President Shavkat Mirziyoyev has called for a significant economic transformation, as stated in Uzbekistan’s New Development Strategy 2022 – 2026. Uzbekistan is well on its way to achieving its socio-economic development goals, based on recent press coverage and on-the-ground images. & nbsp,
All of that is good information, but Uzbekistan is capable of more. & nbsp,
It is past time for Uzbekistan to begin creating a robust long-term loan funds market in ens, the nation’s official currency. A well-developed local debt market may benefit Uzbekistan’s lenders and borrowers more than the current structure of its debt markets, and over time it would also benefit foreign investors, to hasten the process of economic transformation. & nbsp,
Box 1 demonstrates why a portion of the som debt market isn’t appealing to borrowers under the current conditions. This is the main reason why the SOM-denominated bond market remains undeveloped. Loans in SOm are costly due to inflation. & nbsp,
Box 1: In Uzbekistan, who can afford a 16 % mortgage?
Consider the home loan industry in Uzbekistan to describe the purpose of this article. You can obtain a som mortgage loan at presently 16 % interest from the lender if you want to purchase real estate. A 20-year linear mortgage with a 5 % redemption rate implies that the borrower pays 21 % of the original amount in the first year. Who has the money for that?
This explains why the regular mortgage in Uzbekistan only accounts for 25 % of the property’s value. & nbsp, Banks seems to have poor vision. & nbsp,
An inflation-linked loan is a much better product for the lenders. Assume the bank wants to make a 4 % margin and that inflation will be 12 % the following year. The borrower would have to spend what? The loan would only need to consent to prices plus 4 % interest.
In general, the borrower will pay the 4 % interest plus 5 % redemption, which equals 9 %, plus inflation over this sum, or 1.12 times the 10 %, in the first year. Consequently. The bank only charges the borrower 10 % in the first year as opposed to the original 21 %. The cost of the mortgage is now double as low!
To put it another way, a person can use half as much with an inflation-linked loan. As a result, the average mortgage in Uzbekistan could now easily increase from 25 % to 50 % of the home’s market value.
The development of solely inflation-protected debt instruments is the answer to the comparative unaffordability of the sole loan industry. The creditor may now only give a chance premium of, say, 4 % annually after accounting for inflation, as opposed to the nominal rate, which would have been 16 %. In our example, the customer may spend half of the loan’s cash flow in the first year as opposed to the amount that is currently owed. & nbsp,
There is no magic in this situation because as a borrower’s payments rise in nominal terms over time due to inflation, you end up paying the same as you would under an old ( non-indexed ) contract. The money flows are, in actual words, better distributed over time, which is the difference. & nbsp,
The confusion of Uzbekistan’s potential inflation is taken into account when pricing inflation-indexed equipment. Also long-term maturities of 20 or 30 years ought to be feasible.
Due to the lower risks, it is anticipated that this type of debt will lower the cost of borrowing in Uzbekistan, which will benefit both the housing market( see Box 2 ) and the government’s budget. & nbsp,
Box 2: According to economic theory, an inflation-linked relationship offsets currency risk by ensuring that the native stock’s buying power at maturity is constant across all markets. In other words, the transfer rate between two nations is essentially balanced. & nbsp,
Because the purchasing power of principal and interest at any given time is supposed to be the same across industry, inflation-linked bonds are made to make costs and inflation useless. For instance, it makes no difference if an asset costs US$ 1, 000 or$ 10,000 in six months because you will always receive the appropriate number, regardless of its nominal charge. In addition, & nbsp,
Long-term ties in regional money
Consider Uzbekistan’s federal loans needs as stated by its Ministry of Investments, Industry, and Trade as another illustration of the value of developing a native bond market. & nbsp,
It is obvious that Uzbekistan needs long-term funding because there are numerous infrastructure projects with long shelf lives, including the ambitious Trans-Afghan Railway and its planned free economic zones and public private partnerships( PPPs ) across the nation.
It takes a while to repay these jobs because they require so much cash. Such words should not be used to finance a railroad’s borrowing costs because they cannot be” earned up” in just three years. & nbsp,
If Uzbekistan wants to fund its long-term agreements with debt tools that must be refinanced every three years, a debt crisis may be on the horizon. Borrowing foreign money over the long term has related limitations because exchange rates are outside of Uzbekistan’s control. & nbsp,
Additionally, because these jobs are in Uzbekistan, local currency is the best form of financing.
Treasury Inflation – Protected Securities ( TIPS ) of the Uzbek Republic
The Uzbekistan Treasury Inflation-Protested Securities ( U – TIPS ), inflation-linked local currency debt instruments, or the tip-protected securities market should all be developed in order to finance these projects.
U-tips, like US TIPS, may be indexed to a trustworthy inflation and nbsp measure to shield investors and investors from an increase in their money’s purchasing power. The primary value of a TIPS increases as inflation rises, which causes the discount payments to change proportionately. & nbsp,
Interestingly, Uzbek TIPS would enable owners to concentrate on the credit risk in the investment structure and, as a result, more closely align the ties with credit default swaps. Credit default swaps are tools that, in theory, ignore other dangers like prices and just charge the costs associated with default. In addition, & nbsp,
For instance, Turkey recently issued a 10-year bond at 27 % annually when its credit risk was only 7 %. Turkey should have been able to issue a TIPS in the range of just 7 %, which means investors receive an annual return of 3 %, each year adjusted for inflation, as opposed to issuing an interest-bearing bond of 27 %. & nbsp,
Additionally, an inflation-linked bond is preferable to a fixed-rate long-term bond for the reasons listed below: & nbsp,
- Lower risks: greater certainty regarding the actual income and cost of debt for both the lender and the borrower.
- Lower saving costs as a result of lower risk premiums due to walled prices risk.
- Due to inflation hedge, nearby currency risk was mostly avoided. This will be more accurate the longer the saving phrase( see Box 2 ) & nbsp,
- Risks involving foreign exchange were avoided, such as prices in the eu or imbalances on the EU single market. & nbsp,
- No risks associated with international politics, such as restrictions on dollar payments to second nations.
Other benefits that come with creating a strong local currency government bond market include the following: & nbsp,
- Companies can raise long-term funding from domestic sources thanks to a more secure financial system under Uzbekistan’s control( better allocation of saving ).
- Government finances should be better managed and planned to reduce the need for selling proper assets, increase taxes, or overstuff the balance sheet of the central bank. & nbsp,
- establishes a benchmark rate for home financial markets and government risk. & nbsp,
- provides opportunities for local pension funds and insurance firms to invest while fostering native private capital markets.
Mirziyoyev might think about asking his economic team to put together a plan to develop the mechanism to issue inflation-indexed local currency debt instruments with 10 year tenors, and perhaps longer. This mechanism would include dependable and independent methodologies to determine inflation. & nbsp,
In this way, Uzbekistan would become the only other Asian nation to challenge 10-year inflation-indexed ties, joining Japan, South Korea, and a select few people.