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Lending-Driven Economic Growth May Lead to Risks – Fitch

The rating agency Fitch Ratings in a new report warned about the risks for the economy of Uzbekistan.

Analysts pointed to significant changes in the economy and politics of Uzbekistan since the liberalization of the foreign exchange market in September 2017.

“The increased flexibility of the exchange rate is beneficial for the economy, but also creates risks due to the mismatch of borrowing and lending currencies and an increase in the volume of borrowings in foreign currency,” the report says.

Progress in reducing dependence on government funding sources and moving towards market-based financing costs differs across sectors and organizations. Banks and several non-financial corporations have made the most progress in this direction, Fitch noted.

“The reform process was facilitated by the low level of debt in the economy, but the rapid build-up of the debt burden, if sustained, creates risks,” added the analysts.

The agency emphasizes that achieving higher growth rates, for example by increasing investment in key sectors of the economy such as power generation, is one of the main policy objectives underlying the government’s reforms. This could boost the development of other sectors such as insurance and corporate law.

“However, high growth rates due to lending can also lead to risks, for example, in terms of deteriorating asset quality and greater dependence of banks on external sources of financing,” the report says.

The quality of management is a weak point in the creditworthiness of Uzbekistan, analysts of the agency noted. In their opinion, improving institutional stability, the quality of corporate governance, transparency and approximation of reporting to international standards is a key task for the country’s enterprises.

The regulatory environment is evolving towards an increased role for market mechanisms, however, in Fitch’s view, the pace and timing will depend on social and political considerations.

The total external debt of Uzbekistan in the first nine months of 2021 increased by $ 3.7 billion – to $ 37.6 billion.