Page 56 - bne_Magazine_April_2018

56 Opinion
bne April 2018
The jury is out
on Uzbekistan's lure as the next investors' darling
Tomas Motl of OG Research
Formerly one of the most closed economies in the
world, Uzbekistan has seen sweeping changes over
the past year. President Shavkat Mirziyoyev, who replaced his late predecessor Islam Karimov in December 2016, brought a wind of change. Stifling regulations were abolished, relationships with neighbours are improving, and the government announced an ambitious five-year reform plan that, if implemented, would radically improve the growth potential of the Uzbek economy. However, we argue that the chances currently look slim that Uzbekistan will offer a hefty payout on an early investment.
The five-year plan goes well beyond economic stabilisation and includes also political reforms such as strengthening the role of parliament, establishing an independent judiciary, and the fight against corruption. In order to make Uzbekistan an
“Stifling regulations were abolished, relationships with neighbours are improving, and the government announced an ambitious five-year reform plan”
attractive investment destination, the country wants to reduce the role of the state in the economy through privatisation, establish a favorable tax regime, improve transparency, and deliver full convertibility of the currency by 2019. The great promises and the prospect of entering a pristine market with 33mn consumers have caught the attention of many investors.
There are good reasons to think that the reality will be much less sanguine than the government would like us to think. To some extent at least, the reforms were forced upon Uzbekistan by the drop in world energy prices and the Russian economic downturn in 2015-2016, which reduced foreign inflows by $7.5bn (11% of GDP) annually.
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President Shavkat Mirziyoyev has brought a wind of change.
Official statistics showed the growth holding steady at an enviable 8% per year, but that only serves to demonstrate that the official statistics have little to do with economic reality, and indeed Uzbekistan has started cooperation with the IMF to produce a new, reliable set of basic statistics. Our OGResearch estimation is that the true growth rate was perhaps 5pp lower than officially reported. The extent of the problems was best reflected in the value of the Uzbek som on the black market, where it declined to a half of its official value in the summer of 2017.
With the mounting economic costs and little hope of improvement, reforms were the only viable path forward. The most notable reform surely was the devaluation of
the national currency in September 2017 and loosening of regulations which effectively abolished the black exchange rate market, removing the single biggest obstacle for business in Uzbekistan.
The key for success of the reform plan will be to attract sufficient foreign investment to bring new technologies, improve productivity, and help overcome the low level of domestic human and physical capital. The task is even more challenging for a landlocked country with poor transport infrastructure. Countries that have successfully transformed their economies from centrally controlled to market-based models, such as China or the Central European countries, have seen investment inflows of around 4-5% of GDP that lasted decades. Uzbekistan only touched those levels briefly during the commodity price boom and the investment flowed mainly into the hydrocarbon extraction industry. With current oil and gas prices, that is unlikely to be repeated.
Enriching the elites
To attract the needed investment, Uzbekistan will have to create an inviting business environment. That will require the Uzbek political elites to give up a significant part of their economic control over the country, and ultimately also part of their political control. The current practice of using the political system to rig the markets and enrich the elites is not compatible with a truly attractive investor environment.