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50 n 0 Q IMPROVING UZBEKISTAN'S POSITION IN INTERNATIONAL RATINGS L U L O AND INDEXES: THEORY, PRACTICE, AND STRATEGY
UNDERSTANDING ROLE OF VARIOUS ECONOMIC VARIABLES IN IMPROVING UZBEKISTAN'S POSITION IN INTERNATIONAL RATINGS AND INDICES 1Dr. Alekha Chandra Panda 2Mr.Sreekanth Peringanam Veluthedan
1Visiting Lectures Banking and Finance School Management Development Institute of Singapore in Tashkent (MDIST) 2Visiting Lectures Banking and Finance School Management Development Institute of Singapore in Tashkent (MDIST) 28 Bunyodkor Avenue, Tashkent
1apanda@mdis.uz 2sveluthedan@mdis.uz https://doi.org/10.5281/zenodo.10134720
Abstract. In the debt (bond) and capital markets of many nations, credit rating agencies (CRAs) have a significant impact. Government policy-making benefits greatly from the work of CRAs. The rating agencies use a combination of several quantitative and qualitative variables (economic, social and political) in order to assign a credit rating to a debtor or to a debt instrument. As a consequence, an important issue is to identify the various factors that are statistically significant in the determination of sovereign credit ratings. An effort has been made to highlight, where Uzbekistan stands of various rankings and its achievements and challenges on various parameters. This study provide some findings and suggestions to improve the ranking and rating in the country's credit rating process.
Keywords: Credit rating agencies, Economic variables, Government policy, Capital
Market
INTRODUCTION
A credit rating is an independent assessment of the creditworthiness of a country or sovereign entity and how risky investing in it might be, which is conducted by credit rating agencies (CRA). Standard and Poor's (S&P), Moody's, and Fitch, the three major credit rating agencies of the world. The rating agencies uses a number of quantitative and qualitative factors (economic, social, and political) for rating a company or country. Identification of the factors influencing their assignment of sovereign credit ratings is crucial because they do not publicly disclose their methodologies.
Credit ratings aim to measure the creditworthiness of an entity (e.g., a corporation). They represent an opinion of a rating agency that evaluates the fundamental credit strength of an issuer and his ability to fully and punctually meet his debt obligations (Gonzales et al. (2004), Berblinger (1996) p. 11, and Wappenschmidt (2009)). The market for ratings has an oligopoly structure as the three leading agencies 'Moody's', 'Standard & Poor's' (S&P), and 'Fitch Publishing Company' control around 95% of the market (Asmussen (2005), Wappenschmidt (2009) p. 13). Any nation must prioritize having a high ranking in various indices. It is very important for any country to get a good ranking in various indexes. From time to time there are many international research agencies publish reports indicating various global parameters. This global raking reflects a countries socio economic, political and various other parameter, which help to judge strength of the country.
The sovereign credit ratings given by Standard and Poor's (S&P) to international emerging markets are based on number of macroeconomic factors. Ratings for sovereign debt indicate a nation's political, economic, and financial health. Ratings play a significant role in attracting investments and capital inflow. This is particularly important for developing nations. According to Erdem, O., and Varli (2014), the most important variables are Budget Balance/GDP, GDP per capita, Governance Indicators, and Reserves/GDP.
0 n 0 Q IMPROVING UZBEKISTAN'S POSITION IN INTERNATIONAL RATINGS L U L O AND INDEXES: THEORY, PRACTICE, AND STRATEGY
Based on ratings issued by Moody's and S&P's in June 2001 using cross-section data and employing both a linear and a non-linear transformation of rating levels, Afonso (2003) studied various key factors determining sovereign debt ratings using data from 81 developed and developing countries. He demonstrates that six variables are the most relevant factors in explaining the credit ratings: (1) GDP per capita, (2) external debt-to-exports ratio, (3) level of economic development He comes to the conclusion that for wealthy countries, GDP per capita is essentially the only meaningful economic determinant, whereas foreign debt is significant for emerging countries.
Corruption of country leads to institutional entrance barriers and imposing additional taxes, which raise corporate costs and lead to less-than-ideal levels of FDI (also known as the "sanding the wheels" channel) (Wei, 2000; Aidt, 2003; Du et al., 2008; Javorcik and Wei, 2009), corruption is detrimental to FDI. The credit ratings of a country are based on economic fundamentals such as the ratio of non-gold foreign exchange reserves to imports, the current account balance to GDP, growth, and inflation, rising international interest rates have a negative impact on developing country ratings regardless of domestic economic fundamentals (Haque, N., Kumar, M., Mark, N. et al. 1996)
There are currently numerous indices that rate nations according to their level of national competitiveness, happiness, human development, and other factors. The economic prosperity of a country is a major factor which depends upon how creditworthy it is, which impact the longer-term political stability (Lee, S 1993). The adverse effects of bureaucratic corruption can have a negative effect on the nation's overall economic development. Economic development and investment are harmed by corruption (Méndez F., Sepúlveda F 2006).
