Learning to Embrace Debt Starts at Top With Uzbek Bond Debut

(Bloomberg) -- Uzbekistan knows it has plenty of catching up to do after sitting out much of the economic transformation that’s swept across the former Soviet Union during more than two decades since the end of communism.

Rapid-fire reforms have followed the death of long-time ruler Islam Karimov in 2016, with President Shavkat Mirziyoev lifting currency controls and easing some travel restrictions. But as the authorities retool the economy, they’ve run up against deeper cultural barriers, such as an entrenched aversion to debt, according to Timur Ishmetov, first deputy governor of the Uzbek central bank.

The government thinks it can remedy that with its first Eurobond, creating a borrowing benchmark for companies, turbocharging the local capital market and even improving corporate governance in the country of over 30 million people. “We don’t need money for its own sake,” Ishmetov said in an interview in the capital, Tashkent.

As the once-reclusive nation opens up to foreign investment, it’s planning to sell up to $300 million of Eurobonds this year, the second debut issuer in two years to come from a region wedged between Russia and Afghanistan. Ishmetov says that by borrowing abroad, Uzbekistan will set an example for domestic companies and make them more amenable to fundraising and expanding their businesses.

“The government now needs to finance a lot of production and infrastructure projects, create new jobs,” he said. “Alternative sources of financing are very important for Uzbekistan.”

As the economic revamp picked up speed, it’s thrust monetary policy and currency management to the top of the agenda. Uzbekistan has moved to free up the exchange rate and allowed its currency to devalue, with the soum stabilizing after losing over 60 percent last year against the dollar, the worst performance globally.

The central bank plans to allow the national currency to trade freely in the next two to three years before shifting to inflation targeting, Ishmetov said. It maintains a “managed” floating exchange rate and doesn’t intervene to steer the currency, stepping in only to prevent sharp fluctuations, he said.

“Fluctuations can be quite high if we don’t participate,” Ishmetov said. “It’s because the market isn’t deep.”

The central bank will keep its key interest rate unchanged at 14 percent this year to stem inflation, according to Ishmetov. Price growth accelerated to 14 percent last year and will remain high in 2018 as consumer costs adjust to a new environment where the government’s cutting back on subsidies for goods such as petrol and electricity, the deputy governor said. Rates may be reduced next year, when inflation is expected to fall below 10 percent.

“We expect some improvement in the effectiveness of monetary policy after the FX reform and for the central bank to switch to a tighter policy in terms of credit conditions,” said Anastasia Turdyeva, a banking analyst at S&P Global Ratings. “FX rate liberalization reform can potentially bring more foreign direct investment to Uzbekistan.”

Uzbekistan’s foreign-currency and gold reserves expanded by $1.4 billion last year to $26.6 billion. Gold makes up about half of the reserves, according to Ishmetov. By law, the central bank is the only buyer of gold produced domestically. That may change in the future to allow producers to export gold, he said.

Additionally, Uzbekistan plans to amend a law this year to make the central bank more independent from the government. The monetary authority is no longer subordinated to the cabinet and now reports to parliament only. Legislation will also be amended to ensure that the central bank focuses on inflation rather than the stability of the national currency, he said.

“What others do in five to 10 years we have to complete in two to three years,” Ishmetov said. “It’ll be very difficult. We need to prepare well.”

--With assistance from Anna Andrianova

To contact the reporters on this story: Evgenia Pismennaya in Moscow at epismennaya@bloomberg.net, Zulfugar Agayev in Baku at zagayev@bloomberg.net.

To contact the editors responsible for this story: Torrey Clark at tclark8@bloomberg.net, Paul Abelsky, Alex Nicholson

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