CIS Countries Economic Forecast

Economic Snapshot for the CIS Countries

September 5, 2018

Growth stays solid in Q2 on firm commodity prices

Recent data for the economy of the Commonwealth of Independent States (CIS) suggests that the regional recovery remained on track in the second quarter. Regional GDP is expected to have grown 2.0% year-on-year in Q2, unchanged from Q1’s expansion. Tailwinds from higher commodity prices, an improving labor market, low inflation and rising remittances are expected to have fueled activity in the region. However, overall regional growth is still moderate and remains far below the level prior to the commodity price slump in 2014.  

Official GDP data for the second quarter is still outstanding for most of the region’s economies. However, preliminary figures revealed that growth waned in Armenia on the back of fiscal tightening and moderating fixed investment. Despite this, rising household spending thanks to increased remittances inflows amid the region’s recovery buttressed the downfall and kept momentum solid overall. In contrast, GDP growth rose in Ukraine—which is not included in the regional aggregate—supported by an improving labor market and recovering confidence despite delays in the country’s IMF program.

Meanwhile, Azerbaijan’s economy lost momentum in the second quarter. Official data for the first half of 2018 revealed that the economy grew 1.3% over the first half of 2017, suggesting that growth moderated from the first quarter’s 2.3%. A weak energy sector despite higher oil prices is expected to have dampened momentum. Similarly, H1 data for Belarus showed that the economy lost steam in the second quarter, but still grew solidly overall, while Kazakstan’s H1 growth was steady at Q1’s pace. Although official data is not available for regional-giant Russia, growth is expected to have kept pace at Q1’s speed, supported by low inflation and a tight labor market. 

On the political front, Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan signed a landmark treaty on 12 August. The agreement clarifies the status of the Caspian Sea and should open up opportunities for increased oil and gas exploration, as well as transport deals between the countries. However, it remains to be seen how many new projects will emerge and the size of the economic effect, as the treaty was quite vague, and some crucial details still need to be ironed out.

Regional growth prospects unchanged despite fresh sanctions on Russia

Firm commodity prices are buffering the region’s economy against ongoing geopolitical uncertainty. Higher oil prices and oil production, along with a tight labor market, are supporting Russia’s growth outlook this year, which will in turn spur growth in many of the region’s smaller economies through export demand and remittances inflows. In addition, higher commodity prices are also helping to revive energy and mining sectors in these economies. Although fresh sanctions imposed by the U.S. on Russia in August caused the ruble to plunge, the Russian economy has been resilient against sanctions so far and growth is expected to continue to hold up despite the new measures. That said, sanctions are expected to further spark volatility in the ruble and financial markets, while harsher measures remain a downside risk to growth.

The CIS economy is seen expanding 2.1% in 2018, which is unchanged from last month’s forecast and will mark the fastest growth rate in five years if confirmed. Next year, growth is seen holding steady at 2.1%. This month over half of the CIS economies saw no changes to their growth projections for 2018, including Belarus and Kazakhstan. However, Kyrgyzstan and Moldova’s forecasts were downgraded, while Armenia and Russia had their projections lifted. As for the three countries that are not included in the regional GDP aggregate, forecasts for Georgia and Ukraine were revised up, while Turkmenistan’s projection was left unchanged.

This year, Tajikistan and Uzbekistan are projected to be the region’s top performers, both growing over 5.5%. Turkmenistan, which is not included in the regional aggregate, is also seen expanding a vigorous 5.9%. In contrast, Azerbaijan and Russia are expected to be the region’s weakest performers, with expansions of below 2.0%. Among the region’s larger economies, Kazakhstan will outpace the rest, growing 3.7%, followed by Belarus (3.3%).

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RUSSIA | Putin softens proposed retirement age increase for women

The recovery is expected to have broadly kept pace in the second quarter, after growth picked up modestly at the start of the year. According to the Finance Ministry, monthly GDP grew solidly in April and May, but slowed in June. Firm oil prices, low unemployment and rising wages likely supported the economy’s momentum; however, data for the manufacturing sector remains lackluster and industrial production growth fell notably in June. More recent data for Q3 revealed that the quarter started off on a mixed note. Industrial production growth regained lost steam in July and the services PMI rose, while the Ural oil price fell to a four-month low. In the political arena, following widespread protests, President Vladimir Putin reduced a planned increase in the retirement age for women on 29 August, but left a planned increase in the male retirement age unchanged. The proposed retirement age rise is widely unpopular especially due to low life expectancy, but deemed necessary to support the country’s pension system. Meanwhile, on 27 August, new U.S. sanctions against Russia took effect targeting foreign aid, defense and security goods.

A firm labor market, higher commodity prices and rising oil production are expected to boost growth this year. However, high geopolitical uncertainty and the possibility of further economic sanctions remain key risks to the outlook. Met the why particular Consensus Forecast panelists see GDP expanding 1.8% in 2018, which is up 0.1 percentage points from last month’s forecast. In 2019, growth is seen broadly steady at 1.7%.

