BCG: The investment potential of Uzbekistan is up to US$65 billion

Tashkent, Uzbekistan ( -- Against the backdrop of a global decline in foreign direct investment in the world, Central Asia is showing strong growth and could become a new frontier for international capital. For this, development of cooperation within the region and pooling efforts to achieve the common goals of its member countries is crucial. Priority areas for attracting investment are agro-processing, petrochemistry and tourism. In addition to these industries, Kazakhstan has good prospects for investors in the mining industry, engineering, financial sector and alternative energy. The investment potential of Uzbekistan is up to US$65 billion, of which up to US$20 billion in non-primary industries.

Central Asia remains overlooked for now, compared to other developing economies. Its FDI potential is estimated at $170 billion, including US$40-70 billion in non-extractive industries, over the next 10 years.

According to the findings of the new BCG report “Investments in Central Asia: One Region, Many Opportunities”, Uzbekistan’s investment potential is US$65 billion, including US$20 billion in non-extractive industries.

The report for the first time considers the region of Central Asia in a complex, including all five of its member countries - Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan.

 “Today, the region has an opportunity to change the trajectory of development,” said Reza Nuriev, partner and managing director, head of the BCG in the Central Asian and Caspian regions. - Improving public institutions, significant (albeit uneven) economic growth and the liberalizing influence of the younger generation together created a stronger basis for cooperation between the countries of Central Asia, especially in such priority areas as cross-border transport infrastructure, energy, ICT, and reforms to support market trading, investment-based diversification and integration. To fully realize the potential of the region, it is necessary to develop coordination between countries, and the success of this process largely depends on two key states - Kazakhstan and Uzbekistan. A strong partnership between them could be the first step towards developing cooperation in the region as a whole. ”

Uzbekistan manages to maintain relatively high macroeconomic stability due to such factors as high growth rates, low public debt, and significant gold and foreign exchange reserves. In recent years, the country has achieved significant success in a number of parameters:

  • Since the mid-2000s, Uzbekistan shows steady growth in GDP, and in 2004-2016 Uzbekistan’s economic growth rate was 7–9% per year;
  • Uzbekistan is undergoing numerous reforms designed to simplify the regulatory framework, customs and tax systems and make them more transparent. One of the most significant reforms of the new era is the liberalization of the monetary regime in September 2017. Thanks to it, it is much easier for foreign investors to see Uzbekistan as a direction for investment;
  • In recent years, the country has made a sharp jump in the Doing Business investment rating - from 166th place in 2012 to 76th place, according to Doing Business 2019;
  • As of December 2018, the portfolio of investment projects in Uzbekistan includes 456 projects in various sectors with a total value of US$23 billion. However, FDI inflows to Uzbekistan are mainly focused on the oil and gas industry - in the last 10 years, it accounted for more than 40% of the total FDI. Investments in other industries are critical for modernizing the industrial base and increasing its productivity;
  • The potential of attracting FDI to Uzbekistan is estimated at up to US$65 billion, including up to US$20 billion in non-oil sectors.

Economic growth is gaining momentum

From 2000 to 2017, the share of Central Asia (CA) in the world economy has tripled, and by the end of 2017, the region already accounted for 0.3% of world GDP or about US$265 billion, which is comparable to Central America (255 billion) and Finland (252 billion). According to the data of the Asian Development Bank, the development prospects of the region have improved: the GDP growth forecast for 2018 was adjusted upwards in the fall (4.1% instead of 3.9% a year earlier) and improved outlook for Kazakhstan (3.7% in 2018 and 3.9% in 2019).

In the near future, further growth is expected to accelerate due to the positive influence of neighboring China (including One Belt and One Road Initiative) and India, and a partial recovery in commodity prices.

