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Asia Frontier Capital - Uzbekistan - on the Cusp of a Consumer Renaissance


Uzbekistan - on the Cusp of a Consumer Renaissance


Dear Investors and Friends,

As part of our continuing on the ground research, Scott Osheroff, CIO of the AFC Uzbekistan Fund, traveled to Uzbekistan recently. Photos are by Asia Frontier Capital.

Flying to Tashkent from Bangkok, I noticed that the flight pattern had finally returned to normal. My last three trips required us to fly over China and Kazakhstan rather than the typical route westwards over India and Pakistan due to Pakistan having closed its airspace in February 2019 after its spat with India where an Indian fighter jet was shot down. Being back on the usual flight path shaved 2 hours off the flight time to 6 hours, which was most welcomed.

Upon landing I was greeted by our two brokers who wouldn’t take “no” for an answer when they said they would pick me up from the airport. This is typical Uzbek hospitality. Having landed on a national holiday, Teacher’s Day, once they picked me up, we went to one of our usual restaurants for lunch, a Turkish venue whose cases of kebabs and desserts will lead you to overeat even if you weren’t hungry when you walked in.

While the Soviet Union and Mikhail Gorbachev in the late 1980’s are synonymous with the term “Perestroika” which literally translates to “restructuring”, ever since I first visited Uzbekistan in May 2018, perhaps the best term to use for what I have seen is “perestraivat”, or the rebuilding of Uzbekistan as construction projects are seemingly everywhere and not just in Tashkent but country-wide. This includes everything from modern shopping malls to apartments and office buildings. What was immediately noticeable during my first few days back in Tashkent was that the construction projects which I have seen underway for the past 1.5 years are finally moving towards completion. With their green safety mesh surrounding the buildings finally being taken down, the building facades are visible and foreshadow the change that is about to occur in the city, especially as there are several mid-end and luxury apartment blocks with over 800 units each coming online shortly. Uzbekistan is likely on the cusp of a boom in consumption that neighbouring Kazakhstan experienced in the 2000’s and which I experienced firsthand in Cambodia and Vietnam from 2012, having lived in both countries.


An 800-unit residential complex with ground floor retail



As Tashkent’s new apartment blocks are completed, many of which have the first story or two dedicated to commercial space, this natural catchment point for middle and upper class consumers will be where foreign chains, many of which currently only have one or two locations in the country, can expand their footprint, first through Tashkent’s new residential developments and malls, followed by a westward expansion into Samarkand and Bukhara, before moving into the population-dense Fergana Valley in Uzbekistan’s east. Experiencing first-hand the explosion of foreign brands into Cambodia around 2015, I foresee it as very likely that this quality retail space and target audience with money to spend will lead to international chains already in the country expanding city-wide, while new franchises enter Uzbekistan as well.


Miniso from China and Baskin Robbins ice cream from USA



The first drive-thru in Uzbekistan at KFC



Due to the lack of retail and international F&B options, historically Uzbeks were forced to travel to nearby Shymkent (the third largest city in Kazakhstan 70 km from Tashkent) or otherwise to faraway destinations such as Turkey, Thailand or Europe. This is a typical frontier market growing pain as those with money to spend organize shopping trips. It is not uncommon for the ultra-rich in these countries to charter flights for such occasions. Though as the retail environment matures domestically, and as long as the price differential isn’t too high relative to other countries, then such extravagant shopping trips become less necessary as one can much more easily drive to one of the several new modern shopping malls once they are completed in the coming year or two.

Not only will the increase in physical commercial locations for consumption be the trigger for spending increases, but GDP per capita, which currently stands at USD 1,460, is rising rapidly. In fact, earlier this month, the World Bank increased its GDP forecast for Uzbekistan for 2019 and 2020 to 5.5% and 5.7% from 5.3% and 5.5%, while 2021 is expected to see growth of 6.0%.

Helping to drive this change over the long-term will be the increase of leverage at the consumer level, which is currently extremely low, since the vast majority of loans from banks are to the commercial sector, mainly SME’s. Many private banks face capital shortages which constricts their lending, but in the coming months it is expected they will begin issuing new equity through the Tashkent Stock Exchange and raise funds through Eurobonds, which should lead to a decrease in their cost of capital and in due course this should trickle down to borrowers.

