The deputy finance minister of Uzbekistan speaks to Kimberley Long about how the country is undertaking a wide range of banking and business reforms, and its success after reaching out to the international capital markets for the first time.

Odilbek Isakov

Q: Uzbekistan is undertaking a number of reforms to open up the country. These changes include steps to improve business conditions. What form will these changes take?

A: In Uzbekistan, we are actively moving to expand the private sector and increase foreign direct investment. Under the previous government model, it was difficult. The government would control the access to foreign currency and allocate state funds to strategic entities, which were de facto state monopolies crowding out the private sector. This needed to be changed.

One of the first steps was to take regulatory functions from the state-owned enterprises. Our national carrier, Uzbekistan Airways, acted as both the airport operator and the airline industry regulator – this also meant it did not allow competitors. Now, Uzbekistan Airways operates as a company and not as a regulator. The railways ran in the same way. Regulatory power (both air and rail) is now held by the Ministry of Transport, which was established recently.

It is a system that was replicated across the industrial sector, with state-owned Uzbekneftegaz holding the oil and gas fields and operating as the regulator as well. To counteract this, the company was split into exploration, transmission and distribution. Similarly, the electricity company was split into generation, transmission and distribution. Regulatory powers were handed to the newly established Ministry of Energy.

Doing this opened up the energy sector, and broke up the monopoly on energy. The construction of a solar plant was opened for tender and won by United Arab Emirates’ Masdar Clean Energy. The new site now means we are able to buy 100% green electricity at a price of 2.67 cents per kilowatt hour. This is lower than before, so this is a good result.

The small and medium-sized business sector has been supported with the creation of local offices that have access to the prime minister, enabling the companies to air their grievances. Following foreign exchange liberalisation in 2017, they can now easily access foreign exchange markets. Previously, they were forced to use the black market, which was costing them twice as much as legitimate currency exchanges.

Q: Alongside the business environment, banking is also subject to a large-scale overhaul. What is the plan for the transformation of the state-owned banks?

A: Banking is a huge economic sector, and 80% government owned. Of the 13 government lenders, six are deemed systemic. The government would provide support to the state-owned enterprises via the banks. If we are to properly reform the corporate sector, it means having to overhaul the banking sector as well. The Ministry of Finance is overseeing the reforms, with the agenda being set by president Shavkat Mirziyoyev.

There have been significant changes in Uzbekistan in recent years. There were UZS52,600bn ($5.5bn) in total banking sector assets when Mr Mirziyoyev was elected in 2016. At the end of June 2019, the figure was UZS209,000bn. During the first 25 years of independence, the country did not invest enough in infrastructure, job creation and the social sector. Mr Mirziyoyev decided to push for investments as part of the reform priorities. This saw the usage of sovereign wealth fund assets channelled through the banking sector to fund the development projects over the past three years.

However, the banking sector was not operating under a sustainable model. The government was doing the work that the banks should have been doing to support the economy. A recently adopted presidential decree to support and commercialise the banking sector was a very important step in taking the directed loans off the banks’ balance sheets while capitalising them. This meant $1.4bn in loans was converted into equity, with the top six banks having 20% to 33% of Tier 1 capital.

The transformation of the banks is being conducted with the assistance of the International Finance Corporation and the European Bank for Reconstruction and Development. The country has been following the model seen in eastern Europe, such as in Georgia, where the agencies have worked with them by providing equity and aiming to launch an initial public offering in the mid-term. We intend to use a similar strategy.

Q: During 2019, the country took its first steps in to the capital markets, and Uzbekistan issued its first Eurobond. How was that received by the international markets, and what has been gained from this experience?

A: The first bond issuance was a huge success, with the $1bn Eurobond being more than eight times oversubscribed at its peak. The pricing was 4.75% on five-year and 5.375% on 10-year notes. It was an unprecedented result for a debut bond issuance. The bonds also traded well in the secondary market thereby demonstrating that Uzbek bonds are a good investment opportunity.

We want to see greater private sector investment, and we know to achieve that we have to offer the best standard of Eurobonds. This will help to attract more potential investors to our order books. We have shown that the Eurobond was properly handled – if it has not been, it would have been obvious to investors. It is important for us to learn how to be best in class from the outset. Importantly, we have set a benchmark for future issuances.

Having a strong bond market is important to finance our future plans. There is a pipeline of $12bn in projects that need government support. We need to be restrictive in how much of the government balance sheet is used to finance this. To succeed, we need the banks and other financial services to start filling the funding gap. While the local currency market has a good potential, the banks increasingly need to look to Eurobonds to raise funds needed to boost the economic growth. Our second largest bank, Sanoat Qurilish Bank, has recently debuted with $300m five-year issuance, which was four times oversubscribed. A few other banks and corporates are planning their debut transactions in 2020 and 2021.

Q: There are clearly big plans to change how business is done in Uzbekistan. What are your ambitions for the development of its financial markets?

A: Our aim is for Uzbekistan to have a role in the global capital markets, and for this to be an engine of growth for our economy. For this reason, we established the Capital Markets Development Agency in 2019, whose job is to develop and regulate the market.

I personally like following a developing market model, and looked at what has been developed in Poland. The Warsaw Stock Exchange has been a success, a place to raise capital (equities and bonds) for Polish and central and eastern European issuers. The stock exchange is also modern, allowing the trading of stock to happen in real time.

For Uzbekistan to grow its financial markets, there also has to be reforms to other parts of the industry. This will take the shape of pension fund reforms, and a focus on insurance sector growth.

At the same time, we remain importers of capital in the foreseeable future, therefore our capital markets infrastructure should allow foreign investors to trade in our domestic markets in the comfort of their own offices. It means our systems should be operating to the best international standards. This also means being connected to the Euroclear or Clearstream networks to allow transactions to flow smoothly. There is currently not the level of infrastructure needed in place, and this needs to be remedied to make Uzbekistan an attractive place for investors, and make the essential link to the capital markets.

We also understand the importance of adhering to internationally recognised metrics, and have been closely working with the credit ratings agencies and other international index providers to measure our reform progress. At present, Uzbekistan is rated as stable BB negative by both S&P and Fitch, and has been making progress in the Organisation for Economic Co-operation and Development country classification, moving to group five earlier in 2019.

The government is also focused on institutional reforms to address key issues such as corruption, accountability, freedom of speech and many others. And we are also trying to educate ourselves on what we need to do to meet our ambitious reform goals. We also want to be sure to communicate these reforms to our people, and [explain] how the changes will bring them more prosperity.


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