Fitch Ratings has reaffirmed Uzbekistan's credit rating at 'BB-' with a Stable Outlook in its latest report. Here's a look at the key findings:

Credit Fundamentals: Fitch's assessment recognizes Uzbekistan's robust external and fiscal buffers, low government debt, and a history of high growth relative to countries with a similar 'BB' rating. However, challenges are noted, including high commodity dependence and structural weaknesses such as low GDP per capita, an uncompetitive and large state presence in the economy, and weak governance levels.

Fiscal Dynamics: 2023 witnessed the widening of the budget deficit to 5.5% of the GDP, surpassing the originally targeted 3%. Fitch attributes this increase to delays in energy tariff liberalization, slower-than-expected reduction in subsidized lending, and lower corporate profit tax. Yet, Fitch predicts a contraction of the deficit to 4.3% in 2024 and 3.9% in 2025, fueled by proposed measures and cuts to energy subsidies.

Debt Profile: Fitch emphasizes the relatively low public debt levels in Uzbekistan, with a significant portion in foreign currency. Notably, it recognizes the presence of a high share of concessional debt as a mitigating factor, coupled with sustainable maturities for external debt.

Inflation: Fitch factors in a potential boost of up to 3pp to inflation from higher energy tariffs in 2024, which is expected to result in annual average inflation of 13% for the year. Further phases of tariff increases, as authorities aim to achieve full market pricing by 2027-28, pose potential upside risks to inflation.

Banking Sector: While the banking sector has seen solid credit growth and the non-performing loan (NPL) ratio appears low, Fitch highlights concerns related to the quality of loans issued at the start of the reform period in 2017.

For a complete commentary, please refer to this link: https://www.fitchratings.com/research/sovereigns/fitch-affirms-uzbekistan-at-bb-outlook-stable-23-02-2024

The Uzbek stock market is still in its early stages of development. However, in 2023, there were three significant IPOs. At the start of the year, UzAuto Motors conducted its initial public offering, and towards the end of the year, the largest national telecom operator, Uztelecom, and the insurance company Uzbekinvest with preferred shares entered the stock market.

Uztelecom IPO (ticker: UZTL) was facilitated by a consortium comprising Portfolio Investments, NBU, and SQB. During the offering, 5 542 046 new common shares, equivalent to 2% of the authorized capital, were issued. The fair price per share was set at 9 135 soums and the offering price range was established between 6,000 and 10,000 soums per share.

During the Uztelecom IPO, the underwriter faced obstacles that were effectively overcome, showcasing a high degree of professional expertise:

1. High deposit rates. Based on data from the Central Bank of the Republic of Uzbekistan as of September 30, 2023, the weighted average rates on deposits in the national currency for individuals and corporate entities, with a placement period exceeding 1 year, stood at 21.3% and 16.8%, respectively. The high-interest rates, coupled with the insurance of individual deposits, diminish the appeal of the stock market for both retail and institutional investors. Consequently, when companies conduct an IPO, there is a significant risk of under-placement of the declared volume.

Uztelecom case: To address this issue, a decision was made to implement a 35% discount to the fair price of 9,135 soums per ordinary share. Additionally, the issuer opted to distribute a minimum of 30% of the net annual profit as dividends.

2) Opening brokerage accounts. Until recently, the process of opening a brokerage account necessitated in-person presence at the broker's office. In essence, remote opening of a brokerage account was not feasible, causing inconvenience for both the investor and the broker. This limitation posed a constraint on the maximum achievable number of open accounts for the broker.

Uztelecom case: To address this challenge, the decision was made to leverage the services of the investment platform, Jett, which is the sole application in Uzbekistan enabling share trading via mobile phones. This move facilitated the opening of over 15,000 accounts during the IPO, with nearly 11,000 of them funding their accounts and purchasing Uztelecom shares. Before Uztelecom's IPO, the Jett app established approximately 25,000 individual accounts. The Jett connectivity has been seamlessly integrated into Uztelecom's proprietary application, MyUztelecom, and apps from other companies like AloqaBank, Zoomrad, and MultiBroker. Instructions were prepared and made available on Telegram and on the websites of Uztelecom and Portfolio Investments to streamline the process of app download and brokerage account opening.