One of the inhibiting factors preventing banks from issuing new equity in meaningful size was an arbitrary law implemented under the previous government in 2008, whereby foreign investors were required to seek pre-approval from the Central Bank before they could buy shares in the banks and the Central Bank rarely gave approval. The previous government was worried that regional powers, namely Russia, could take control of Uzbekistan’s banking industry and thus implemented this law to prevent this from happening. Unfortunately, as this is typical of unfriendly state policies, something we are seeing more of globally nowadays, this law created inefficiency and only served to starve the domestic banking sector of capital.

As part of Uzbekistan’s rapid liberalization, on 6th September 2019, the Legislative Assembly eliminated this requirement for pre-approval and now foreigners can freely purchase equity in banks. This should help to stimulate growth in the banking sector as this will lead to an influx of capital and therefore increase competition amongst banks for clients, leading to falling borrowing costs which currently stand at roughly 20% to 30% per year. As capital availability increases and inflation continues to decelerate from the mid double digits, the Central Bank will likely lower its policy rate, currently at 16%. The increase of available capital for lending and a lowering of the Central Bank policy rate are two key factors which are poised to transform Uzbekistan and also trigger a revaluation in assets nationwide, from real estate to the stock market.

The AFC Uzbekistan Fund has been keen to invest into listed banks since the launch of the fund on 29th March 2019 and is now preparing to do just that. With several private banks trading at P/E ratios of 1x and 2x and P/B ratios of less than 0.60x, the banks, like several of the blue-chip industrial companies, will become “must-owns” for foreign investors.

As I continued exploring Tashkent it also became readily apparent that the Chinese are increasing their influence in the region. There are many Chinese tourists in the city as well as a seemingly increasing number of Chinese businesspeople and teachers residing in Tashkent. In part due to the China-US trade war, Uzbekistan has rolled out the proverbial red carpet to Chinese investment and has signed numerous infrastructure deals with the Asian Infrastructure Investment Bank “AIIB” for the construction and improvement of existing roads and other infrastructure.

Furthermore, from 1st January 2020, Chinese nationals will be granted visa free status for 7 days in what is branded as a bid to increase tourism in Uzbekistan. It would not be unimaginable to begin seeing shortly thereafter more Chinese restaurants and souvenir shops opening, not to mention Chinese real estate agencies, as property seems to often be on the mind of Chinese investors. My only fear is that the Uzbek government may not realize the negative effects that potential zero-dollar tourism could have on the country, as it has caused significant issues in Myanmar, Thailand and Cambodia specifically where Chinese tour operators charge Chinese for the tour outside of Uzbekistan. Once in Uzbekistan the tourists stay at hotels, eat at restaurants, ride on buses and visit souvenir shops all owned by the tour companies, therefore contributing neither employment opportunities nor tax income for the Uzbek government. Although, given that the Uzbek government has done a good job of picking itself up after its “trips”, I am hopeful that if this becomes a glaring problem, it will be addressed. Nonetheless, as more Chinese investment finds its way to Uzbekistan, just as we have seen in Pakistan, Vietnam, Cambodia and Laos, some of that capital is liable to find its way into the Tashkent Stock Exchange, helping to instigate the re-rating we believe is imminent.


A Chinese university in the heart of Tashkent



As the weather began getting colder, the trees had finally begun to change colour and started shedding their leaves. Central Asia is a wonderful part of the world to spend time in, save for summer when it can get quite oven-like with temperatures of over 50 degrees Celsius. October’s weather is equivalent to autumn in New York or Boston and thus I had very few complaints, especially as it was peak melon season and you can purchase farm fresh and organic winter melons and watermelons for UZS 10,000 (USD 1.06) each on the roadside.


A melon seller on the outskirts of Tashkent



For further viewing here are some interesting, relevant news links related to Uzbekistan:  

For information about the AFC Uzbekistan Fund and the AFC Asia Frontier Fund click one of the following links:


I hope you have enjoyed reading this travel report. If you would like any further information about the AFC Uzbekistan Fund and the AFC Asia Frontier Fund, please get in touch with me or my colleagues.

With kind regards,
Thomas Hugger
Fund Manager

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