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UZS has been stable so far but how long can it last?

Since one-off devaluation of UZS to 8,100 UZS/USD from 4,210 on 5th of September, 2017, Uzbekistan’s local currency has been quite stable thanks to 1) growing exports, 2) increasing foreign investments and loans from IFIs (International Financial Institutions like EBRD, ADB, etc.), 3) decreasing use of US dollar within Uzbekistan and 4) small intervention from Central Bank of Uzbekistan (CBU).
Amid rising interest rates in the US and FX turbulence in emerging markets (sharp depreciation of RUB, TYR, KZT, CNY, etc.), can UZS stay away from these volatilities and sustain its stability? Our answer is no. We expect a modest depreciation of 5-7% over the next year but believe that massive depreciation of above 10% is less likely (under our base case scenario). UZS depreciation is driven by
1) high but declining inflation
2) modest deterioration of current account balance
3) modest decline in remittance inflow

However, we believe that massive depreciation is less likely given
1) country’s relatively low external debt
2) large international reserves which can be used to defend large fluctuations in the rates
3) stable economic growth.

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Below we discuss the factors that impact UZS and share our view of the future of the currency.


1. High inflation. Inflation was high at 18.9% in 2017 driven by 1) currency liberalization (which made imported goods more expensive in local currency) and 2) loose monetary policy. Central Bank and Fund for Reconstruction and Development of Uzbekistan injected large monetary resources into the local banks to ease the negative impacts from currency devaluation and boost economic growth. Albeit declining, inflation remain high during 8M18 - annualized inflation rate of 15.7% as of August which is higher than 11.5-13.5% expected by CBU and lower than 16.9% by IMF. On 22 September 2018, CBU revised up its inflation estimates for 2018 to 16-17% from 11.5-13.5% expected at the beginning of the year due to 1) high loan growth, 2) increase of utility prices (e.g. electricity, natural gas, etc.) by liberalization policy, and 3) higher than expected budget expenses (e.g. salary hike of government employees, such as teachers, etc.). On the same day, CBU raised refinancing rate to 16% from 14%. Inflation is expected to decline slowly and reach 10.1% by the end of 2019, according to IMF.
2. Declining remittance from Russia, Kazakhstan, etc. Uzbekistan receives remittance from the workers in Russia, Kazakhstan, Korea, etc. In 2017, remittance from Russia was $2.7bn. During 1H18, total remittance to Uzbekistan was $2.3bn. There is downside risk to the remittance amount due to the devaluation of Russian Ruble (RUB) and Kazakhstan Tenge (KZT) and sanctions against Russian which might slow down its economy.
3. Deteriorating current balance. Since March, 2018, current account deficit has been widening. Current account deficit is expected to continue given 1) country’s market opening policies and removing/lowering import tariffs and 2) lower prices for key export commodities like gold, natural gas, cotton, etc.


1. Relatively low external debt. External debt is low at 20% of GDP according to local authorities (although IMF puts it at around 40%). Large portion of external debt is comprised of policy loans from IFIs thus interest rates on these loans are low. Servicing these loans shouldn’t assert too much pressure on the government.
2. Large international reserves. Uzbekistan’s international reserves stand at US$26.9bn which is quite high vs. GDP at about US$39bn. Although international reserves are in declining trend due to dollar appreciation and decline in gold prices, we believe that CBU has enough resources to intervene FX market in order to stabilize the rates, if needed.
3. Modest but stable economic growth. Economic growth for 2018E/19E is expected to be c.5% driven by 1) export growth (strong commodity prices, agriculture reforms, etc.) and 2) infrastructure and real estate sectors growth.
4. Stable currency is a state priority. Stable currency is one of the key economic priorities of the new government in order to execute reform plans and attract foreign investments. Thus government will take all necessary measures to keep it stable.