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Capital Markets

Uzbekistan takes reform story to bond investors

Central Asian state prepares for $1bn international debt market debut

Ipoteka Bank, which has issued stock and bonds domestically, could be a candidate to issue international debt. (Photo by Ikrom Nosirov)

TASHKENT/ALMATY - Interest in the opening up of Uzbekistan, the Central Asian state that was long one of the world's most isolated nations, has been growing amid a flurry of announced reforms. Soon investors will get a chance to take their own view on its economic prospects.

The government of President Shavkat Mirziyoyev is preparing to make its debut on the international bond market with a $1 billion debt issue. Since Tajikistan, Uzbekistan's poorer neighbor, was able to sell a $500 million bond to international investors in its first outing last year, authorities in Tashkent are optimistic about their chances even as global interest in high-yield debt from frontier markets cools.

The planned Uzbek eurobond will mark a further step away from the authoritarian autarchy of Islam Karimov who led Central Asia's most populous nation from its independence from the Soviet Union in 1991 until his death in 2016.

"The president will take the final decision on participating in the international eurobond market," said Uzbek Finance Minister Djamshid Kuchkarov in an interview with a local website in March. "For now, I can say that the eurobond will be $1 billion."

Just a month earlier, Kuchkarov had estimated the planned issue size at $200 million to $300 million. The issue's purpose, he said, is to create a benchmark for Uzbek companies to issue their own international bonds.

The three major international rating agencies have been publishing ratings for Uzbekistan's handful of large banks, some of which have outstanding domestic bonds. Bank stocks also dominate the ranks of the most-traded shares on Tashkent's Republican Stock Exchange. Abhor Ratings, the national rating agency, was organized by the Uzbekistan Banking Association.

Tashkent's expanded target for the sovereign bond issue comes amid signs the plans have piqued interest. "We think that the Uzbek story is an incredible story," said Clemente Cappello, chief executive of Sturgeon Capital, a Central Asia-focused fund manager based in London. "We will definitely look at the Uzbek bond and we might buy it."

Mirziyoyev was Karimov's long-time prime minister but has surprised observers by abandoning many of his predecessor's isolationist policies, re-opening border crossings and transport links and loosening currency controls.

Social restrictions have also been relaxed, with the Muslim call to prayer allowed to sound from mosques for the first time in two generations, thousands of political prisoners released, and bars and nightclubs permitted to stay open late. Ties with neighboring states have improved markedly and Tashkent has renewed engagement with international development institutions such as the European Bank for Reconstruction and Development.

Said a young woman buying vegetables in a Tashkent market, "We've seen significant changes in the country, including economic and currency liberalization, and the opening of borders with Tajikistan." A young man with her grumbled that restrictions imposed by Mirziyoyev on the cost of wedding parties had made his business less profitable but added that the president's initiatives have largely been positive.

Uzbekistan had previously posted official economic growth rates of at least 8% for a decade, but Mirziyoyev in December said those numbers were "fiction." The government has put gross domestic product growth last year at 5.5%, the same level the Asian Development Bank forecasts it will achieve this year.

"The bond issuance will be an effective scorecard for Mirziyoyev's attempts at economic reforms and whether international investors are buying into Uzbekistan's story of turning a new reformist leaf," said Samten Bhutia, Uzbekistan country analyst for the Economist Intelligence Unit.

Moody's Investors Service has not yet issued a sovereign rating for Uzbekistan, but the agency said in a research note in February that it was optimistic about a five-year liberalization plan focusing on government modernization, the strengthening of the rule of law and social welfare improvements.

"Even the plan's partial implementation would enhance the country's institutional and economic strength and help attract foreign investment," Moody's said.

Some observers have warned that waning interest in developing market bonds could force Tashkent to offer a higher coupon rate than the 7.125% Tajikistan secured. The Tajik bond, issued to fund the development of a hydroelectric dam, benefited from investors' search for yield amid low interest rates in advanced economies.

"We will have a look at the Uzbekistan sovereign bond issue, if and when it comes around, but the market is more difficult for high-risk debt this year than it was last year," said Theo Holland, investment manager at Kames Capital's Emerging Market Bond Opportunities debt fund. He said he had not invested in the Tajik bond issue, in part because he felt the asking price was too high.

"Uzbekistan is very much an unknown quantity in the debt market, but my feeling is that there will be interest," said Dominic Lewenz, head of research at Visor Capital, a brokerage focused on Central Asia. "Although the global macro environment remains supportive, the hunt for yield which helped drive recent issues has abated somewhat this year as central banks like the U.S. Federal Reserve tighten policy, but there is still interest in frontier market debt," Lewenz said.

Before Tajikistan's eurobond, Kazakhstan was the only Central Asian state to have issued sovereign debt. In 2014 it issued two eurobonds, its first in 14 years, for a combined $2.5 billion in proceeds. Two further issues raised $3.5 billion in 2015.

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