Uzbekistan after Elections: Scenarios for Economic Development and Implications for Business and Investment

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Uzbekistan after Elections:

Scenarios for Economic

Development and Implications for Business and Investment

Lotte City Hotel Tashkent Palace

December 15, 2016

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Political stability in Uzbekistan

Threats to security

 Fears of Islamic fundamentalism

 Possibilities of social unrest within CA

Ethnic fragmentation in Kyrgyz in 2010

Problems with access to water resources

 Strategic location

Regional (Russia and China) and global (EU and US) players

Security has been a #1 issue and will remain so.

→ Uzbekistan is the least prone to social

outbreaks and revolutions.

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Uzbekistan’s economy: a snapshot

Strong and stable economy

 Dominance of the government

 Gradual reforms as opposed to shock therapy

Rich in natural resources and labor

 Gas, gold, copper, uranium, etc.

 Relatively young population with 99% literacy, growing at 1%

Impressive economic performance over a decade

Sufficiently large FX reserves

Relatively low foreign debt

and a large unrealized potential in virtually all

economic sectors

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Economic growth

Economic growth decelerated over the last two years due to

 Fall in prices of exporting commodities (energy, ferrous and non- ferrous metals, cotton)

 Regional economic downturn, especially Russia

Decreased exports and remittances

Growth rate

is forecasted to remain around 7% in 2017 due

to

 Further public investment into infrastructure, education and healthcare

 Recovery of energy prices in 2017 by OPEC production limits (World Bank, 2016)

 This might reverse the economic situation of oil-dependent Kazakhstan and Russia, export destinations

 Sanctions imposed on Russia partially relaxed

Perceptions of open US policy towards Russia, EU disunited with imposing sanctions further

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GDP growth rates

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Inflation

Inflation is expected to rise in 2017 due to

 Higher production costs

minimum wage, imports and other cost-push pressures

 Depreciation of UZS vis-à-vis floating currencies

Possible unification of exchange rates, access to foreign exchange, Central Bank’s policy of currency devaluation

 Relatively high inflation in the major importing partners

→ Implications for business planning in terms of uncertainty

2014 2015 2016f 2017f Source

6.1 5.6 5.5-6.5 Official statistics 13.5 8.7 8.4 9.6 World Bank / IMF

8.1 9.00 10 11 ADB

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Exchange rates (ER)

Multiple ER system

 CBU, parallel markets, ER at Currency Exchange

 Reasons: responses to external shocks and protection of FX reserves, import substitution, subsidies to socially

important food imports

→ Foreign exchange controls and

rationing

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Two scenarios for 2017 ER forecast

Under current scenario ER is generally forecast to depreciate at 10%.

Under possible unification and FX deregulation the ER is expected to fluctuate at UZS 5,700-6,200 per 1 USD with seasonal swings.

 Measures stipulated in draft PR on priority directions of ER policy

¹

ER will be determined ONLY through market mechanism

Wider access to foreign exchange and resultant increase in imports

Abandonment of practice of denominating local goods in USD

 BUT, higher prices for exporting commodities, tourism

receipts, recovery of Russia and other trading partners work

for ER appreciation but not to the magnitude of this policy

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Possible scenario of ER unification under draft PR

200 400 600 800 1,000 1,200 1,400 1,600

IV I II III IV I II III IV I II III IV

2001 2002 2003

Central Bank's ER Parallel market ER 0

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

94 96 98 00 02 04 06 08 10 12 14 16

Central Bank's ER Parallel market ER

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Trade commodities and partners

25.2% 22.1%

10.8%

6.8%

5.1% 6.1%

1.3%

22.6%

services energy food

gold cotton chemicals

Exports = USD 12.14b

Export composition, 2015

7.7%

5.8%

12.8% 7.4%

17%

40.5%

8.8%

Imports = USD 12.42b

Import composition, 2015 # Exported to 1 China

2 Russia

3 Switzerland 4 Kazakhstan 5 Turkey

# Imported from

1 China 2 Russia

3 South Korea

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Current account balance

Since 2014 current account is negative

 More pressure from the gap between multiple ER

 Exports ↓ due to recession in export destinations

 Imports ↓ due to FX controls and contracted remittances

→ Our results for current account forecast are mixed

Negative current account in the near future (2017)

 Possible ER unification and “emerging” shaded imports, higher import bill

But positive current account in the longer term

 Higher prices and volumes for energy export

Rising gas exports to China in 2017-18

Improved economic conditions in export destinations

 Visa-free tourism for citizens from 27 countries, including South Korea, from April 1, 2017 [PD as of Dec 2, 2016]

→ Implications for corporate profit repatriation

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Structural policies

Stimuli to increase the flow of foreign investment and domestic production in Uzbekistan

 Corporate governance

In 2016 100 managers were trained in the European School of Management and Technology, Germany

 A network of (tax-) free economic zones to be

established in different locations throughout Uzbekistan

Urgut, Gijduvan, Kokand and Hazarasp in addition to existing Navoiy, Djizakh and Angren

 Rapid development of private sector and entrepreneurship

Institute of Business Ombudsperson, transparent court system, corruption reduction, fiscal loosening for enterprises with

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Investment program for 2017

Government with financial institutions

(ADB, etc.) and private sector develop the production in the following areas [PR

#4647 as of May 18, 2016]

^Areas of

development Content of the areas Period

Energy

gas processing plant (Kandym), byproducts (olefin), electric transmission lines, combined-cycle plants, power stations (Navoiy, Sirdarya), including solar (Surkhandarya)

2015-2020

Rural housing affordable housing in rural areas 2016-2017 Road construction two-lane road (Karshi-Shakhrisabz-Kitob, Guzar-

Bukhara-Nukus), rail electrification (Pap-

Namangan-Andijan), 2016-2020

Chemicals Phosphate (incl. monoammonium) fertilizers, infusion solutions, fiberglass (Deutsche kabel),

sulfuric acid (Tissen Group) 2016-2020

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Investment program for 2017

→ Opportunities for investment in high value

Areas of

development Content of the areas Period

Food infrastructure commercial loans for tech imports by farmers, store, logistics, export 2016-2018 Civil construction

materials and engineering

Production of construction cranes (Teichmann Group), dry construction materials (Knauf)

2016-2018 Water treatment

management water supply and sewerage system (Tashkent,

Tashkent region, Karakalpakstan) 2017-2021 Entrepreneurship

development commercial loans

2016-2020 Education and

healthcare IT, innovation centers, hospitals

2016-2017

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Other expectations

The year of 2017 is announced to be the

Year of Human Interests and Public Dialogue

 More transparent and accountable public sector

 Higher regional decentralization due to new approach to electing khokims

Inclusion of private sector in regional development

Strong regional and international cooperation

 Shymkent-Tashkent transport corridor

 Restored air Tashkent-Dushanbe corridor

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Uzbekistan after Elections: Scenarios for Economic Development and Implications for Business and Investment