KAZAKHSTAN | Incoming data points to healthy economic momentums

Recent data shows that the economy continued expanding at a robust pace in the first seven months of the year. The short-term economic activity indicator climbed 4.9% year-on-year in this period (January–June: +5.2% year-on-year). Despite oil prices falling in July, oil production remained firm in the same month and continued to drive the economy’s sustained growth. Retail sales also climbed robustly in July, albeit moderating from June, as both the unemployment rate and inflation hovered at multi-year lows. Moreover, industrial production picked up in the month, although fell short of the first quarter’s rate of expansion. On 12 August, Kazakhstan signed a landmark treaty together with the four other Caspian nations—namely Russia, Iran, Azerbaijan, and Turkmenistan—to settle the legal status of the Caspian Sea following a two-decade long dispute, which should pave the way for increased oil and gas exploration in the area.

Another year of strong economic growth is expected, buoyed by higher oil prices and increased investment in the oil sector, along with improved domestic demand amid subdued inflation. Economic activity is expected to expand at a weaker rate overall, however, as exports are anticipated to decelerate as global trade tensions escalate. The government’s fiscal tightening plans could also hold back growth. Key challenges to the outlook include the Federal Reserve’s interest rate hikes spurring sharp capital outflows, and political uncertainties stemming from the transition of power if President Nazarbayev decides to stay out of the 2020 presidential race. Met the why particular panelists see GDP growing 3.7% in 2018, which is unchanged from last month’s forecast, and 3.6% in 2019

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UKRAINE | Recovery gains steam in Q2

The economy continued to gain traction in the second quarter, following a solid outturn at the beginning of the year. Domestic demand seemingly remained at the forefront of the expansion, and easing inflationary pressures, coupled with a tightening labor market and rising consumer lending, bolstered household consumption growth in the quarter. In addition, investment activity remained buoyant in Q2, despite losing some momentum from Q1, as investment in the mining and quarrying, and manufacturing sectors continued to soar at a double-digit pace. Meanwhile, external sector dynamics appear to have improved slightly from the previous quarter: Exports accelerated in Q2 on the back of solid demand from EU countries, led by Italy and Poland, outpacing imports for the first time in over a year. On a less positive note, unfavorable weather conditions have led to a worse-than-expected crop harvest this year, which clouds the exports outlook and is likely to lead to higher food prices domestically.

Robust domestic demand should buttress economic momentum this year, on the back of solid private consumption and investment activity growth. However, import growth is seen outpacing that of exports in the second half of the year, mostly on solid domestic demand and higher energy imports, which will likely take a bite out of overall GDP growth. Downside risks remain significant, largely stemming from mounting political tensions domestically and geopolitical uncertainties. Met the why particular panelists see GDP rising 3.2% in 2018, up 0.1 percentage points from last month’s forecast, and 3.1% in 2019.

BELARUS | Activity remains firm at start of Q3; Lukashenko shakes up cabinet

Growth momentum seemingly held up at the outset of the third quarter, largely on the back of a buoyant industrial sector amid solid domestic and external demand. Despite gloomy economic conditions in Russia—Belarus’s main trading partner—exports accelerated in June, with momentum likely carrying over into July on booming demand from non-CIS countries and the EU. Meanwhile, inflation remained at an all-time low in July and, coupled with high wage growth, likely buoyed private consumption in the month. Meanwhile, in the political arena, President Alexander Lukashenko reshuffled the government on 18 August, sacking the prime minister and other top ministers, following recent corruption scandals. The move, which included naming free-market advocate Sergei Rumas as the new prime minister, was seen by some analysts as a strategic step in preparation for the 2020 elections.

The economy is expected to lose some steam in the second half of the year, largely due to a high base effect and the spillover effect from economic sanctions imposed by Western governments on Russia. Nevertheless, growth should remain solid and will be bolstered by higher private consumption against the backdrop of lower inflation and favorable labor market dynamics.Met the why particular panelists see the economy expanding 3.3% in 2018, which is unchanged from last month’s forecast, and 2.9% in 2019.

MONETARY SECTOR | Inflation edges up in July

A preliminary estimate of regional inflation revealed that price pressures rose for the first time in four months in July. Inflation in the CIS region increased from June’s 2.6% to 2.8%, while higher price pressures were recorded in three of the region’s economies, including Russia. That said, inflation remains at a historically-low level.

Inflation is seen picking up pace by the end of this year and rising further in 2019. Pass-through effects from the ruble’s recent depreciation will likely fan price pressures in Russia, which will be compounded by a hike in the VAT in 2019. Inflation is projected to come in at 4.2% at the end of the year, which is unchanged from last month’s forecast. In 2019, inflation is expected to edge up to 4.5% by year-end

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Angela Bouzanis

Senior Economist 

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