3) Interaction with RSE “Toshkent”. The Exchange's systems had never before handled the simultaneous processing of tens of thousands of applications.

Uztelecom case: The interaction format with the Exchange was established, including the decision to close the order book and maintain suspense. Additionally, an option was agreed upon to allow for editing orders in the event of oversubscription, subject to agreement between the issuer and investor. Furthermore, the exchange system underwent preliminary testing to ensure the capability to handle tens of thousands of applications and manage the upload of files containing numerous applications and transactions. Before the IPO of Uztelecom, the Exchange had not encountered such a scale of operations.

4) Limited number of institutional investors. Presently, Uzbekistan hosts a limited number of institutional investors, and not all of them partake in IPOs, thereby increasing the risk of under-placement. The absence of pension funds or mutual funds in the market, along with banks' limited participation in IPOs due to reserve requirements, contributes to the underdeveloped and passive nature of the market. Insurance companies predominantly allocate funds to deposits. To attract foreign investors, enhancing the market infrastructure is imperative. This includes establishing connections between the Central Depository and Clearstream/Euroclear, introducing global custodian institutions, and liberalizing currency regulations. In developed stock markets, institutional investors play a pivotal role in determining the fair market value of shares. Given that Uzbekistan's stock market is primarily driven by retail clients, whose knowledge may be inadequate in determining, for instance, the fair value of assets. This, in turn, poses reputational risks for the issuer company.

Uztelecom case: In addition to implementing a 35% discount, efforts to address this issue involved conducting due diligence (pre-investment analysis) and preparing a comprehensive investment memorandum, made accessible to all interested parties. Furthermore, investor calls, multiple investor meetings, and a business breakfast were organized as part of the Road Show process.

5) High fees. High commission fees from brokers have been a concern, with fees in certain IPOs reaching as high as 2.5%.

Uztelecom case: Commission fees were established at 1%, with 0.77% allotted to the broker to cover the minimal expenses associated with online account opening through Jett and filing IPO applications. The remainder encompassed a 0.2% commission of the Tashkent Stock Exchange and a 0.03% commission of the Central Securities Depository.

6) Lack of awareness. The nearly 12-year tenure of Portfolio Investments shows that the country's stock market continues to remain distant and enigmatic for the general populace. Consider, for instance, the number of open accounts on the stock exchange, which stands at approximately 50,000, in contrast to a population of 36 million people. To compare, as of March 31, 2023, Russia's Moscow Exchange had 31.8 million open accounts and a population of around 143 million, representing roughly 22%.

Uztelecom case: A comprehensive marketing campaign was launched, commencing at the ICTWEEK UZBEKISTAN forum. This initiative encompassed promotional activities through television, radio, banners, and targeted advertising on Facebook and Instagram. Furthermore, a dedicated website for the IPO was established for the issuer and lead underwriter. Following the active advertising, an investor call was arranged to provide a thorough insight into the investment attractiveness of the IPO, highlighting future growth prospects and company valuation. Moreover, a series of offline and online meetings were conducted for Uztelecom employees interested in the offering. These sessions delved into the specifics of the IPO, outlining potential benefits and risks associated with the investment opportunity.

7) Foreign investor participation. At present, the functionality of the local stock exchange system does not support trading shares for foreign investors without opening a brokerage account in Uzbekistan. This restriction stems from the absence of connections between global custodians like Euroclear/Clearstream and the lack of a regular API for the Tashkent stock exchange platform.

Uztelecom case: To address this challenge, efforts were made to scout potential foreign investors, providing them with informational materials, guidance on the local market, answers to queries, and comprehensive support during the process of opening and funding a brokerage account. Despite increased interest from foreign investors, only a portion of them were successfully attracted. The critical request from foreign investors was the availability of modern financial infrastructure to participate in the IPO. This underscores the imperative need to modernize or replace the existing trading platform of the Tashkent Republican Stock Exchange and establish connections with various foreign stock exchanges.

