Tashkent, Uzbekistan (UzDaily.com) — According to a report by Moody’s Ratings, US tariffs have a limited direct impact on the economy of Central Asia, but they create indirect risks for the banking and corporate sectors in the region.

On April 9, the US postponed the imposition of higher tariffs on imports from several countries, including Kazakhstan. Initially, a tariff of 27% had been set for Kazakhstan's exports to the US, which was significantly higher than the base tariff of 10% that has been in place since April 5 for Central Asian and Caucasian countries.

Moody’s highlights that the direct economic impact of tariffs on the region’s countries will be limited. The tariffs are relatively moderate, and the US accounts for only a small share of these countries' overall exports, with most of their exports not subject to the new restrictions. For instance, over 90% of Kazakhstan’s exports to the US consist of oil, uranium, silver, and other raw materials, which are exempt from the tariffs.

However, an escalation of the trade war between the world’s largest economies could lead to more severe economic consequences for the region’s banks and companies through three main risk channels: trade, reduced confidence, and macroeconomic conditions and financial markets. Lower oil prices and other commodities, potential trade disruptions, currency volatility, reduced investments, inflationary pressure, tighter credit conditions, and sectoral effects could weaken the financial performance of several companies. This, in turn, would limit credit growth by local banks, deteriorate asset quality, and put pressure on profitability.

Moody’s emphasizes that US tariffs will have an indirect impact on the region. The economies and specific sectors of Central Asia and the Caucasus could face negative consequences from US tariff policy if it leads to a slowdown in global economic growth, particularly in key trading partners such as Russia, China, and the European Union. Falling commodity prices will affect the region’s major export commodities, and a general reduction in economic activity and investments will lead to lower demand for exports.

Commodity price fluctuations and increased competition in foreign markets will also create additional challenges for sectors such as manufacturing, textiles, and mining. Companies outside the region facing high tariffs may redirect their sales to other markets, potentially leading to lower prices and intensified competition for local producers.

This scenario is especially relevant for Uzbekistan, where textile products make up around 11% of total exports. Banks financing these sectors will face increased risks if companies struggle with declining revenues and rising costs, potentially leading to stricter credit conditions and higher lending costs.

On the other hand, changes in global trade flows may create new opportunities for the region. For example, lower prices for certain goods such as equipment, metals, and construction materials could be redirected from the US market. The global trade war, triggered by the broad tariffs on US imports, could also prompt affected countries to seek new trading partners, increasing interest in the resource-rich region of Central Asia and the Caucasus.

According to the agency, the region has significant transport and logistics potential as a link between the North and South, East and West. In particular, rail freight transport in Kazakhstan and Azerbaijan could gain an additional boost through increased transit operations between Asia and Europe. This could lead to growth in investments and demand for new bank loans for developing and promising sectors. However, risks remain high amid increasing economic uncertainty and volatility.

Concerns about a potential trade war due to US trade policies could slow global economic growth and, therefore, reduce demand for oil. In addition, OPEC+ has decided to increase oil production, adding additional supplies to the market. As a result, oil prices significantly fell in April, with Brent and WTI quotes around $65 and $62 per barrel, respectively, as of April 16. Oil prices are expected to remain low but volatile in 2025. Even if demand for oil remains stable, the market will be sufficient to accumulate reserves if OPEC and OPEC+ continue to reduce production.

However, in recent years, both countries have made significant progress in diversifying their economies and increasing reserve funds, helping reduce dependence on raw materials and improving economic resilience. These efforts proved effective during the pandemic crisis, when oil prices fell to $40 per barrel in 2020.

Exports from Uzbekistan, Tajikistan, Armenia, and Kyrgyzstan heavily depend on gold. General economic conditions in these countries will be supported by the growth in gold prices in 2024 and the first quarter of 2025, helping mitigate the possible indirect effects of US tariffs.

A weak local currency limits the opportunities for heavily dollarized banks and increases credit risks for companies. Low oil prices and other commodities, as well as a decline in global demand and possible trade disruptions, will put pressure on local currencies in the region. Historically, local currencies in Central Asia and the Caucasus have been susceptible to external shocks, leading to depreciation and adding pressure on banks with large foreign currency loan portfolios, according to Moody’s Ratings.

Despite significant de-dollarization in the past 10 years, which has helped strengthen financial stability and economic resilience, many banks in the region remain heavily dollarized, as noted in the report.

Moody’s Ratings experts believe that a sharp depreciation of the local currency could have some positive economic effects, including supporting exports, reducing the current account deficit, and stimulating economic growth. However, for banks that heavily rely on the dollar, currency devaluation leads to increased loan losses, reduced profitability, and higher volatility in the financial sector.

Additionally, borrowers who are not protected from currency fluctuations will find it more difficult to service their foreign currency loans, leading to significant losses for banks. Furthermore, the rise in non-performing loans forces financial institutions to form reserves to cover potential loan losses, which reduces profitability.

Moody’s Ratings specialists also emphasize that the weakening of local currencies increases credit risks for companies in Central Asia and the Caucasus, especially for those focused on domestic markets, engaged in imports, or with significant foreign currency debts without corresponding cash flows. Foreign currency debt levels vary by country, but Kazakhstani companies not engaged in exports have successfully reduced their foreign currency debt after several currency shocks over the past two decades, helping minimize income-debt mismatch risks.

On the other hand, exporters could benefit from a weak currency, as it boosts their revenues and serves as protection against foreign currency debt obligations. Specifically, a weak currency could support the profitability and income of exporters, including oil and gas companies, particularly in light of significant price drops. However, foreign currency expenses linked to the dollar and inflationary pressure on costs could reduce these benefits. Additionally, currency devaluation could raise borrowing costs, affecting the entire corporate sector.

In recent years, major economies in the region, such as Kazakhstan, Azerbaijan, and Uzbekistan, have made significant strides in diversifying their economies and strengthening economic resilience. Most regional banking systems have also built up significant reserves to overcome moderate external shocks. Tighter regulations after the 2014-2015 currency crisis and the pandemic also led to a reduction in dollarization in banks, making them less vulnerable to external risks.

In the corporate sector, experts expect that stable financial performance, high liquidity, and government support will help large state-owned companies cope with potential difficulties, according to Moody’s Ratings experts.