Tamerlane #27: March 29-April 5
Inflation falls to 11.7% yoy in March, electricity price liberalization unlikely in 2023, international arbitration launched against Uzbek government, "people's IPOs" to target expanded participation
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Top News
Inflation in March fell to 11.7% yoy, a significant drop from the February print of 12.2% yoy and the lowest figure since May 2022. The decrease was primarily driven by a fall in price of foodstuffs, which reached 14.6% yoy in March after recording 15.5% in February. The price growth of grains, flour, and cooking oils eased in March, while the cost of vegetables, fruits, and nuts continued to rise but at a slower pace than the highs of 2022. Inflation for non-food products fell from 10.7% in February to 10.2% in March, as prices of clothing, appliances, and furniture stabilized. Price growth for services fell slightly from 8.5% yoy in February to 8.4% in March. Earlier in March, the Central Bank of Uzbekistan lowered the policy rate by 100 basis points to 14% as a result of encouraging preliminary data pointing to stabilizing inflation.
The Ministry of Economy and Finance does not expect to carry out the long-planned liberalization of electricity and energy prices in 2023, according to Deputy Minister Dilshod Sultanov. The price liberalization, which was intended to coincide with the 7% increase for pensions and welfare payments scheduled for April 1, would have been the first raising of utilities prices since 2019 but has been delayed multiple times for both individual consumers and businesses after receiving negative public feedback. In his annual address to the Oliy Majlis (parliament) in December 2022, President Shavkat Mirziyoyev told deputies, “if we do not liberalize the energy market, investors will not come,” given the cost of the modernization of Uzbekistan’s energy infrastructure could only be provided by the private sector. The planned liberalization is expected to be targeted and implemented in phases, with the current subsidized prices remaining in place for low-income households and increases only for higher income households and businesses. Earlier in March, Fitch Ratings pointed to the liberalization of electricity prices as a key bellwether “for the appetite and capacity for reforms.”
Spanish explosives manufacturer Maxam filed international arbitration proceedings in London against the government of Uzbekistan for breach of contract relating to the company’s stake in Maxam-Chirchiq, a chemicals joint venture with state-owned Uzkimyosanoat. In a major challenge to Uzbekistan’s attempts to attract international investors and enact business friendly reforms, sources told Eurasianet Maxam was forced to initiate legal proceedings after negotiations with the government failed to resolve the company’s claims regarding the joint venture, which it joined in 2007. Uzkimyosanoat has rejected Maxam’s “frivolous” claims and asserted the Spanish company failed to meet its investment obligations in the JV, mismanaged its stake, and was only interested in collecting dividends.
The Uzbek government is transitioning to the “E-Auction” platform for the “people’s IPO” to expand access and increase the number of domestic participants in the privatization program, according to officials. Sohibjon Murodov, Director of the Center for the Organization of Online Auctions, told Kursiv.uz that listing stakes in state-owned enterprises on the Republican Stock Exchange Toshkent would only reach a “small circle” of buyers who regularly trade on the exchange. According to Alisher Miraliyev, Deputy Director of the State Assets Management Agency, the RSE Toshkent recorded 100,000 users at the end of 2022, while the “E-Auction” platform has more than four million users. Foreign investors will not be allowed to participate in the “people’s IPO” auctions, and officials emphasized that “E-Auction” will not act as an exchange but rather as an intermediary, with secondary trading taking place on the RSE Toshkent after the auctions are completed. The auction format for the “people’s IPOs” has received strong criticism from local market participants.
Local Markets
Fintech and digital ecosystem provider Uzum plans to raise USD 300 million by the end of 2023 and is considering an IPO within the next three years. In an interview, two of Uzum’s co-founders, Jasur Djumaev and Boris Dobrodeev (former head of Russian social media network VK), told Russian news site RBK that Uzum, whose holding company in the United Arab Emirates, is currently raising funds from institutional investors in the Middle East. Uzum and its co-founders, which also include unnamed “Uzbek businessmen,” have close ties to Uzbek-Russian oligarch Alisher Usmanov. In 2022, Djumaev sold a mobile marketing company to Megafon, which is controlled by Usmanov’s USM, while Dobrodeev headed USM Telecom in 2022 after leaving VK. Dobrodeev and former USM executive Irina Lupicheva reportedly equally owned Finance TCI, which along with Telecominvest was part of Usmanov’s USM holdings that held a stake in Uzbek Kapitalbank before it was sold to “private entrepreneurs.” In January 2023, Finance TCI became the controlling shareholder of Kapitalbank after it purchased a 50% stake and raised its total share in Uzbekistan’s largest private bank to 61.54%. Kapitalbank and its digital subsidiary, Apelsin Bank, are now part of the Uzum ecosystem, which the latter rebranded as Uzum Bank. Uzum plans to expand into food delivery services in the near future.
