Why invest in Uzbekistan?
Boston Consulting Group analytics prepared “Investing in Central Asia: one region, many opportunities” report.
According to the document, several international institutions and private equity funds agree that the Central Asian countries are becoming new FDI destinations, thanks to two main characteristics: an abundance of natural resources and a growing population that is increasing the market size. These markets have vast natural resource deposits, but most importantly they are home to a young and well-educated workforce capable of converting this raw metal, mineral and energy wealth into longterm sustainable economic growth and regional prosperity.
Some Central Asian countries already are on investors’ maps. This is the case of Kazakhstan, which has become an attractive destination for investment in the last decade. Between 2008 and 2017, the cumulative greenfield FDI into the country was $82 billion. Uzbekistan has the potential to follow a similar trajectory and has begun a major transformation. The new leadership has been outlining plans for systemic economic reforms and the creation of a favorable business climate since late 2016. This opening up of the country can put the region on track to further cooperation and development.
Central Asia has significant potential for further economic development. Today, Central Asia accounts for 0.3% of the world’s GDP. With a total GDP of around $265 billion in 2017, it is comparable to Central America ($255 billion), Finland ($252 billion), or Chile ($277 billion) taken individually. Central Asia represents 1% of the world population (with 71.9 million people), forming a market comparable in size to Thailand (~69 million inhabitants for a GDP of $455 billion) or Turkey (81 million for a GDP of $851 billion) on an area of 4 million km2, equivalent to the total area of the European Union (4.5 million km2). Moreover, regional GDP per capita ($3,719) is much lower than in developing economies like Thailand ($6,594) or Turkey ($10,541).
Despite being landlocked, Central Asia is at the center of major crossroads between Russia, Asia and Europe. Moreover, the rapid economic expansion of China and other nearby countries creates an unprecedented opportunity for Central Asia to emerge as an economic trade hub and a transit corridor between Europe and Asia.
Although Central Asian countries have the potential to attract investors, for now they are overlooked and undersaturated, even compared to regions like the Balkans or Central America. The region benefits from macroeconomic stability, a large domestic market, and a cheap and abundant labor force. However, except for resource-based industries, the share of FDI in the GDP is lower for Central Asia than for other developing regions. Cumulative FDI in other industries represented less than 20% of Central Asia’s average GDP between 2008 and 2016, while it reached 47.2% of the Balkans’ GDP, 35.9% for Central America and 26.8% for North Africa. This indicator is strongly dependent on the on the structure of economy. To reach the level of investment of the resource-rich North African region, Central Asia would need increase the amount of FDI in non-resource industries by 75% over the next 10 years. Thus, Central Asia’s FDI potential is estimated at $170 billion, including investments into non-extractive sectors of up to $40-70 billion16.
Close, but different
After gaining independence in 1991 the Central Asian countries have followed divergent paths since their independence, making it difficult for investors to comprehend the region as a whole. They differ in level of development, investment climate, and regulatory environment.
Central Asian countries share a common history through several centuries, as well as a common culture and widespread knowledge of Russian. This common culture translates into a relatively homogeneous social profile in the region, characterized by a great distance between the authorities and the public, a low level of individualism (versus collectivism) and a preference to avoid uncertainty. Based on those three indicators, the region’s profile significantly lags behind in terms of innovation as, culturally, the public has a low tolerance for risk and is inclined to prefer stability over growth and achievement. However, Central Asia could still overcome this inherent tendency, as other countries with similar cultural backgrounds, such as China, Japan and South Korea, were able to become leaders in innovation.
The structures of the five economies are similar, as determined by natural resources. They also have several common advantages, such as low labor cost (which helps develop labor-intensive industries) and agriculture potential. All five countries are striving to attract more investment for their further development. However, the scale of their reform programs varies greatly from one country to another.
Region’s key players
Uzbekistan benefits from a relatively low level of public debt, and a relatively high level of gold and foreign currency reserves, which mitigates risks of further currency devaluation. However, according to the BCG analytics, additional reforms are still needed. Uzbekistan’s challenge in the coming years will be to sustain the current pace of reforms and ensure their efficient implementation.
The country was, until recently, off the investors’ map because of its closed economy and poor investment climate. In early 2017, BCG conducted a series of deep-dive interviews on the investment climate in Uzbekistan, with foreign and local investors, international institutions, state-owned enterprises and local government agencies.
This survey highlighted the main barriers to business operation in the country. Respondents mainly mentioned: currency conversion and profit repatriation limitations, the complexity and non-transparency of regulation and lack of rule of law, the low reliability and difficulty connecting to electricity, gas and water supplies, unequal customs treatment for certain market players and complicated customs clearance procedures, the high tax burden and complexity of the tax regime.
Since the survey, numerous reforms have been implemented to address these issues. Uzbekistan has seen its investment climate improve rapidly in response to investors’ concerns. Numerous reforms are ongoing to reduce the complexity and improve the transparency of the regulatory, customs and tax systems. One of the
most emblematic reforms of this new era is the currency liberalization that was implemented in September 2017. The reform makes it much easier for foreign investors to consider Uzbekistan an investment destination. Over the next 10 years, the country expects an inflow of FDI of $65 billion, with $20 billion invested into non-extractive industries.
“A window of opportunity now exists for the region to revisit its development trajectory” – notes Rza Nuriyev, head of BCG’s Central Asian and Caspian region. – “ Steady improvement of institutions, significant (if uneven) economic growth, and the liberalizing influence of the younger generation have all created a greater basis for cooperation among the Central Asian countries, specifically in priority areas such as cross-border infrastructure in transportation, energy and information and communications technology, as well as policy reforms to support marketdriven trade and investment-led diversification and integration. This process is critically dependent on two key states – Kazakhstan and Uzbekistan. Strengthening of bilateral relations will probably be the first step in regional cooperation”.
The story was originally published in Russian in Pravda Vostoka newspaper.