Some of the Wellknown indices published by various publishing house and rating agencies
are
Index Parameters
Press Freedom Index Assesses violations against journalists and media outlets, taking into account responses from press freedom specialists.
Environmental Performance Index (EPI) Ranks based on 40 metrics that focus on criteria such as reducing global warming, enhancing environmental safety, and preserving ecosystem vitality.
Global Hunger Index Evaluates factors like undernourishment, child wasting, child stunting, and child mortality.
One of the most comprehensive ranking of countries is by the Global Sustainable Competitiveness Index (GSCI 2022), measures Sustainable competitiveness of countries based on 189 measurable, quantitative indicators derived from reliable sources, such as the World Bank, the IMF, and various UN agencies. The 189 indicators are grouped into 6 sub-indexes: Natural Capital, Resource Efficiency & Intensity, Social Cohesion, Intellectual Capital, Economic Sustainability, and Governance Efficiency.
A CRITICAL ANALYSIS BASED ON GLOBAL INNOVATION INDEX The Global Innovation Index is an annual ranking of countries by their capacity for, and success in, innovation, published by the World Intellectual Property Organization (WIPO), was started in 2007. The Global Innovation Index (GII) takes the pulse of innovation against a
0 n 0 Q IMPROVING UZBEKISTAN'S POSITION IN INTERNATIONAL RATINGS L U L O AND INDEXES: THEORY, PRACTICE, AND STRATEGY
background of an economic and geopolitical environment fraught with uncertainty. It reveals the most innovative economies in the world, ranking the innovation performance of around 132 economies while highlighting innovation strengths and weaknesses.
In addition to the overall value of GII, the seven GII pillars, namely five input pillars and two output pillars. They are, Institutions (I), Human Capital and Research (HC&R), Infrastructure (Inf), Market Sophistication (MS), Business Sophistication (BS), Knowledge and Technology Outputs (K&TO), and Creative Outputs (CO). The Global Innovation Index (GII) rank and its components from 2020 to 2023 displayed in the above table.
Uzbekistan Global Innovation Index Position
Elements 2020 2021 2022 2023
Overall GII rank 93 86 82 82
Institutions 95 94 63 55
Human capital & 77 72 65 89
research
Infrastructure 72 72 74 73
Market 27 24 60 69
sophistication
Business 127 123 74 78
sophistication
Knowledge & 90 77 80 78
technology
outputs
Creative outputs 127 113 102 93
The rank under institutions pillar were improved in 2023, from 63 to 55. But human capital and research which dealt with education, tertiary education and research and development (R&D) showing outperformed and the rank jump from 65 to 89 in last two year. The following areas were identified underperformed in 2023 especially in R&D. Global corporate R&D investors, top 3, mn USD (Score 0.0 and rank 40) QS university ranking, top 3 (Score 0.0 and rank 71). While considering the infrastructure the ranks were improving for the last four years consecutively with special focus on Information and communication technologies (ICTs), but there is an improvement essential in Ecological sustainability that is GDP/unit of energy use and ISO 14001 environment/bn PPP$ GDP, which is ranked 110 and 99 respectively.
Looking in to market sophistication the rank has been heavily declined after 2021. The reason might be the issues associated with credit (rank 121) which include outperformance of Finance for startups and scaleups, Domestic credit to private sector, % GDP and Loans from microfinance institutions, % GDP. There is a significant improvement in the rank of business sophistication from 127 in 2020 to 78 in 2023. But there are some areas need to give more focus such as Firms offering formal training (rank 88), Females employed w/advanced degrees (rank 84), GERD financed by abroad, % GDP (rank 92), Joint venture/strategic alliance deals/bn PPP$ GDP (rank 96), Patent families/bn PPP$ GDP (rank 95).
Knowledge and technology outputs pillar covers all those variables that are traditionally thought to be the fruits of inventions and/or innovations. There are three sub-pillars; knowledge creation, knowledge impact and knowledge diffusion. It has been observed that the Scientific and technical articles/bn PPP$ GDP score is very low and ranked 117th among other countries. The Citable documents H-index also found outperformed with a rank of 115.
0 n 0 Q IMPROVING UZBEKISTAN'S POSITION IN INTERNATIONAL RATINGS L U L O AND INDEXES: THEORY, PRACTICE, AND STRATEGY
Since its inception, the GII has always emphasized measuring creativity as part of its Innovation Output Sub-Index. The last pillar, on creative outputs, has three sub-pillars, namely, Intangible assets, Creative goods and services and Online creativity. The overall values and rank of creative output were improving year by year, but special emphasis required in the area of National feature films (which measures national feature films produced in a given economy (per capita count)), Generic top-level domains (generic and economy/country-code top-level domains).
Economic Variable and Impact on Credit Rating
Variable Economic Rationale Theoretical Predictions
Per capita income An increase of the per capita income implies a larger potential tax base and a greataer ability for a country to repay debt.
