Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings assigned its ‘B+’ local and foreign currency long-term issuer credit ratings to the Uzbekistani Ferghana Region. The outlook is stable.

The stable outlook reflects our assumption that in the next 12 months Ferghana will maintain a strong budgetary performance on the back of the transfers from the central government. In addition, we assume that the region will have zero debt in the medium term, absent changes in the national regulation that currently prohibits local and regional governments (LRGs) from commercial borrowing.

S&P Global Ratings might lower the ratings if it observed a weakening of financial indicators, leading to a pronounced deficit after capital accounts and rapid debt accumulation.

The agency might consider an upgrade if it observed an improvement in the institutional framework under which Ferghana operates or if the region’s wealth level increased.

The ratings on Ferghana are supported by our assumption that the region will continue reporting a surplus after capital accounts to comply with national regulation. We also factor in that the region probably won’t resort to commercial borrowing over the coming several years. The ratings are constrained by the very volatile and centralized Uzbekistani institutional framework for LRGs, the region’s low wealth--with local GDP per capita at about $1,100--and management’s limited flexibility.

A volatile framework in Uzbekistan and low wealth levels are the main rating constraints

Ferghana operates under a volatile institutional setting. In our view its budgetary flexibility is affected by the highly centralized decision-making process. The central government’s stance on key taxes, transfers, and expenditure responsibilities changes frequently. The political practices, procedures, and regulatory environment are in nascent stages. The framework undergoes regular modifications, upsetting the stability of both the region’s revenue sources and its spending mandates. The central government oversees LRGs’ activities, requiring the regions to maintain a balanced budget and limiting their commercial borrowing. The visibility on systemic changes remains low, consequently undermining reliable medium-term planning at the local level. Furthermore, the substantial investment requirements and a high share of social expenditure continue to restrict spending flexibility of Uzbekistani LRGs, including Ferghana Region.

S&P Global Ratings believes that the decision-making ability of Ferghana’s financial management team is markedly limited by the centralized institutional settings in Uzbekistan. We note that the region’s management started medium-term planning in 2018, and there are some discrepancies between forecast and actual financial indicators. In our view, debt and liquidity management practices are in nascent stages, and their effectiveness has yet to be tested. These factors constrain the region’s creditworthiness.

The agency views Ferghana’s economy as very weak in a national and international context, mostly due to low GDP per capita. Moreover, we believe the economy is relatively concentrated on agriculture. The region accounts for 11% of the country’s population but contributes only 6% of GDP. Nevertheless, we expect the region’s economy to expand parallel to that of Uzbekistan, at 7% real GDP growth on average per year until 2024, propelled by developments in the industrial and service sectors.

The budgetary performance should remain strong, and the debt burden will stay very low

S&P Global Ratings expects Ferghana to continue posting a budget surplus over the next three years, in line with the national legislation. We anticipate that revenue sources will be volatile, given the central government’s track record of revising tax shares. We also project a slight increase in capital expenditure over the next few years, following the region’s objective to invest more in infrastructure development predominately using central budget sources of financing.

The agency believes that substantial infrastructure development needs will curb economic development and budget flexibility. However, the funding backlog is unlikely to lead to material debt accumulation since the national legislation currently prohibits LRG commercial borrowings. At this time, the region’s commercial debt is zero.

The agency understands Ferghana oversees some state-owned enterprises located in the region. It has no stakes in regional enterprises, with no track record of the regional government providing subsidies, capital injections, or extraordinary support to the relevant companies. The districts and municipalities are financially healthy thanks to central government support.

S&P Global Ratings assumes that Ferghana’s liquidity position will remain solid, particularly considering the almost zero debt. However, we believe that the coverage ratio might fall sharply if the region attracts debt over the longer term. That said, this is not our base case. Ferghana is eligible to receive short-term interest-free budget loans to cover liquidity shortages. At the same time, we believe that the access to external funding is limited, due to the weaknesses of the capital market and banking sector in Uzbekistan.