The population of Central Asia has about 70 million inhabitants, and this is 1% of the world’s population. The turnover of the growing domestic market, according to BCG estimates, amounted to US$150 billion in 2017, the GDP per capita indicator is US$3,719. For comparison: in Thailand - ~ 69 million inhabitants, GDP per capita is 6,594 US dollars. All Central Asian countries have a growing population; in the last decade, private consumption has increased rapidly (on average by 3.4% per year compared with the world average growth of 1.5%), in 2017 it reached US$2,017.

Investment climate

The structures of the economies of all five countries are similar, as they are based on several common advantages - rich natural resources, low cost of labor and agro-industrial potential, macroeconomic stability and growing population, the presence of young, well-educated personnel. The scale of reforms in different countries after independence in 1991 varied significantly, the investment climate and attractiveness for investors also differ significantly. All this is reflected in the Doing Business rating, according to which in 2019 all countries improved their positions: Kazakhstan ranks 28th, Kyrgyzstan 70, Uzbekistan 76, Tajikistan 126. Kazakhstan is the most developed of the countries of the region four times already.

Since 2008, FDI in new projects in Central Asia has reached US$113 billion, representing 1.5% of world total. Kazakhstan undoubtedly leads, attracting 70% of all investments in the Central Asian region, followed by Uzbekistan (16%) and Turkmenistan (8%), while Kyrgyzstan and Tajikistan together account for less than 6%.

Sergey Perapechka, partner and managing director of BCG, head of expert practice on working with the public sector in Russia and the CIS, said: “Large-scale reforms are underway in Central Asia aimed at increasing their investment attractiveness, and significant positive changes are already noticeable. Systemic positive changes are critical to maintaining high growth rates: measures to diversify the economy and reduce dependence on oil and other raw materials will help countries in the region improve the investment climate, while ensuring resilience to external shock factors. ”

Potential of non-primary industries - three priorities

And yet, the views of investors for the most part are still directed beyond the limits of Central Asia, which remains for them to be underestimated by the "frontier" region. By "frontier economies" we mean the markets of countries that are at earlier stages of economic and political development than larger and more mature economies.

To date, the largest share of investments in Central Asia (~ 59%) was directed to the primary industries, whereas in the global FDI volume, these industries account for only 22%. In construction, the volume of investments in Central Asia is comparable to the world level - 12 and 14%. Until recently, investments in non-tradable sectors (eg, telecommunications, trade, financial services) accounted for about 9%, which is significantly lower than the global share of FDI in the service industries (24%).

According to the report, the sectors that currently lack investment are information technologies, telecommunications, financial services, construction, engineering, the chemical industry, and the renewable energy sector. Of these, the most promising are agricultural processing and tourism in all five countries, as well as the petrochemical industry in Kazakhstan and Uzbekistan.

In terms of the share of FDI in non-primary industries, Central Asia still lags behind other developing regions. In 2008-2016 this figure was 18.2% of the region’s average annual GDP for the same period, while for the North African region this figure was 26.8%, Central America - 35.9%, and for the Balkan region - 47.2%. This indicator is highly dependent on the structure of the economy. In order to achieve the level of investment (relative to GDP) of the resource-rich North-African region, for Central Asia, it is necessary to increase the volume of FDI in non-primary sectors by 75% over the next 10 years. Thus, the potential for attracting FDI to Central Asia over the next 10 years is estimated at up to US$170 billion, including in the non-commodity sectors of 40-70 billion.

Vladislav Butenko, Senior Partner and Managing Director, Chairman of BCG Russia, noted: “Promising industries were selected based on three criteria: a relatively low level of existing investments, a low barrier to entry and a priority for the industry for the government. In addition, agricultural processing and tourism will require relatively small investments. And the more capital-intensive petrochemical industry is attracted by the availability of high-quality human resources - a large pool of professionals and experts with the necessary knowledge and experience. ”

Agricultural processing. Central Asia has vast land resources - 75% of its territory is agricultural and 10% is arable land. One of the main obstacles to the development of agriculture in the region is the lack and insufficient efficiency of irrigation systems, which cover only 22% of the cultivated land.