Gross domestic product (GDP) growth An increasing rate of economic growth tends to decrease the relative debt burden. Moreover, it may help in avoiding insolvency problems.
Inflation rate A low inflation rate reveals sustainable monetary and exchange rate policies. It can also be seen as a proxy of the quality of economic management. +
Economic development Developed countries are integrated within the world economy and are less inclined to default on their foreign debt in order to avoid sanctions from the lenders.
Current account A large current account deficit implies the dependence of a country on foreign creditors. A persistent deficit affects the country's sustainability. +
Foreign debt/GDP This ratio is negatively related to default risk. +
Real exchange rate The real exchange rate assesses the trade competitiveness of the economy. +
0 n 0 Q IMPROVING UZBEKISTAN'S POSITION IN INTERNATIONAL RATINGS L U L O AND INDEXES: THEORY, PRACTICE, AND STRATEGY
Default history A country's default history affects its reputation. +
Ratio debt/GDP The higher this ratio is, the greater the occurrence of a liquidity crisis. +
Ratio reserves/imports The higher this ratio is, the more reserves are available to service foreign debt.
Ratio investment/GDP This ratio captures the future growth ability of a country and it is a decreasing function of default.
Corruption index This index is a measure of political risk and can reduce a country's willingness to pay. +
Regulatory quality, accountability, rule of law and political stability These indicators provide a means of evaluating the governance of a country and affect a country's willingness to pay.
Source : Mellios, C., & Paget-Blanc, E. (2006).
The above table provide the significant economic variables, operational definition of these variables and how this variable effect the performance of country. It briefly explains the relationship between each variable and the ability and the willingness of country to pay its debt.
FINDINGS AND SUGGESTIONS
The government nurturing an institutional framework that attracts business and fosters growth by providing good governance and the correct levels of protection and incentives is essential to innovation. The Institutions pillar captures the institutional framework of an economy. Uzbekistan's startup scene saw an increase in 2023 and jumped 4 spots from the previous year, outranking Bolivia, with a regional ranking of 3rd in central Asia.
This study found that Human capital and research is still acting as a weakness to the country. Pupil-teacher ratio, secondary and Graduates in science and engineering data shows significant improvement. This study suggests that there should be more Global corporate R&D investors in academic sector. The absence of QS university ranking is also affecting rating and indexing which can be resolved if a university publish at least 100 papers indexed by Scopus and published over a 5-year window to consider for the QS World University Rankings. It can be achieved by giving supports and encouragements to teachers and students of the universities and institutions to publish their articles and masters' projects in Scopus indexed journals.
The study found that Domestic credit to private sector also need an improvement. Domestic credit to private sector refers to financial resources provided to the private sector by financial corporations, such as through loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment. It is still lacking in Uzbekistan. The availability of credit and an environment that supports investment, access to the international market, competition, and market scale are all critical for businesses to prosper and for innovation to occur.
0 n 0 Q IMPROVING UZBEKISTAN'S POSITION IN INTERNATIONAL RATINGS L U L O AND INDEXES: THEORY, PRACTICE, AND STRATEGY
The study found that GERD performance is also need significant improvement. GERD performed by business enterprise consists of the total expenditure (current and capital) on R&D by all resident companies excluding R&D expenditures financed by domestic businesses but performed abroad. Joint venture/strategic alliance deals are also lacking significant attention by the country. It can be achieved by establishing a long-term agreement with identified potential partners in selected sectors like banking and insurance, automobile, health, retail etc.
The GII in Scientific and technical articles pillar showing a rank of 117/132 and Citable documents H-index with a rank of 115/132. In 2020, scientific and technical journal articles for Uzbekistan was 1,375. This can be increased by starting new diploma, bachelor, master, Ph. D courses and research projects in science and technical field, namely microbiology, biotechnology, electro chemistry and courses in artificial intelligent, machine learning and encourage the students to carryout different projects and publish Scientific and technical articles.
Uzbekistan inflation rate for 2022 was 11.45%, a 0.6% increase from 2021, which considered as very high. This is largely due to the global rise in prices, the rise in the cost of products in the countries that are the main suppliers to the Uzbek market. One of the commonly used measures to control inflation is controlling the money supply in the economy. Government also can adopt the controlling measures which include output adjustment, suitable wage policy, price control, rationing, etc.
CONCLUSION
A credit rating is an independent assessment of the creditworthiness of a country or sovereign entity and how risky investing in it might be, which is conducted by credit rating agencies (CRA). This study identifies some important credit rating methodologies and performance of Uzbekistan among these credit rating procedures with special emphasis on Global Innovation Index foe past four years. This study examines the relative importance of political and economic variables in determining a country's credit rating. Our significant finding is that Uzbekistan have a leading position in some of the economic variables and it also require extensive supervision on the variables which lagging behind to improve the positions in the credit rating in the future.
REFERENCES:
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0 n 0 Q IMPROVING UZBEKISTAN'S POSITION IN INTERNATIONAL RATINGS L U L O AND INDEXES: THEORY, PRACTICE, AND STRATEGY
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