The Republican Stock Exchange Toshkent announced a change in listing categories for 11 companies, including the transfer of 10 companies from the “Transit” to “Standard” categories after free float requirements for the latter were lowered to 1% in February. Large companies such as Trustbank, Agrobank, Aloqabank, Uzbektelecom, and others were upgraded to the “Standard” listing category after the free float requirements were loosened, while 1-Reinforced Concrete Products Factory was downgraded to “Transit.” The RSE Toshkent has three listing categories – “Transit,” “Standard,” and “Premium” – based on trading, liquidity, financial, and transparency metrics.
Asia Frontier Capital Uzbekistan Fund’s monthly update offers some positive commentary on Uzbekistan’s latest privatization program, suggesting the use of the term “people’s IPOs” aligns with similar terminology in other post-Soviet reform campaigns and could mean this process is better planned out. Scott Osheroff, AFC Uzbekistan Fund’s CIO, also pointed to the involvement of Franklin Templeton in establishing a national investment fund, which he hopes will be similar to Romania’s “Fondul Proprietatea,” as a welcome development that could attract international institutional investors and inject liquidity into the local capital market.
Macroeconomics
State-owned Hududgazta’minot, which maintains and operates Uzbekistan’s gas distribution network infrastructure, signed agreements with Italian gas equipment manufacturer Pietro Fiorentini for a EUR 200 million project to modernize the country’s distribution system financed by Italy’s Export Credit Agency (SACE). Pietro Fiorentini will provide hydraulic gas control points, pressure regulators, filters, and other components to the Uzbek gas distribution network while also offering training for local engineers. Uzbekistan’s outdated gas distribution infrastructure came under intense pressure during a cold weather snap in January that resulted in widespread outages and shortages.
The Japan Bank for International Cooperation (JBIC) will allocate USD 393 million in financing for the construction of a natural gas-fired combined cycle power plant in the Syrdaryo region. JBIC is entering into the project finance agreement for the power plant, which will have a total capacity of 1.6 GW, with general contractor ENERSOK Foreign Enterprise LLC. Mizuho Bank, Sumitomo Mitsui Banking Corporation, Société Générale, and the International Finance Corporation are co-financing the loan and bringing the total investment in the project to USD 805 million.
The Center for Economic Research and Reform (CERR) published its Bank Activity Index for Q1 2023, which ranks banks on metrics such as financial accessibility, capital adequacy, asset quality, management efficiency, profitability, and others. Unsurprisingly, CERR’s ratings are dominated by private banks, with Kapitalbank in first place, followed by Asia-Alliance Bank, Hamkor Bank, Ipak Yo’li Bank, and Trust Bank. The highest ranked state-owned bank in the rankings is Ipoteka Bank in seventh place, which is set to be privatized by Hungarian OTP Bank in the summer of 2023. Overall, CERR concluded that Uzbeks were beginning to “show more confidence in banks” while non-performing loans (NPLs) levels continued to fall.
Uzbek citizens without sufficient “official” income will be considered for mortgages as part of a government program to solve Uzbekistan’s chronic housing shortages. According to the Presidential Administration, other metrics such as individuals’ bank card turnover, rental and utility payments, and other expense payments will be considered when issuing state subsidized mortgages. The government also plans to establish a new housing company under the Ministry of Construction as part of the “My First Home” affordable housing program, which will sell retail and commercial space in state housing developments to reduce the cost of apartments. Other measures to stimulate housing development include lowering import tariffs on construction materials, continued mortgage refinancing by the state, infrastructure projects to expand roads, and funds to renovate existing dilapidated housing.
From January to February 2023, the average price of imported cars rose 27.7% to USD 26,700 as lower customs duties of foreign cars has incentivized the purchase of more expensive automobiles. Import duties on foreign cars were reduced from 30% to 15% starting from January 1, 2023, as a measure to open up Uzbekistan’s closed market for automobiles. China and South Korea remain the largest car exports to Uzbekistan, although the first two months of 2023 recorded a significant increase of cars imported from the United States, Japan, Hong Kong, and Germany.
