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Uzbekistani Tashkent Region Assigned ‘BB-’ Rating; Outlook Stable

Botschaft Usbekistan, May 17, 2019

On 15 May 2019, S&P Global Ratings assigned its ‘BB-’ long-term issuer credit rating to the Uzbekistani Tashkent Region. The outlook is stable.

“Our stable outlook reflects our assumption that the region will maintain its strong budgetary performance to comply with the fiscal restrictions. We also assume that the region will keep its debt burden low in the medium term, but may resort to moderate commercial borrowings in the longer run if permitted by national regulation,” the agency said.

S&P Global Ratings added that it might lower the rating on Tashkent Region if the agency was to lower our sovereign ratings on Uzbekistan. S&P Global Ratings would also consider a negative rating action on Tashkent Region if it observed rapid debt accumulation along with weak debt management practices.

“We might consider a positive rating action if we took a similar action on Uzbekistan and if the institutional framework under which the Tashkent region operates becomes more predictable and supportive,” S&P Global Ratings said.

“The rating on Tashkent Region reflects our assumption that the region will continue reporting balanced budgets to comply with national regulation and won’t resort to commercial borrowing in the medium term. We think that Tashkent Region is constrained by the very volatile and centralized Uzbekistani institutional framework for local and regional governments (LRGs), resulting in the region’s limited financial flexibility and the region’s low wealth levels,” the agency noted.

A volatile framework, limited flexibility, and low wealth levels are the main constraints on credit quality.

“The region operates in a very volatile institutional setting. Moreover, Tashkent’s budgetary flexibility and performance are significantly affected by the highly centralized decision-making process. The central government sets up tax distribution rates, transfers, and expenditure responsibilities annually and individually for regions, which constrains the reliability of their medium-term financial planning,” it added.

“Furthermore, the region’s substantial investment requirements and high share of social expenditures restrict its spending flexibility. At the same time, the central government maintains a high level of LRG monitoring, requiring balanced budgets and restricting commercial borrowing. Due to ongoing institutional reforms, there might be some additional changes in the distribution of revenues and spending mandates at the LRG level,” S&P Global Ratings said.

“We consider that the quality of financial management also constrains Tashkent Region’s creditworthiness. We observe only emerging medium-term planning, large deviations between budgeted and actual performance, as well as a lack of established practice of debt and liquidity management. However, we note that in the centralized system, the region can adjust its budget responsibilities in case of revenue shortfalls,” the agency underlined.

“We view Tashkent’s economy as weak by international standards, mostly due to low wealth levels and concentration in the metals and mining industry. The region accounts for 9% of Uzbekistan’s population and contributes 9% of the national GDP. Tashkent Region’s population is young, with almost 90% at or below working age. This might potentially lead to the labor market expanding, while at the same time presenting challenges for employment in the long term. We expect the region’s growth to mirror Uzbekistan’s at 5.3% on average annually over 2019-2021, supported by the growth in the manufacturing, agricultural, and service sectors,” S&P Global Ratings added.

The budgetary performance will likely remain strong with marginal or no increase in the debt burden.

S&P Global Ratings expects Tashkent Region to continue posting a budget surplus over the next three years in line with national legislation. “We anticipate that revenue sources will be volatile, given the state’s track record of revising tax shares. We also project a slight increase in capital expenditures in the next few years, following the central government goal to foster infrastructure development. Funding for capital spending will come mostly from the central budget, although we expect the region will also contribute,” it noted

“At the same time, we note that the region’s infrastructure is poor, and will continue to constrain its economic development and budget flexibility. However, the funding backlog is unlikely to lead to material debt accumulation, as the national legislation currently prohibits LRG commercial borrowings. In the long term, though, Tashkent Region might access the capital markets with the president’s consent and discussed amendments to national regulation,” the agency said.

At present, the region’s debt is modest and consists only of a US$50 million loan from the Uzbekistan Reconstruction and Development Fund. It accounts for slightly above 70% of the region’s operating revenues. Tashkent services this debt via its recently established Development Fund. The loan was granted in 2018 for capital development purposes and we expect the region to service it using own funds. Given that the liability is denominated in U.S. dollars, we note that Tashkent’s debt burden might be subject to exchange rate volatility.

“We view Tashkent Region’s contingent liabilities as modest. It has no stakes in regional enterprises, with no track record of the region providing subsidies, capital injections, or extraordinary support to companies in the region. The districts and municipalities are financially healthy thanks to central government support. Although we do not project that the region will financially support companies or lower government layers, we do not completely disregard the risk of Tashkent Region stepping in if the need arose,” S&P Global Ratings said.

“We assume that Tashkent Region’s liquidity position will remain solid and comfortably cover the region’s annual debt service over the next 12 months. However, we believe that the coverage ratio might fall sharply if the region attracts further debt. We positively note that Tashkent Region is eligible to receive short-term interest-free budget loans to cover liquidity shortages. At the same time, we believe that the region’s access to external funding is limited, owing to the weaknesses of the capital market and banking sector in Uzbekistan,” the agency concluded.


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