Uzbekistan’s star appears in the credit rating universe

In the 1420s, Mirza Muhammad Taraghay, also known as Ulugbek—the Great Leader, built a three-story observatory in the city of Samarkand (in today’s Uzbekistan) to determine the location of all the major stars in the universe. The nearly 300 pages of charts and quantitative data he and his collaborators compiled were considered the most authoritative guide to the sky between Ptolemy’s in the second century and Tycho Brache’s at the end of the 16th century. Ulugbek’s observatory, part of which has endured until today, yielded remarkably precise results to locate 992 stars in the universe.

Putting Uzbekistan on the map

About 600 years later at the end of 2018, the Republic of Uzbekistan finally secured its place in the credit rating universe by becoming the 133rd country rated by Standard & Poor’s (S&P) and the 117th rated by Fitch, two of the three main credit rating agencies. A sovereign credit rating is an indication of a country’s ability and willingness to honor its debt obligations towards its creditors. As reflected in Table 1, the BB- rating assigned by S&P puts Uzbekistan equal with countries such as Vietnam, Brazil, and Georgia, and between South Africa (BB) and Turkey (B+). In the regional context, Uzbekistan is ahead of Tajikistan (B-) but has still a way to go to reach investment grade (BBB-) like Kazakhstan. While the line between a BB+ and a BBB- is a defining one—it determines if a government’s bonds are considered investment grade or “junk”—this does not mean that a country rated below a BBB- cannot successfully issue government securities. The pool of investors for such speculative grade bonds might be, however, smaller, and borrowing costs will usually be higher as the lower rating is associated with a higher risk of default.

To assess a country’s risk of default, rating analysts rely on a plethora of data, run quantitative models, and make critical value judgments, especially when it comes to weighing a country’s strengths against its weaknesses. As noted in the published rating reports linked above, Uzbekistan’s key credit strengths are a large level of liquid assets to support strong external and fiscal positions as well as high economic growth and low public debt. Its credit weaknesses include high commodity dependence, high inflation, and weak institutions. A major constraint for Uzbekistan’s rating is the country’s low GDP per capita, which is given significant weight in the credit risk assessment—it serves as a key proxy for economic strength and repayment capacity. Uzbekistan’s GDP per capita of about $1,200 is the lowest among S&P’s BB- or better-rated sovereigns. Going forward, Uzbekistan may consider improving its measurement of the national accounts to include parts of the economy that are currently not reflected in the overall GDP figures. In combination with strong economic growth, this would help improve its credit rating in the longer term.

Why a sovereign rating?

One of the key reasons for securing a credit rating—tapping international bond markets to cover a financing gap—does not apply to Uzbekistan, which holds reserves of $27.1 billion. This is over 60 percent of GDP and far more than most other countries hold. Nevertheless, the government has named four international banks to facilitate the issuance of a $500 million 5-10 year benchmark bond for the first quarter of 2019. Accessing the international capital markets will be another first for Uzbekistan. Despite the large stock of reserves—including $14.6 billion in gold (which could be invested more productively)—and the high direct and indirect costs of a bond issuance, the government is pushing ahead as it seeks to create an additional layer of accountability—namely vis-a-vis investors—to anchor the reform process. The first bond issuance may be followed by additional issuances. And before entering or expanding in the Uzbek market, the pricing of the bonds and the sovereign rating itself will help investors to make a better-informed assessment of the country’s credit risk.

A new golden age?

With his compassion for observation and hard data, Ulugbek changed the course of astronomy by freeing it from the last remnants of religion and moving it towards producing new empirical evidence. As a ruler, the grandson of Amir Timur (Tamerlane) was less successful. During his reign, Ulugbek suffered a major defeat against Uzbek tribes, which marked their debut as a rising power, and eventually the last cultural and economic flowering of Central Asia came to an end. At the current moment, we cannot conclude with certainty that Uzbekistan is on the verge of another golden age, given its key (credit) weaknesses. But, recent progress on improving economic statistics has been impressive, and credit ratings and bond spreads will provide additional instruments for observing the Uzbek economy just as Ulugbek’s observatory did for watching the stars.