Today, December 4, Standard & Poor’s credit rating service has published a new report “Assessment of industry and country risks of the banking sector: the Republic of Uzbekistan”.
Based on Banking industry country risk assessment – BICRA methodology,
the banking sector of the Republic of Uzbekistan (not rated S & P) was assigned into a risk score of group of 8 that reflects the assessment of economic risk “7” and the industry score of “9” .
In accordance with the gradation BICRA countries are divided into groups depending on the level of risk in their banking sectors – from group 1 (the country with the lowest risk) to group 10 (the country with the highest risk). In addition to Uzbekistan, a group of 8 consists of Argentina, Azerbaijan, Bolivia, Georgia, Hungary, Kazakhstan, Lebanon, Nigeria, Paraguay, Slovenia, Sri Lanka and Tunisia.
Uzbekistan is characterized by insufficient infrastructure development and relatively low level of well-being. In 2014 the GDP per capita was estimated at $ 2 000. This corresponds to a per capita gross national income of $ 5,340 based on purchasing power in 2013 . (according to the World Bank). The significant size of the underground economy could be the reason why the rate of disposable income per capita in this country appears to be higher.
The highly centralized decision-making process related to the economic course, has a negative impact on the predictability of government policy. This is exacerbated by the limited flexibility of monetary policy in fact multiple exchange rates and limited access of the private sector to foreign currencies.
Uzbekistan is only slightly affected by the recent global economic crisis, due to its limited globalization of financial markets, high commodity prices, which are the main export commodities, and the implementation of state programs to stimulate the economy. It can be noted, however, that there is a strong dependence of economic indicators from changes in the terms of trade in the export-oriented commodity sector, especially in industries related to the production of natural gas, metals (mainly gold), and the collection and processing of cotton.
The state strictly controls the economy in general and the banking system in particular. Specificity of the economy and strong state control reduces the risk of external volatility and limit the possibility of “price bubbles” in the economy, in particular in the sector of real estate transactions.
Despite the low level of debt of businesses and individuals, the low level of well-being, rigorous standards of underwriting and vulnerability of the legal system, determine the potential increase in credit risk in the banking sector. At the same time in 2013, the volume of bad loans did not exceed 1%.
The system of banking regulation and supervision in Uzbekistan is still developing, which leads to a weak market discipline. In addition, despite a number of measures taken by the Central Bank of Uzbekistan to improve disclosure, corporate governance and transparency, the results of these measures are being evaluated as very low. Dominant position in the banking system of Uzbekistan is state-owned banks together control about 80% of the assets of the banking system, in which a high proportion of directed lending. State ownership and control of the state limits the development of competition, which has a negative impact on the creditworthiness of private banks. In addition, the state uses the majority of state-owned banks to provide financial support to key sectors of the economy that puts pressure on the margins of banks.
The assessment of the funding of the banking sector reflects the fact that a significant portion of the loans financed by customer deposits; net external funding provides only about 14% of the loans, which involved mainly the two largest state-owned banks. Shallow and relatively illiquid domestic financial market and the lack of adequate access to long-term resources or resources attracted from international capital markets, are also regarded as risk factors.
The Government of the Republic of Uzbekistan is “ready to support” the banking sector. The government of Uzbekistan tightly controlled sector and traditionally provides emergency support to banks during the financial and economic crises.
The position of the banking system of Uzbekistan in terms of exposure to economic risk is assessed as “stable” despite the upcoming parliamentary and presidential elections and the rapid growth of credit in the economy. It is expected that Uzbekistan will maintain a significant budget surplus and current small account imbalances and, the existing political and economic system will remain unchanged.
Exposure to credit risk remains very high in structural terms, due to the relatively low (in an international context) level of economic development (GDP per capita was about 2000 dollars. In 2014, per capita gross national income in purchasing power parity – about 5340 USD. in 2013), as well as the weakness and vulnerability of the payment culture of the legal system.
The trend in industry risk in the banking system of Uzbekistan is evaluated to be “stable”. Increasing the transparency and quality of data may lead to a reassessment of the institutional environment. It is believed that the dominance of state-owned banks in the banking sector and in the future may hinder the development of competition in the banking system. Funding Uzbek banks assessed as relatively stable due to an increase in public funding and corporate deposits. However, a slowdown in retail deposits and deterioration in banks’ capitalization is noted due to the rapid growth of assets.