CIS Countries Economic Forecast

Economic Snapshot for the CIS Countries

April 3, 2019

CIS Countries regional growth set to slide this year

Regional growth is expected to slide this year, chiefly owing to the challenging economic situation in Russia due to the VAT hike and oil production cuts. Spillover effects from lower growth in the regional heavyweight will also hit other economies as remittances and export demand are squeezed. Overall, the bulk of CIS economies are seen losing steam this year.

CIS countries regional growth is expected to come in at 1.8% in 2019, unchanged from last month's forecast, and 0.9% in 2020.

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Russia Economic Outlook

GDP data confirmed a solid end to 2018 with growth hitting an over two-year high partly due to accelerating household spending. This year, however, growth is expected to have softened in the first quarter. A hike in the VAT in January likely weighing on consumer spending and stoked price pressures in the first few months of the year. Retail sales growth recorded one of the softest readings seen in the past year-and-a-half in February, although picked up from January’s low nonetheless. Meanwhile, data from the external sector has also been weak, with exports contracting in January for the first time since October 2016. A combination of a warmer winter in Europe and weak demand from CIS states likely drove the reading, while other data regarding the important energy sector has been more positive. Oil prices increased in January and February, while production was above its output cut commitments agreed with OPEC.

Growth is set to decelerate this year as the higher VAT eats into consumer spending and the OPEC+ production cuts limit exports. Additional U.S. sanctions, volatile commodity prices and slowing global growth continue to pose risks to the economy, although prudent fiscal policy has helped bolster buffers.

Kazakhstan Economic Outlook

On 19 March, President Nursultan Nazarbayev unexpectedly resigned after three decades ruling the country. As specified in the constitution, the Senate speaker, Kassym-Jomart Tokayev, has taken the reins until next year’s presidential election decides Nazarbayev’s successor. While a high degree of policy continuity should prevail on the economic front, the transition will likely delay the implementation of key structural reforms and privatization plans. The change in power comes as the economy grapples with lower oil production—due to maintenance works at the Kashagan, Karachaganak and Tengiz oil fields—which has constrained oil revenues. Moreover, economic activity grew at a softer pace, on average, in the first two months of Q1 2019, compared to the previous quarter. A downturn in the manufacturing sector, largely due to China and Russia’s slowdown, has caused overall activity to weaken.

The economy is set to lose traction this year, as slowing growth in trade partners weighs on export performance and as a fall in oil output likely limits oil revenues. Domestic demand dynamics should remain robust, however, amid strengthening credit growth. Meanwhile, uncertainty over the transition in power and lower commodity prices present the key downside risks.

Ukraine Economic Outlook

Volodymyr Zelenskiy, a comedian and political novice, came out on top in the first round of Ukraine’s presidential election on 31 March, securing 30.3% of the votes. In the second-round run-off on 21 April, Zelenskiy will face the incumbent President Petro Poroshenko, who scrambled 16.0% of the votes, beating opposition leader Yulia Tymoshenko to claim the second place. Regardless of the lingering political uncertainty, robust growth momentum appears to have carried over into this year, on the heels of a strong domestic demand-led expansion in Q4 2018. Retail sales accelerated in January and February amid moderating inflationary pressures, a resilient hryvnia and improving consumer confidence. On the external front, metrics were also upbeat: Goods exports rose at a healthy clip in January on vigorous demand from the EU, China and the U.S.

Growth is seen losing traction this year, as tight monetary and fiscal policies weigh on activity growth and global demand outlook darkens. Nevertheless, the overall expansion should remain healthy, spearheaded by solid private consumption amid tightening labor market conditions and rising real incomes. Political uncertainty remains the key risk to the outlook, however.

CIS Countries Monetary & Financial Sector News

Inflation rose to 5.3% in the CIS economy in February, up modestly from January’s 5.1%. Higher food prices along with the VAT hike in Russia stoked price pressures. Inflation is seen inching up in the coming quarters before dropping in 2020.

Russia’s Central Bank held the key interest rate unchanged in March but changed its forward guidance to a more accommodative tone amid lower-than-expected inflation. Similarly, policymakers in Armenia also held rates unchanged. Outside of CIS, Ukraine’s Central Bank also held rates stable amid still-high inflation.

Most of the region’s currencies were broadly stable in March, posting minor gains or losses. The more dovish stance taken by the Federal Reserve has alleviated some pressure from emerging-market assets, while the Russian ruble appreciated supported by higher energy prices and the country’s twin surpluses. Overall, CIS currencies are seen depreciating slightly in 2019.

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