TOPIC OF THE WEEK: Two good pieces of macro news for Uzbekistan
A key macro risk for Uzbekistan has been the transition into a net gas importer status in 2023. The external gap in trading natural gas worsened significantly in 2024 as the country continued to suffer from declining gas production. Still, overall trade dynamics improved last year as higher gas (and broader energy) imports were offset by most of the remaining import categories, while robust gold shipments propped up total exports. As a result, Uzbekistan enjoyed a (slightly) smaller trade deficit last year despite the significant rise in energy purchases.
Equally important, last year fiscal plans were met for the first time since 2020. The series of tariff hikes implemented since late 2023 have sharply reduced the amount of gas subsidy, while a broader expenditure optimization has contributed to a restrained expenditure policy, resulting in consolidated budget deficit that fell from 5.0% of GDP in 2023 to 3.3% of GDP in 2024 (vs originally planned 4.0% fiscal gap). This is a very welcome development and I anticipate these positive fiscal efforts to continue in the coming years.
As a result, Uzbekistan has enjoyed a sizable moderation in its twin deficits in 2024. They have grown steadily from a balanced position in 2017 to almost 13% of GDP in 2023. However, the conscientious government efforts to address fiscal excesses and diversify remittances away from Russia have paid off, with the twin deficit declining to a more manageable 8.8% of GDP in 2024. Of course, one should not be oblivious to future risks deriving from pursuing ad-hoc spending initiatives and decreasing remittances(and/or higher-than-anticipated energy imports), but 2024 has turned out to be a successful year from the point of view of the magnitude of the twin gaps.
The currency is one asset that has benefited from these developments as demonstrated by the more modest depreciation experienced in 2024. The currency is one asset that has benefited from these developments as demonstrated by the more modest depreciation experienced in 2024. For example, while the UZS depreciated vs the US$ by 10.3% in 2023, it lost only 4.3% vs the US currency last year. If I am right that the twin deficits will continue to be more manageable over the coming years, then investors should consider smaller rates of depreciation of the Uzbek sum in future, i.e. something to the tune of 5% per annum vs the previous working hypothesis of around 10%.
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