Moody’s upgrades Uzbekistan’s outlook but highlights rule of law shortfalls

Moody’s justified the Ba3 rating with Uzbekistan’s positive macroeconomic indicators and relatively low debt burden. Although most public debt is in foreign currency, its largely concessional nature provides significant borrowing capacity.

However, the broader public debt, including non-guaranteed loans by state-owned enterprises and public-private partnership (PPP) obligations, is rising. In recent years, major state-owned enterprises have increased external borrowing to diversify funding sources and assess market valuations ahead of potential privatization. PPP obligations reached 27% of GDP in 2024, mainly tied to energy and infrastructure projects. Moody’s anticipates that broader public debt will continue to grow over the next two to three years, posing risks of contingent liabilities.

The government is refining its system for assessing risks from state-owned enterprises and PPPs. For instance, it recently announced that new PPP commitments in 2025 will not exceed $6.5 billion. Additionally, all state-owned enterprises must now obtain government approval for external financing, helping to moderate the rapid growth of foreign currency obligations. The risk of contingent liabilities is partially mitigated by significant assets in Uzbekistan’s sovereign wealth fund, the Fund for Reconstruction and Development.

The Ba3 rating also reflects low per capita income, limited competitiveness, and institutional weaknesses. High dollarization, restricted interbank market operations, and shallow domestic capital markets constrain the transmission of monetary policy. Despite some improvements, Uzbekistan continues to lag behind peer Ba3-rated countries in voice and accountability, rule of law, and control of corruption.

The rating further accounts for moderate political risks, as more complex reforms, such as large-scale privatization, could entail economic and social costs, potentially slowing progress and increasing business environment uncertainties. Geopolitically, Russia’s invasion of Ukraine and its potential influence in Europe and the CIS have heightened risks, raising the possibility of shifting political alliances in Central Asia and beyond. Despite strong ties with Russia, Uzbekistan has sought to maintain a neutral stance since the conflict began.

Factors that could affect the rating

Moody’s analysts indicated that confidence in Uzbekistan’s reforms leading to improved political effectiveness and institutional quality could result in a rating upgrade. Enhanced economic competitiveness, successful privatization of major state-owned companies and banks, and sustained fiscal stability while avoiding sharp increases in social spending could also support an upgrade.

Given the “positive” outlook, a downgrade in Uzbekistan’s sovereign rating in the near future is highly unlikely. However, significant deviations from economic reforms, possibly due to domestic political or social pressures, could prompt Moody’s to revert the outlook to “stable.” Fiscal challenges arising from state-owned enterprises or PPP obligations could also lead to a downgrade. The nature of potential external risks remains unpredictable.