As outlined in Uzbekistan’s New Development Strategy 2022-2026, President Shavkat Mirziyoyev has called for a radical transformation of the economy. Judging from recent media coverage and on-the-ground appearances, Uzbekistan is well on its way in meeting its socio-economic development objectives.
That’s all good news, but Uzbekistan can do better.
It is high time for Uzbekistan to start developing a deep long-term debt capital market in som, the country’s currency. To accelerate the process of economic transformation, a well-developed local debt market would serve Uzbekistan’s lenders and borrowers better than the current structure of its debt markets, and in time would even better serve foreign investors.
The main reason the som-denominated bond market remains underdeveloped is that loans in som are expensive because of inflation; Box 1 illustrates why a part of the som debt market, under current conditions, isn’t attractive to borrowers.
To explain the purpose of this article, consider the home-loan market in Uzbekistan. If you want to buy a house, you can take out a som mortgage loan with a bank at a rate, currently, of 16%. For a 20-year linear mortgage, a 5% redemption per year, implies that the borrower pays the first year a total of 21% of the original amount. Who can afford that?
This helps explain why in Uzbekistan the average mortgage on a house is only 25% of the value of the property. Banks appear to be shortsighted.
A far better product for the banks is an inflation-linked mortgage. Assume the inflation will be 12% next year, and assume the bank wants to make 4% margin. What would the borrower pay? The borrower would only have to agree to 4% interest, plus inflation.
Roughly, the borrower will pay in the first year the 4% interest plus the 5% redemption, which totals 9%, plus inflation over this amount which will be 1.12 times the 9% or about 10%. So. in the first year, the bank charges the borrower only 10% instead of the original 21%. The mortgage has become twice as affordable!
Stated differently, with an inflation-linked mortgage, a person can borrow twice as much. As such, the average mortgage in Uzbekistan could now easily jump from 25% to 50% of the market value of the house.
Source : Asiatimes
