Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed the Uzbek City of Tashkent’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘BB-’ with Stable Outlooks. 

The affirmation reflects Fitch’s expectation that the city’s debt sustainability metrics will remain in line with its ratings, despite the economic impact of the coronavirus pandemic and growing capex that is counterbalanced by the moderate debt level. The IDRs are notched down once from our assessment of the city’s Standalone Credit Profile (SCP) of ‘bb’ due to weak reporting and transparency practices that lag international standards. This leads to Tashkent’s IDRs being in line with the Uzbek sovereign IDRs (BB-/Stable).

The ‘Weaker’ Risk Profile assessment results from a ‘Weaker’ assessment for all of the city’s six key risk factors. This reflects Fitch’s view of high risk relative to international peers that the city may see its ability to cover debt service by its operating balance weaken unexpectedly over the forecast horizon of 2021-2025, either because of lower-than-expected revenue or expenditure exceeding expectations, or because of an unanticipated rise in liabilities or debt-service requirements.

Uzbek subnationals’ revenue sources are unstable following extensive tax and budgetary reform in the republic. The composition of taxes collected by the city and their allocation between tiers of government are subject to change at the discretion of the central government.

Taxes contributed a moderate 30% to the city’s total revenue in 2020. Transfers from the central government have been gradually increasing over the last five years and reached 57% of total revenue in 2020, up from 14% in 2016. The high dependence on a weak central government (BB-/Stable) for a material portion of revenue and the ongoing changes to national fiscal regulation resulting in low revenue predictability drive the ‘Weaker’ revenue robustness assessment.

Fitch assesses Tashkent’s ability to generate additional revenue in response to possible economic downturns as limited. The city’s fiscal autonomy is controlled by the central government, which sets all tax rates and determines the amount of tax revenue allocated between government tiers. Affordability for additional taxation is also limited by the low disposable income of the population (average monthly salary in Tashkent was about USD375 in 2020).

Expenditure sustainability is fragile due to the changing composition of the city’s responsibilities, limiting expenditure predictability. Spending over the last five years was volatile due to the reallocation of spending responsibilities, and further affected by high, albeit reducing, inflation, which decreased to 13.0% in 2020 from a peak of 17.9% in 2018.

The city’s main spending responsibilities are education and healthcare, which are stable in nature, and accounted for about 35% of the city’s total expenditure in 2020. In general, spending dynamics follow that of revenue as local government budgets must be balanced and a deficit is not allowed under national regulation. However, the city’s budgetary policy is also dependent on central government decisions, which could negatively affect the expenditure dynamic.

Tashkent’s ability to curb expenditure in response to shrinking revenue is low as most of the city’s spending responsibilities are mandatory. Consequently, the city’s budget is dominated by inflexible spending items that exceeded 80% of total expenditure in 2020. About 30% of spending is salaries and wages, which are the most rigid items and subject to indexation to inflation.

The city’s investment programme, which account for capex at 23% of total expenditure in 2020 could offer some leeway in the short term as the city can re-direct part of the funds to other spending in case of stress. Over the longer term, pressure on capex may persist as the city’s infrastructure needs remain high.

This assessment reflects an overall weak national framework for debt and liquidity management and under-developed capital markets in Uzbekistan. Uzbek sub-nationals are not allowed to incur debt, except inter-governmental budget loans, and cannot issue guarantees.

Tashkent has an exclusive limited right to borrow domestically, but the city is currently free from direct debt. The city attracts borrowing through its government-related entities (GRE) to finance the city’s investment projects. Subsequently, Tashkent supports these entities in debt servicing by providing transfers from the budget.

At end-2020, Tashkent serviced six entities’ loans totalling UZS1,249 billion and Fitch included these loans in its adjusted debt calculation. A material part of debt is denominated in foreign currencies, exposing the city to FX risk, given the volatile local currency (it depreciated 3.7x over 2016-2020).

Liquidity available to Tashkent is limited to its cash balance, which is low (end-2020: UZS412.8 billion), as the city’s access to debt market is restricted by national regulation. The bulk of the cash is restricted as earmarked for certain spending. At the same time, Tashkent is supported by a liquidity mechanism provided by the central government in the form of short-term budget loans to cover intra-year cash gaps. The sovereign ‘BB-’ rating as a provider of additional liquidity in case of need underpins the ‘Weaker’ liquidity flexibility assessment.

The ‘aa’ assessment is derived from a combination of a sound payback ratio (net adjusted debt-to-operating balance), which under Fitch’s rating case should remain below 5x during the projected period, in line with a ‘aaa’ assessment; a moderate fiscal debt burden (net adjusted debt-to-operating revenue) at below 50%, corresponding to a ‘aaa’ assessment; and a weaker actual debt service coverage ratio (operating balance-to-debt service, including short-term debt maturities) at about 1.3x by 2025, in the ‘bbb’ category.

Tashkent City has an ESG Relevance Score of ‘4’ for Data Quality and Transparency due to exposure to limitations on the quality and timeliness of financial data, including transparency of public debt and contingent liabilities that lags international standards. This has a negative impact on the credit profile, is relevant to the rating in conjunction with other factors, and leads to one notch downward adjustment to the city’s rating.

Tashkent’s ‘bb’ SCP reflects a combination of a ‘Weaker’ risk profile and ‘aa’ debt sustainability and factors in a comparison with international peers. The application of a single-notch downward adjustment to the city’s SCP results in the city’s ‘BB-’ IDRs.