By Hamlin Lovell, NordicInvestor

As this country at the heart of China’s Belt & Road initiative undergoes political modernization, and issues its first ever Eurobond – hot on the heels of its inaugural sovereign credit rating – there are high hopes that strong economic growth and a structural reform program will be a springboard for industries ranging from oil & gas to agriculture, banking and tourism. We spoke to Sturgeon Capital, who have been investing in Central Asia for 12 years.

Sturgeon Capital is an award-winning investment manager focused on the Silk Road region with more than a decade of experience in investing in Central Asia and the Caucasus. Sturgeon has been invested in Uzbekistan for over 8 years, and travels to the country several times a year. Their latest trip, in February 2018, had fourteen participants ranging from frontier market fund of fund managers to private investors and financial journalists – a record number. The reasons for such interest are not hard to find. “The transition to an open market economy is similar to Eastern Europe in the 1990s in the opportunity it presents for early stage investors” says Sturgeon Capital founder and CIO, Clemente Capello.

Strong macroeconomy

On February 13th, 2019, Uzbekistan raised $1 billion in its first Eurobond offering. Bloomberg reported the yield as being 4.75% on the five-year USD bond and 5.375% on the ten-year USD bond, a spread of 2.16% and 2.669% over the respective US government bond maturities.

In December 2018, the country obtained its first sovereign credit rating, three rungs below investment grade at BB- with a stable outlook from both Fitch and S&P Global Ratings, with Moody’s issuing a rating of B1 ahead of the recent offering.

The yield and rating reflect strong macroeconomic fundamentals.

Uzbekistan’s 32 million people make it Central Asia’s most populous country, with a median age of 26 and nearly 50% of the population under 25. The population is growing at about 1% per year, and GDP growth is forecast to accelerate from 4.5% to 6% in the medium term. “Historically, figures as high as 8% were reported, but with economic statistics reporting recently brought in line with international standards as part of the reform program, the current figures present a more accurate picture of GDP growth” says Robin Butler, analyst at Sturgeon Capital.

Though the current account has slipped into a small deficit, the external balance is relatively strong. Thanks partly to exports of gold, cotton and textiles, FX reserves of around $28 billion cover roughly 20 months of imports. As part of their recent investor trip, Sturgeon visited SAG, the fourth largest carpet manufacturer in the world producing 5-6,000 carpets a day at their state-of-the-art factory in Samarkand. “Uzbekistan’s gas reserves are second only to Turkmenistan in Central Asia, and are higher than those of Kuwait, Norway or Libya” notes Cappello.

Public debt at 25% of GDP – and a small fiscal deficit – also compare well with most emerging and frontier markets.

The currency devaluation of 50% in September 2017 in reality aligned the official exchange rate with the unofficial market one, and paved the way for a managed float. The rate has been stable since then.

“Short term interest rates were raised to 16% in September 2018 to combat rising inflation. The inflationary pressures of the currency devaluation and loosening of monetary policy, as well as the liberalization of prices for many basic goods and services, such as utilities, can keep inflation in the mid-teens in the immediate short-term. However, the IMF forecasts that this will drop to single digits by 2021 as one-time shocks work through the system” says Cappello.

The banking system, particularly state-owned banks, is thought to have high non-performing corporate loans, often made to state-owned enterprises. The government is very much alert to the risks these pose, and intervened to shore up banks that were hit by currency devaluation. Retail lending on the other hand is in its infancy.


In December 2016, newly elected president Shavkat Mirziyoyev came to power acknowledging the need to transition from a centrally planned post-Soviet economy to a market-oriented economy driven by the private sector. The man he replaced, Islam Karimov, had ruled Uzbekistan since 1989 till his death in September 2016. “It is time to end the period when people worked for the government. Instead, the government must start working for the people” said Mirziyoyev, shortly after coming to power.

The IMF has welcomed moves to a more open market economy, including reforms of public services, increased judicial independence, educational development, and tax system reforms, where online payments should make for a more orderly system. There is also a major anti-corruption drive, with reports of governors fired on the spot for soliciting bribes.

The government has made a concerted effort to reduce the practice of forced labour in the cotton industry. This – an important topic for ESG investors – has been nearly eliminated, according to a United Nations report (though some non-governmental organisations, such as the Uzbek-German Human Rights Forum, and the Cotton Campaign, claim that there is still some forced labour).

Uzbekistan is steadily climbing up the rankings for the World Bank’s Ease of doing business report, from 154 to 76, and the government has set the target of reaching the top 20 by 2022. “A reverse brain-drain has begun, with the successful Uzbek diaspora answering the President’s call to return to Uzbekistan to help both with the government reforms and to start businesses” says Capello.

Foreign relations with its neighbours, which include all the Stan’s countries, are being improved and Uzbekistan – which has not joined the Russia-centric Eurasian Economic Union – has a balanced perspective, forging ties globally, with the US, Europe, Russia and China” says Cappello. “As part of Uzbekistan’s reengagement with the world, Mirziyoyev has been busy, visiting 16 countries in 2017 including Russia, China, the United States and South Korea, 12 countri