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Uzbekistan Economy - Understanding Uzbekistan

6 Dec, 2018

Uzbekistan is Central Asia's most populous country, comprising nearly half of the region's total. The country has over 1,800 mineral reserves with substantial deposits of gold, copper, uranium, coal and natural gas. 

The economy experienced the smallest contraction among its peers after the collapse of the Soviet Union in 1991. The country managed to increase its nominal GDP by 19x to US$ 67.1bn between 1992 and 2016. However, this was not sufficient to raise the living standards of the population with per capita GDP at US$ 2,124 in 2016 – one of the lowest globally, albeit up from US$ 167 in 1992.

Solid economic growth was insufficient for quality job creation given the rapidly increasing labor force. Uzbekistan’s annual average real GDP growth of 8.3% over 2007-16 was 6th highest in the world. Despite unprecedented growth levels public sector was unable to meet labor market demand with 500,000 new job seekers entering the market every year. 

A private sector-driven growth model and attracting foreign investment are high on agenda. Worsening external environment since 2014 required the economy to move towards a different growth model. At end-2016, newly elected president Shavkat Mirziyoyev acknowledged that the economy needed new drivers of growth and some dismantling given that it was still closed and centrally planned 25 years after the collapse of the Soviet Union. The government’s five-year development strategy, adopted in February 2017, is the country’s official roadmap of liberal economic reforms aiming to increase private investment in the economy.

Uzbekistan implemented a series of reforms under its development strategy in 2017-18. Institutional progress was rapidly acknowledged by international observers. The World Bank named Uzbekistan as one of the top improvers globally and the regional leader in terms of its total number of reforms in its 2018 “Doing Business” report. Despite this progress, the authorities have much work to do to move away from a state controlled economic model and combat widespread corruption. 

Uzbekistan has the potential to become the largest economy in Central Asia given its natural resources combined with the government’s commitment to promoting private sector-led growth. Moreover, Uzbekistan’s large FX reserves and low and affordable foreign debt provide a cushion against global market volatility. According to the IMF, the economy has the potential to grow by 5.0% in 2018-19, before accelerating slowly to 6.0% by 2022.


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Georgian Economy - Navigating Regional Instability

23 Oct, 2018

Economic growth in Georgia accelerated to 5.4% in 1H18, supported by booming tourism and significantly increased exports and remittances. These flows provided positive spillovers to the major sectors of the economy, but the increased demand also translated into strong import growth and worsened the trade deficit. The growth lost momentum and slowed to an average of 3.3% in July-August, based on GeoStat’s rapid estimates, resulting in 8M18 growth of 4.8%. This slowdown is mostly explained by reduced construction activity due to underspending on government infrastructure projects. Given the current volatility in regional markets and increased external risks, we revise our growth forecast down from 5.4% to 5.0% for 2018. We also expect growth to soften to 4.3% in 2019 mostly due to tighter credit conditions. Importantly, Georgia’s macro fundamentals remain strong given its prudent fiscal and monetary policies and flexible exchange rate. Therefore, we believe that Georgia’s growth outlook remains robust in the face of increased external risks.

Annual inflation remained close to the NBG’s 3.0% target through 9M18, coming in at 2.7% in September. The NBG maintained a moderately tight monetary policy stance due to increased risks from imported inflation in 1H18, cutting the key rate by 0.25bps to 7.0% in July. We expect annual inflation at 2.9% in 2018 and at 3.9% in 2019, reflecting pass-through impact of GEL depreciation and higher world commodity prices. We also anticipate the monetary policy rate to remain at 7.0% until mid-2019.

The GEL has weakened against the USD since August, reflecting deteriorating sentiment toward EM currencies after the TRY collapse. Despite the GEL weakness vs the USD, the GEL’s strengthened NEER and REER since May-18 enabled the NBG to intervene in the FX market and to purchase US$ 112.5mn during the April-September period with the aim to build reserves. We expect the GEL’s seasonal weakness to continue until end-2018, and we see GEL being close to 2.7-75 vs USD till the end of the year, while we see GEL close to 2.5 vs USD in medium term.

The 2019 draft budget reflects the government’s commitment to contain current spending and increase growth-enhancing infrastructure investment. As a result, the fiscal deficit is expected to narrow further to 2.6% of GDP in 2019 – in line with the IMF-supported program.


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Georgian Economy - GEL - Expected Adjustment

13 Aug, 2018

Prudent macroeconomic policy-making and strong growth in external earnings helped the GEL remain immune to the sell-off in regional currencies until early August 2018. However, the TRY’s collapse on 10 August affected the GEL through the expectations channel when the currency lost 3.9% in one day against the USD trading at 2.57 on Bloomberg. Taking into account the ongoing currency crisis in Turkey and sour global sentiment in EM currencies, we expect the US$/GEL rate to weaken to around 2.7 compared to our previous 2.6 projection for end-2018. The gradual adjustment in the US$/GEL rate is likely a necessary correction to rectify the GEL’s real gains against the TRY and RUB – Georgia’s two largest trading partners. We also believe that depending on FDI/tourism inflows and import performance, pressure on the GEL might subside in August–September 2018.


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Georgian Economy - Exposure to Turkey Lower than Broadly Believed

28 May, 2018

Currency depreciation in Turkey is raising concerns in Georgia, as many analysts believe that there is a direct link between TRY and GEL. While correlation to the currency of its largest trading partner exists, we argue that it is relatively low and significantly smaller than widely believed.

In recent years, TRY has seen far more rapid depreciation trends than GEL. GEL is however impacted in the short term by TRY through the expectations channel. For example, GEL’s depreciation from September to November 2017 was largely driven by negative expectations amid TRY depreciation – there was no evidence from the trade, tourism or financial channels to explain the development.

Georgia’s exposure (as defined by combination of four channels: exports, tourism, remittances and FDI) to Turkey accounted for only 6.1% of GDP in 2017. Notably, in the 2008-2017 period, exposure to Turkey increased by just 1.9ppts as a share of GDP, while exposure to other countries rose by 20.3ppts. 

Georgia is a well-diversified economy and this minimizes the potential negative impact from turbulence in any particular market. This was illustrated in 2015-2016 when growth in Georgia slowed but remained positive at 2.8% as many of its trading partners entered recessions. Furthermore, Georgia benefits from a stable macroeconomic environment, prudent monetary and fiscal policies, a business-friendly environment, and a healthy banking sector. This is reflected in increasing investment from local and international investors.


Summing up:

  • Given Turkey’s economic structure, dependency on short-term portfolio funds flow, and domestic political developments, TRY has been more vulnerable to USD global strengthening than GEL.
  • Inflation differential between Turkey (double-digits) and Georgia (low single-digits) justifies 6-8% annual outperformance of GEL against TRY in nominal terms.
  • As Georgia enters the busy tourism season, GEL is expected to be stable over the June-September period.
  • The ongoing currency crisis in Turkey may cause GEL to depreciate by 2-3% in the short term via the trade channel (to 2.49-2.52 vs US$).
  • Pressure from TRY weakness will be offset by positive spillovers from Russia and Azerbaijan’s recovery. 
  • We expect the current account deficit to improve slightly to 8.6% of GDP in 2018 (8.7% in 2017) and believe that the fundamental factors affecting GEL remain favorable. We see GEL’s fair value close to 2.4 vs US$.
  • We expect year-end GEL weakness, but we think that volatility will be lower compared to previous years.

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