Moody’s: Measures taken against coronavirus have a negative impact on the economy of Uzbekistan

The report of the international rating agency Moody’s, published on April 8, 2020, states that the banking system of Uzbekistan remains “stable”.

According to the Ministry of Finance, the main factor is that the country’s banking system is more resistant to the effects of the coronavirus pandemic than in the CIS countries.

According to experts, the fact that the public sector in Uzbekistan has a significant share in the country’s economy and banking system and creates material reserves, it limits the impact of disruptions on economic activity caused by the spread of the coronavirus.

Strong material reserves and previous large gains are sufficient to cover losses – result of deteriorating economic conditions. However, the growth of loans in state-owned banks will increase the pressure on their liquidity reserves.

According to Moody’s, the following factors are expected to have a positive impact on the stability of the country’s banking system:

- the predominance of loans to state-owned enterprises in the loan portfolio of the banking system and the fact that these borrowers can rely on government support will increase the reliability of loans and reduce the risk of deterioration in the quality of bank assets;

- despite the significant devaluation of the national currencies of Uzbekistan’s main trading partners – the Russian Federation, Kazakhstan and Turkey – the value of the soum remained stable against the US dollar. This, in turn, limits the risk of inflation of assets denominated in foreign currency and ensures the stability of the level of capitalization;

- with reserves equal to 52% of GDP, the Uzbek government has great potential to support the country's economy and banking system.

However, the agency listed the following negative factors:

- measures taken by the government to fight the coronavirus pandemic have a negative impact on economic activity. This will primarily affect small and medium-sized businesses, individuals, non-food consumer goods retail, catering, transport and tourism businesses and other service organizations;

- net interest margins decrease as banks spend more money on preventing the outflow of deposits as a result of their conversion from the national currency into foreign currency. This, along with high reserve fees, leads to a decline in profitability;

- the average liquidity ratio of the sector on March 1 was about 16% of total assets. Liquidity reserves will come under pressure due to the growth of lending in state-owned banks.