Soviet Republic sold off $1 billion in eurobonds, parsed out into $500 million 5-year, priced at 4.75%, and $500 million 10-year, priced at 5.375%. There are already rumors that that the country might issue 30-year bonds. Uzbekistan is rated by Global Ratings and Fitch Ratings at BB-, which is three levels below investment grade. Demand for the sale, which was managed jointly by Citi, JPMorgan, and Gazprombank, was higher than $6 billion, showcasing investor eagerness. This eagerness is expected to cool as time ticks on, but the gains of Uzbekistan’s foray into the market should hold out over any waning enthusiasm. Uzbekistan is not the first Central Asian country to turn to the foreign debt market: Tajikistan did the same in 2017, raising $500 million from a 10-year bond at 7.125%. But Uzbekistan’s move is slightly different. While this has implications for the international debt market, the larger trend is Uzbekistan’s constituent pursuit of openness policy. The move is part of a bigger project of current President Mirziyoyev to make Uzbekistan more attractive to outside investors, tourists, and policy leaders following the closed society and system under former Uzbek President Islam Karimov.
Uzbekistan does not need the money from the bond issuance. Their country’s debt load is low, and it has has a lot of liquid assets and large foreign-currency reserves. It has loans from both the World Bank and the Asian Development Bank. The investment climate is not poor. External public debt is 19.8% of GDP, and official reserves are 183% of public debt—impressive for a frontier market. Some have suggested that the sale could be used to finance the country’s budget deficit in 2019. But Uzbekistan’s goal is wider than a basic fundraiser. The country is looking to be an active, invested part of the global financial world, and it is using this bond sale to accomplish that. Eurobonds are a tool to encourage FDI to Uzbekistan and on the other side of the coin, giving future investors a benchmark for country risk and performance. The move also gradually introduce a foothold for Uzbek businesses. So the Silk Road goes both ways for Uzbek and foreign investors.
Uzbekistan’s relatively sturdy market and performance is partly attributable to the legacy of Karimov’s closed state. But Karimov’s reign and Uzbekistan’s cloistered state did a lot of damage to the country’s growth and development as well. After Karimov died and his prime minister, Mirziyoyev, came to power, the country slowly began to open its doors. One aspect of money reform started with a seeming innocuous: currency. In 2017, Uzbekistan’s currency had a terrifying drop—one of the world’s largest—rendering fistfulls of cash essentially meaningless. Uzbekistan opened its currency market, granting domestic business access to the foreign exchange, and quickly injecting the wads of worthless bills with actual value. This move complimented the country’s new fondness for tourists. Despite advertising itself as the new chic destination for tourists along the Silk Road in ancient cities like Bukhara and Samarkand, a foreign tourist could barely find an ATM, let alone get cash with their foreign cards. While Uzbekistan’s reforms became to woo tourists, foreign investors were not charmed by the historic Silk Road country.
But Mirziyoyev’s reforms continued. He opened the country back up to the EBRD—an institution that had been out for over a decade, sent packing by Uzbekistan’s powerful state security chief and the country’s abysmal corruption and transparency ratings. The EBRD is now helping the Central Asia’s most populous country to modernize its banking, and is offering business support to bring the economy up to speed. Programs co-financed by the EBRD have brought new energy initiatives, tourism infrastructure, and financial advice to bring in more investors. The new bond sale is in line with this new approach. The state spokesperson for the project and sale, Deputy Prime Minister Jamshid Kuchkarov, says the project aims at making Uzbekistan more market-friendly by looking to the world to hold the country’s financial system and government accountable for its actions. There is also a high expectation that Uzbekistan’s own commercial banks will tap into market, paving the way for others to follow.
Problems stubbornly remain. The country has an abysmal human rights and corruption index, and consistently receives low scores on Freedom House. Though the EU and other western institutions have lauded Uzbekistan for its progress, there is still a long way to go. On a more practical level, there is a lack of transparency in domestic data released in English, and a dearth of information overall. Western companies looking at Uzbekistan have complained of incomplete, inflated, or misleading figures citing such ambiguity as space for instability, and making it hard to put down real roots in the investment and business climate. This, too, is something the Uzbek government confirmed the country is working to remedy by translating more statistics into English and making them available in online portals, while also cleaning up remnants of poor or incomplete reporting.
But the outlook is promising. Uzbekistan is being consistent in its policy, its actions, and its follow-up, now particularly by moving into the international realm, which is no small task of commitment. The country has made significant moves to address its internal governance and corruption; it has launched an aggressively charming tourism campaign and is part of the much buzzed-about “Silk Road visa,” and is investing in real dialogue and projects with its neighbor, Kazakhstan. This financial move is another step in that direction, with real money—foreign money—as the mouthpiece and currency of choice. Lets see if the investment pays off.