ANALYSIS: Central Asia bond review

ANALYSIS: Central Asia bond review
Aerial view of Tashkent. Uzbekistan, with its strong gold reserves and overall low external debts, has seen its initial eurobonds perform extremely well.
By Maximilian Hess in London for EurasiaNet March 9, 2021

Debt has been a key feature of Central Asia’s integration into the world economy in recent years. Chinese financing has attracted the most attention, little of it positive. But borrowing from Western capital markets, particularly in the form of tradable loans issued abroad and denominated in hard currencies (known as eurobonds), has highlighted key differences in the post-Soviet republics’ development 30 years after independence.

Uzbekistan is the poster child for these efforts, opening up dramatically since the death of President Islam Karimov in 2016 and being embraced by lenders. Tajikistan is proving more of a cautionary tale – both for the indebted government and its weary investors.

Tashkent’s triumph

In February 2019, two Western-educated bankers with extensive experience abroad – Atabek Nazirov of the Capital Market Development Agency and Deputy Finance Minister Odilbek Isakov – oversaw the issuance of Uzbekistan’s first-ever sovereign eurobonds, raising $1bn. The debt has performed extremely well. Half was issued in a 10-year bond that now trades at nearly 113 cents-on-the-dollar.

As bond prices rise, their effective yield goes down. Investors at issuance were promised annual interest payments of 5.375%, but the current effective yield is just 3.5% – meaning the cost of borrowing has fallen for Tashkent.

That November, Uzbekistan’s state-owned Sanoat Qurilish Bank (also known as Uzpromstroybank) followed suit, issuing a $300mn eurobond.

Uzbekistan was not immune to the COVID-19 pandemic, of course, and the March 2020 selloff in emerging-market debt saw the sovereign eurobond fall 24% (from 112 cents on the dollar to 85 cents) in just three weeks. It now trades at around 113 cents, having steadily recovered throughout the second half of 2020. Domestic dynamics have not driven the recovery, but rather Western central banks’ stimulus spending has boosted bond prices globally.

Reports of a cash-crunch in Uzbekistan last April, including new limits on the payout of dollars and euros by local banks, had little impact on the taste for the country’s bonds. Tashkent sold significant stocks of gold in 2019 and 2020, taking advantage of record-high prices. While the sales garnered some criticism domestically, foreign investors have seen the moves as prudent.

One investor in the Uzbek eurobonds says that he was not concerned by domestic political dynamics or even the immediate economic impacts of the pandemic on Uzbekistan but instead remained comfortable with its credit due to strong gold reserves and overall low external debts, although its public debt-to-GDP ratio has nearly doubled to 38% over the last five years.

The National Bank of Uzbekistan and Ipoteka Bank, both also state-run, followed Sanoat Qurilish’s lead, issuing $500mn in five-year bonds at 4.85% and 5.5% in October and November 2020, respectively.

Also last November Uzbekistan issued a new 10-year sovereign eurobond, raising another $555mn. The annual cost of the borrowing is just 3.7%. Uzbekistan shaved nearly 1.6% off its long-term borrowing costs in just 18 months.

Notably Tashkent also sold 2 trillion som ($190mn) worth of local-currency debts in November, despite stubbornly high domestic inflation. Ultimately, the ability to sell local-currency debt abroad should help tame Tashkent’s borrowing costs in financing new development since local-currency loans do not face the exchange-rate risk and other challenges of borrowing in foreign currencies. Uzbekistan now appears poised to establish itself as a fixture of emerging-market investment, much like Kazakhstan. Tashkent plans to issue another 5 trillion som (almost $500mn) of local-currency bonds this year, as well as another $700mn in eurobonds, with investors eager to back both.


Uzbekistan’s path was blazed by neighbouring Kazakhstan, which began issuing sovereign eurobonds way back in 1996, paving access to Western credit for Kazakh firms. Today Kazakh corporations are more regular issuers of eurobonds than the sovereign itself.

In 2018, Kazakhstan sold €525mn in five-year eurobonds at just 1.55% annual interest, at the time a record low for any post-Soviet country. To put that number in context, this week the US Treasury is paying 1.45% to borrow over 10 years.

Kazakhstan has also sought to develop its local-currency bond market and last November issued its first “green bonds,” raising 14bn Kazakhstani tenge ($33.5mn) for sustainable investment with the support of the Asian Development Bank (ADB).

Trouble in Tajikistan

Central Asia’s third eurobond issuer offers a cautionary tale of how market enthusiasm for such securities can prove a double-edged sword. Tajikistan sold its inaugural eurobond in September 2017, raising $500mn. Due for repayment in 2027, Tajikistan pays a whopping 7.125% for the privilege. Over the tenor of the debt, that means Dushanbe will pay investors over $356mn in addition to repaying the $500mn in 2027.

Raiffeisen Bank, one of two bookrunners who helped market the Tajik eurobond, labelled it “the worst-performing among all" emerging-markets bonds in 2019. Last March's market selloff saw the bond collapse even further, reaching a nadir of just 60 cents-on-the-dollar. While it has since recovered some, it did not keep pace with what proved to be a record-setting year for emerging-market debt in 2020. At present rates it is all-but-impossible to envision Tajikistan being able to return to the market.

Therein lies the rub of bond market financing: Growing debts are sustainable as long as investors are willing to refinance them.

Tajikistan’s foray into eurobond financing is likely to meet an ignominious end. It is the sole Central Asian country to join the G20’s Debt-Service Suspension Initiative aimed at providing a bridge through the pandemic.

Dushanbe has begun restructuring talks with Beijing. And though it received an emergency $189.5mn loan from the International Monetary Fund (IMF) last May, the IMF must be wary: It effectively accused Dushanbe of fraud the last time it tried to support the country.

So it is anyone’s guess where Dushanbe will secure the $562mn in fresh loans it says it is seeking this year. As 2027 approaches, the spectre of its $500mn eurobond repayment risks putting off institutional creditors, China and other potential deep-pocketed saviours such as the Gulf states.

This story first appeared on Eurasianet here.

Maximilian Hess is a London-based political risk analyst and writer.