Now, production and exports are mainly focused on the main types of raw materials, besides, the share of food in the total import volume reaches 11-15% in the region. According to experts in agriculture, the region as a whole loses up to 40% of the crop due to poorly developed infrastructure at the stages before and after storage. There is a need to move to the production of higher value added products and to modernize production and infrastructure, including the creation of powerful packaging centers and refrigeration units. Creating and promoting branded products would help the region compete in international markets. Modern IT will help to establish effective trade. Consequently, investments in infrastructure and new technologies will be required, with continued government support.

Central Asia has long been famous for its sheep breeding. The sheep population in the times of the Soviet Union was the largest in the world (139 million). In several countries, cotton continues to play a key role in the economy: pure cotton yarn and raw cotton account for almost 14% of exports in Uzbekistan and 11% in Tajikistan. Thus, Uzbekistan produces about 3.5 million tons of raw cotton and 1.1 million tons of cotton fiber annually. The country is the fifth largest exporter of cotton (283 thousand, more than 3% of world exports). The difficulty lies in making the transition from the production of raw materials to the production of value-added products - fabrics and clothing - on an industrial scale, which will require investment and closer cooperation between the countries of the region. Uzbekistan set an ambitious goal to process 100% of the produced fiber by 2021, for which it is planned to build 112 new enterprises and modernize existing ones.

Petrochemistry. The chemical industry is a growing global industry with a large market size and high growth rates, but Kazakhstan and Uzbekistan so far have competitive advantages only at the most basic level - they have cheap raw materials in large volumes. In terms of oil reserves, Kazakhstan is ranked 12th in the world and 2nd in Eurasia (after Russia), and for proven gas reserves Uzbekistan ranks 21st in the world. Oil and gas in Kazakhstan is 30% cheaper than in Russia, and twice as cheap as in the EU.

The main obstacles to development of production with higher added value are complex logistics of access to international markets (railway only), low level of innovation and competences in the field of marketing and sales, as well as capital intensity. An attractive destination for investors would be the production of polyethylene and propylene, which account for up to 50% of the global demand for petrochemical products.

The first projects for deep processing of petrochemistry have already been implemented, for example, already in 2012, the largest plant in Kazakhstan producing plastic films and bags was opened; in 2017, a new plant for the production of plastic containers opened in Uzbekistan.

Tourism. Central Asia - the region of the Great Silk Road - can potentially become a very attractive destination for tourists due to its unique natural, cultural and historical features. Suffice it to mention the legendary masterpieces of architecture in Samarkand, Bukhara and Khiva. The proximity to Russia and China, the diverse opportunities of eco- and ethno-, extreme and sports tourism, as well as knowledge of the Russian language among the population create additional prerequisites for the development of the industry. However, so far only a small share of the region’s GDP - from 1 to 3% depending on the country - accounts for tourism, and its share in total foreign direct investment, according to FDI Markets, is less than 1%. Significant investments will be required both in transport and tourism infrastructure, as well as in IT, personnel training and marketing in the region. Promoting several countries as one destination, according to the UN World Tourism Organization, can be an effective and profitable strategy to attract tourists who would not otherwise consider visiting this region. Common efforts are needed to facilitate the visa regime and develop cooperation between the countries in the region. The introduction of a single visa for Central Asia could facilitate the influx of tourists. According to a TripAdvisor survey, every second person would be more interested in visiting the region in this case.

Cooperation as the key to success

Each of the considered industries and countries has its own characteristics, and at the same time there are a number of important general patterns in regard to the transition to a qualitatively new level of development. The report’s authors identify five keys with which the countries of Central Asia will be able to unleash their investment potential:

  • Regional Infrastructure Development
  • Support for cross-border movement of goods, services, people and capital
  • Harmonization of the regulatory framework and investment climate
  • Active development of complementary competitive advantages
  • Coordination of investment strategies

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