Tashkent Stock Exchange Index Update
As discussed last month, the Uzbekistan Composite Index (UCI) soared by 109% in February due to insurance provider Universal Sug'urta's (TSE:UNSU) share price rising 199,999% from 23rd December 2020 to 28th February 2021, highly likely a result of share price manipulation. Therefore, it was not a surprise to see UNSU's share price collapse -84% during March (from UZS 20 to UZS 3.25), leading the UCI to fall -45% (from 1,443 to 793).
The economic events of the past year were rather muted as the majority of the news was naturally around COVID-19. The government did a superb job of handling the initial panic of the virus overall. Uzbekistan enacted two approximately one-month-long lockdowns, one in March and the other in July 2020.
The first lockdown was strict with a stay-at-home order and private cars banned from the road. Following this strict period, we believe the Uzbek government took a turn toward thinking more rationally and independently, realizing that through a strict lockdown they might be able to mitigate the spread of the virus, but would destroy the economy in the process, the latter of which many Western countries are doing with unfortunate pinpoint accuracy.
Therefore, the second lockdown was centred around limiting the movement of citizens while attempting not to hinder economic activity. This meant private cars were this time not barred from the road during the mornings and evenings (effectively allowing people to get to work until 10am and return home after 5pm). As this occurred during the summertime, schools were closed, but factories, construction sites, and cafes were all open and operating normally without any restrictions.
Following the second lockdown, during the autumn school semester, many schools began operating in-person classes again, and for the most part, the population stopped wearing masks, while quarantine facilities and emergency hospitals closed. Conversation and media coverage has returned to topics around the economy, politics and social news as movie theatres are open, concerts are happening regularly, and the recent Tashkent Marathon was even held on 28th March 2021.
The government has been working aggressively to privatize hundreds of state assets. Though things have been moving ahead slowly due to a variety of challenges, largely around the scale of the President’s privatization agenda and the valuation metrics being used to price assets for sale.
On 12th May 2020, President Mirziyoyev signed a decree, “On the Strategy for Reforming the Banking System of the Republic of Uzbekistan for 2020-2025,” which is intended as a roadmap for the continued liberalization and privatization within the sector. The main aspects of the decree included:
Increasing the share of private bank’s assets in the sector from 15% to 60%;
Increasing the total share of bank debt to private clients from 28% to 70%;
Attracting foreign strategic investors for at least three state-owned banks;
Increasing the share of non-bank lending from 0.35% to 4% of total loans.
Six state-owned banks are slated for privatization, including Ipoteka Bank (TSE:IPTB), with 90% state ownership, SQBN (TSE:SQBN), with 90% state ownership, Aloka Bank (TSE:ALKB), with 100% state ownership, Qizhlok Qurilish Bank (TSE:KKBN), with 80% state ownership, Turon Bank (TSE:TNBN), with 97% state ownership, and Asaka Bank, with 100% state ownership. Meanwhile, the National Bank of Uzbekistan, Microcredit Bank (TSE:MCBA), and Agro Bank (TSE:AGBA) will not be privatized.
A rumoured piece of legislation that may be announced this year could see an increase in the minimum paid-up capital of banks from UZS 100 bln (USD 9.5 mln) to UZS 500 bln (USD 48 mln) by 2025, to further strengthen the sector.
Further, at the beginning of March 2021, the government published a list of publicly listed companies slated for full privatization, including the largest consumer goods conglomerate in Uzbekistan, Toshkent Vino (TSE:TKVK), construction and bottle glass producer, Kvarts (TSE:KVTS), and industrial fabrication company, Qo'qon Mexanika (TSE:KUMZ), all three of which the fund holds.
One of the biggest challenges hindering competition in the Uzbek market has been the dominant presence of monopolies, specifically state-owned monopolies. To address this elephant in the room, during March 2021 a presidential decree was signed regarding the liberalization of the commodities markets and their de-monopolization, specifically stating that:
From 15th June 2021, state monopolies with greater than 50% direct or indirect state ownership will lose their monopolies. This applies to monopolies in the PVC, ethanol, and silver industries.
From 1st January 2022, non-monopolist companies or companies with less than 50% state-ownership in the cement, cotton and related by-products, and oil and gas condensate industries will no longer have price control protections, instead having their prices regulated by the market forces of supply and demand. Further yet, logistics providers which served monopolies will lose their exclusivity and will have to compete for tenders based on price and service.
Of notable interest in the decree is the planned establishment of commodity futures and derivatives trading on URTS’ exchange platform. Settlement procedures will be enhanced, enabling traders to have foreign bank accounts in order to trade with regional commodity exchanges in other countries. This will provide another long-term bullish catalyst for URTS.
We continue to see opportunities abound in Uzbekistan over the next several years as the economy undergoes continued liberalization and maturation, which in time should drive the capital markets into a more pronounced phase of development, on the back of accelerated state privatizations and future private sector IPOs.
While COVID-19 has slowed the attraction of investors to Uzbekistan, it will not deter them, specifically the Chinese. The Shanghai Cooperation International Summit is planned to be held in Samarkand in 2022, with a reported 20 heads of state expected to attend. Uzbekistan’s location at the heart of Central Asia makes it a natural logistics hub, while it is also the country with the largest consumption potential due to it having the largest population in Central Asia. We anticipate that after the summit significant Chinese investment will pour into the country, spurring a likely prolonged period of “caffeinated” economic growth.
On the subject of caffeine and increasing investment in Uzbekistan, the country will see the grand opening of Starbucks’ flagship store in central Tashkent in 2022. Located on Taras Shevchenko, one of several “high streets” in the city, Starbucks will open in a recently renovated commercial building and be yet another global brand to enter the highly underserved consumer market that will surely attract dozens more foreign brands over the coming years as investors increasingly discover the untapped potential of Uzbekistan.