While the results of Uztelecom's IPO offer hope for successful future IPOs, addressing several market infrastructure issues is essential. The market necessitates new legislation on capital markets, investment funds, and reforms in the country's pension system. The Uztelecom IPO underscored that despite considerable demand among retail investors, institutional demand is crucial for a successful placement. Developing this segment should be a primary focus for the market regulator, the Government, and the Central Bank of the Republic of Uzbekistan. With the ongoing economic reforms, Uzbekistan aspires to become an attractive destination for global investors.

The consortium of underwriters congratulates Uztelecom on its inaugural stock exchange entry and expresses gratitude for the productive collaboration, along with appreciation for the active participation of all investors. Additionally, acknowledgments are extended to the team of the RSE "Toshkent" for their direct support in resolving infrastructure issues, together with the State Unitary Enterprise "Information and Resource Center of the Stock Market," and the investment service Jett for their innovative approach to facilitating the opening of brokerage accounts to participate in the Uztelecom IPO.

Portfolio Investments, the lead underwriter for Uztelecom's initial public offering (IPO), is pleased to announce the successful completion of the transaction.

The final placement price per share was 6,000 soums, with an oversubscription of 131% (43.6 billion soums), making the total transaction volume 33.25 billion soums.

This stage of the placement was historic, as it saw significant participation from retail investors. Through the Jett investment service, Portfolio Investments opened over 15 thousand brokerage accounts, with retail investors collectively purchasing more than 2 million shares, constituting about 40% of the total issue. Corporate and institutional investors also displayed strong interest, purchasing 3.5 million shares (60% of the issue). A total of 10,950 brokerage accounts were funded, with retail investors holding 10,940 of them.

The price dynamics on the secondary market indicate sustained interest from retail investors; in the first few days of trading, the price rose to 7,500 soums, marking a 25% increase compared to the offering price. Shares under the symbol UZTL became the most actively traded on the Tashkent Stock Exchange, with a trading volume of almost 1.7 billion soums and 2 343 transactions made in the first three days.

As it is shown in the table below, Uztelecom JSC currently ranks first in terms of aggregate trading volumes for the first three days after the placement and second place in terms of the volume of the placement itself among all IPOs on the Toshkent Stock Exchange.

The Portfolio Investments team extends gratitude to all investors for their trust and looks forward to successful cooperation in future placements.

Uztelecom's revenue for the first 9 months of 2023 increased by 25% compared to the same period in 2022, showing accelerated growth compared to the 16% growth observed from 2021 to 2022. The growth in revenue was primarily driven by a 49% increase in the broadband segment, attributed to the addition of 446,000 new subscribers over the period. Additionally, revenue in the mobile segment grew by 11%, supported by the addition of 868,000 new subscribers year over year, while revenue in the Interconnect segment grew by 25% over the same period. Despite experiencing strong revenue growth, the net profit declined from 474 billion UZS to 26 billion UZS. This decline was influenced by higher costs of imported services, a weakened local currency, global interest rate hikes, and an increase in the company's payroll. The rising costs of imported international communication services contributed significantly to the overall costs, with service costs in the Interconnect segment. Additionally, as the company continues to modernize its telecoms infrastructure, it faced increased costs for support staff, resulting in a 68% increase in payroll over the period. These factors contributed to the 36% year-over-year increase in the cost of services sold. Uztelecom also faced higher interest payments due to the global rise in interest rates and increased borrowings. The company, given the significant debt burden taken on for expansion, recorded a 74% YoY increase in interest expenses: at 9M 2023, interest expenses stood at 257 billion UZS compared to 147 billion UZS for the same period in 2022. The company was negatively impacted by the sharp depreciation of the national currency in the third quarter. Over the year, the Uzbek soum depreciated by 11.04%, resulting in a 68% YoY increase in exchange rate losses. Exchange rate losses totaled 763 billion UZS in 9M this year, compared to 454 billion UZS in the same period of 2022. In line with its growth-oriented development strategy, Uztelecom is actively investing in broadband and data center initiatives, focusing on expanding Internet coverage to every household, gaining additional market share, and anticipating further acceleration in revenue growth in the coming years.13:25