The media is actively discussing the fact that the new Tax Code has been adopted by the country’s Parliament and, accordingly, the State Budget for 2020, which is based on amendments in the Tax Code, has also been approved. Even though both important documents have not yet been published, some segments of the parameters of the budget and amendments in tax rates have already been published by individual media.
Already in the draft 2020 State Budget submitted by the Ministry of Finance of the Republic of Uzbekistan (https://www.mf.uz/media/file/state-budget/pub/citizens_budget_2020_ru.pdf) it was clear that:
(a) the state budget deficit will increase;
(b) the investment nature of government spending will increase and more state-owned banks will be involved in such spending;
(c) nothing significant will happen in the area of strengthening the control of imports of goods, increasing the volume of customs duties levied.
In addition, the volume of foreign trade deficit is going up, competition in the export market of traditional raw materials is growing significantly, which leads to a decrease in international prices for exported goods and a decrease in export revenues. All this together leads to an increase in the volume of external debt, which will be more and more difficult to service, since it is the revenue from exports that is the source of covering the public debt.
What is particularly disturbing?
At the beginning of the year, Uzbekistan issued Eurobonds totaling 1 billion Euros in two tranches worth 500 million Euros with corresponding maturities of 5 and 10 years and a yield of 4.75% and 5.375% per annum. This was presented to the Uzbek people as the greatest achievement of our economic services, as the demand far exceeded the supply, we were able to borrow money from international investors for much lower interest rates than our neighbors (Tajikistan and Armenia), which spoke about the high confidence of investors in the economy and politics of the Republic of Uzbekistan. Sounds good, do you agree?
In the meantime, in order to convince the international public about the correctness of the vector of reforms, to create a so-called “benchmark” for investors, there was no direct need to borrow money in such a large amount. Borrowing 1/8 of the budget on the government bond market for a country whose annual budget was at that time about $9 billion was more than strange, overly ambitious.
Only the current maintenance of the issued bonds will cost the state budget 50.6 million Euros per year (or almost 556 billion soums in two payments in August and February each year). After all, all this is in addition to the amount of 1 billion Euro borrowing, which in 2024 and 2029 in equal parts should be fully returned to investors.
The total budget expenditures for servicing these bonds will amount to 387.5 million euros until 2029. This is almost 39% of the amount borrowed.
Expenses on the organization of release too were rather big. At the lowest rates of financial institutions involved in the organization, conduct and maintenance of Eurobond issuance, the total costs of Uzbekistan were estimated at not less than 3.3-3.5 million Euros. The organizers of the listing were Citigroup, Gazprombank and JP Morgan, and the rating agencies were Standard&Poors Global Ratings and Fitch Ratings, which assigned a rating of BB- (minus), in line with Brazil, Northern Macedonia and Georgia. Among investors, this rating is called “garbage”. Legal service and support of the issue under international law is conducted by White and Case. The depository is Clearstream Banking S. A., Euroclear Bank.
The proceeds from the listing were spent according to the Decree of the President of the Republic of Uzbekistan dated 02.04.2019 N ПП-4258 “On the effective use of funds received from the listing of first sovereign international bonds of the Republic of Uzbekistan”: $889.2 million were placed on the auction system on deposits of state commercial banks. JSCB “Agrobank” received 20 million dollars in the form of a loan. The remaining $89.9 million were issued to “Navoi mining and metallurgical combine” in the form of a loan.
At the same time, debt obligations of commercial banks to the Ministry of Finance of the Republic of Uzbekistan were recognized as subordinated debt. In other words, the debt of the Ministry of Finance has become the debt of state commercial banks, which are already not in a very good position in terms of liquidity.
However, money was borrowed in the amount of 1 billion Euros, which was approximately at that time $1.1 billion, and distributed $999.1 million. Where is the difference of almost $101 million?
The saddest thing is that the goals set for the issuance of government bonds have not been achieved. The volume of direct investments from the first quarter of 2018 ($187.1 million) has not increased at the end of the second quarter of 2019 ($190.8 million). However, the Ministry of Finance managed to encourage other state-owned companies and banks to borrow money directly on the international capital market. At the end of November 2019, Uzpromstroybank listed $300 million worth international bonds on the London Stock exchange at a rate of 5.75 per annum. Other state-owned banks and state-owned corporations are in line. However, it seems to us that the accumulated problems of state banks and state corporations without a clear planning of investments, spending of borrowed funds will lead to the deterioration of their already bad financial situation.
The plans of our economic departments are to create a credit history of the country, aimed at creating a sustainable positive investment image of the country. At the St. Petersburg international economic forum in June this year, in an interview with Bloomberg, the Chairman of the Central Bank of Uzbekistan Mamarizo Normurodov, acknowledged that Uzbekistan will continue to increase borrowing in the capital market. “International investors should be able to see the credit history of the country. Our first listing doesn’t give us a story yet, it has just created a benchmark.” Uzbekistan intends to issue $ 1 billion bonds in the second bond issue.
Thus, the stated objectives for the issuance of government bonds were the same, and the actual results were completely different. How justified was it to make so many commitments to achieve the goals that could be achieved by improving the investment climate, developing targeted programs to support SMEs and create new jobs?
Economist, Candidate of Economic Sciences