Uzbekistan will invest in improving energy efficiency and renewable energy sources for buildings over the next five years using a USD 143 million loan from the World Bank. The financing will support the “Clean Energy for Buildings in Uzbekistan” project, developed by the Ministry of Energy, the Ministry of Investments and Foreign Trade, and the Intersectoral Energy Saving Fund, which will focus on modernizing energy systems for public education and healthcare institutions.
Business
Ukrainian pharmaceutical manufacturer YURiA-PHARM purchased Uzbek pharma company Reka-Med in a deal supported by EUR 10 million in financing from a European Bank of Reconstruction and Development (EBRD) loan. YURiA-PHARM acquired Reka-Med to help maintain its position in the Uzbek market in the face of logistical challenges from Russia’s invasion of Ukraine. The company exports 30% of its production, with 15% of that destined for Uzbekistan, and the acquisition of Reka-Med allows YURiA-PHARM to manufacture pharmaceutical products locally for the Uzbek market. YURiA-PHARM produces medical devices and prescription medicines, while Reka-Med, with its production facility in the Syrdaryo region, manufactures products for intravenous administration.
Digital lending platform and ecosystem Zood, which includes ZoodPay and ZoodMall, is entering a strategic partnership with Ipak Yo’li Bank, one of Uzbekistan’s largest private banks. The partnership will leverage Zood’s existing customer base to offer small and medium-sized enterprise and consumer lending and banking services from Ipak Yo’li Bank directly through Zood’s apps.
Global law firm Dentons published its “Doing Business in Uzbekistan 2023” annual report, which provides a roadmap for investors and business leaders interested in Central Asia’s fastest growing economy. The Denton’s guide provides directions on setting up a business, taking advantage of incentives for foreign direct investment, navigating tax and employment regulations, resolving disputes, the complex public procurement process, and many other critical topics for doing business in Uzbekistan.
Korea Telecom (KT) and its Uzbek subsidiary East Telecom began construction on a modern data center in Tashkent’s Yunusabad region to serve Uzbekistan’s rapidly growing IT sector. The four-story data center, which is being built on a 6,000 square meter plot of land, will include more than 300 racks for advanced data storage equipment and is part of East Telecom’s broader expansion plans to build digital infrastructure in Uzbekistan, Kazakhstan, and Kyrgyzstan.
South Korean company JM, which supplies leather products to automakers including Hyundai and Toyota, is planning to purchase finished leather goods from Uzbekistan. A delegation from Uzcharmsanoat, an association of leather, footwear, and fur companies, visited South Korea on March 30 and met with representatives from JM, who expressed interest in purchasing Uzbek leather goods and also raised the possibility of establishing a joint venture in the Tashkent region. JM representatives are planning to visit Tashkent later in April.
Government & Politics
The Uzbek government has reportedly paused the mass layoffs of state employees ordered by President Shavkat Mirziyoyev in January to shrink the size of the bureaucracy. According to lawyer Saidali Mukhtoraliev, Head of the Presidential Administration Sardor Umurzakov instructed the ministries to suspend layoffs of government employees, which was confirmed by the Ministry of Employment and Poverty Reduction. The cuts to the bureaucracy, developed by the former Ministry of Finance and Deputy Finance Minister Odilbek Isakov, were part of a wider administrative reform program and were expected to eliminate nearly 17,500 jobs, or 24% of all state employees, and save UZS 1.5 trillion (USD 132.3 million) in personnel costs. Isakov, former Ministry of Finance Timur Ishmetov, and Minister of Economy and Poverty Reduction Jamshid Kuchkarov, were replaced in a major government shakeup earlier in the year.
Uzbekistan and Hungary plan to establish a EUR 50 million joint investment fund to finance projects for Uzbek and Hungarian businesses. Minister of Investment, Industry, and Trade Laziz Kudratov and Hungarian Minister of Economic Development Marton Nade held virtual talks on expanding cooperation between the two countries, and in addition to the joint investment fund, the ministers discussed potential Hungarian projects in Uzbekistan, including poultry processing, licorice production, pharmaceuticals, and auto parts manufacturing.
The new Uzbek Ambassador to the United States, Furqat Sidiqov, officially began his tenure on April 3. Sidiqov was appointed Ambassador to the US by the Senate of the Oliy Majlis (parliament) earlier in March and replaces Javlon Vakhabov, who is reportedly being considered for the position of First Deputy Minister of Foreign Affairs. Sidiqov previously served as the Ambassador Extraordinary and Plenipotentiary of Uzbekistan to Pakistan from 2015 to 2020.
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