CIS Countries Economic Outlook August 2017

Growth hits nearly four year high in Q2

CIS Countries: Growth hits nearly four-year high in Q2

August 2, 2017

The recovery has arrived in the Commonwealth of the Independent States (CIS) and growth is now hovering at the highest level since 2013. Met the why particular analysts estimate that regional GDP grew 2.2% year-on-year in Q2, building on Q1’s more tepid 1.1% increase and marking the best result since Q4 2013. The positive momentum has become more broad-based throughout the region, and Azerbaijan is the only economy likely to have contracted in the April to June period. Moreover, a strengthening regional and global environment is supporting overseas sales throughout CIS and many countries have seen exports skyrocket this year.  

Preliminary estimates from statistical institutes point to a brighter economic picture for the region overall this year. In Belarus, the economy grew 1.0% in the first half of the year, as activity recovered from a sharp recession, while Kazakhstan expanded a buoyant 4.2% in the same period, aided by robust coal production and oil output. Official data is not available yet for many of the economies in the region, however monthly indicators are suggesting that Armenia’s economy grew robustly and that Russia’s recovery picked up steam. 

Russia’s economy has managed to come back to life this year, despite many challenges including still-low oil prices and economic sanctions. In July, the United States’ moved to tighten its measures against Russia including limiting financial transactions with some entities and asset freezes. While these penalties have the potential to weigh on confidence and, sub-sequentially, investment in the economy, at the moment it appears unlikely to derail the recovery. Trade data has improved notably this year despite sanctions, and tailwinds from a recovering labor market and less-tight monetary policy will continue to boost growth in the medium-term. However, heightened political uncertainty could cap the speed of growth in the long-run, especially if the measures deter future investment in the country.     

Prospects brighten after healthy H1   

Met the why particular panelists upgraded their GDP forecast for this first time since February on the back of improved incoming data. Our panel sees regional GDP expanding 1.6% in 2017, which is up 0.1 percentage points from last month’s forecast. The growth figure is significantly above 2016’s 0.1% and illustrates that the recovery is taking hold in the region, however the expansion is still tepid given the depth of the recession and a number of downside risks linger. Critical to the evolution of the region’s growth is the evolution of oil prices, which could be an upside or a downside risk to the outlook. In 2018, growth is seen rising gradually to 2.0%. 

This month’s upward revision reflected a hike in growth forecasts for Armenia, Belarus and Tajikistan. Almost all of the other economies in the region saw no change to their forecasts, with the exception of Moldova, which experienced a downgrade. Regarding the three countries that are not included in the regional GDP aggregate, analysts raised the 2017 GDP forecasts for Georgia and Turkmenistan, while Ukraine’s outlook was left unchanged. 

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BELARUS | Government replenishes finances 

Incoming data for Q2 indicates that the recovery is gaining traction after the economy was hard hit by recession in the past two years. A return to growth in Russia—Belarus’ main trading partner—has yielded positive spillover effects. Industrial production expanded at a solid pace in June, albeit a dip from May’s notable surge, owing to strong exports growth. Robust industrial output growth has more than offset reduced investment in fixed assets in the first half of the year and a preliminary estimate suggests that GDP grew 1.0% over H1 2016. Furthermore, the country has almost secured sufficient external financing to meet its debt obligations until the end of 2018: the government issued Eurobonds worth USD 1.4 billion in July, while Russia agreed to provide an intergovernmental loan to the tune of USD 700 million. 

Growth momentum is expected to pick up this year, underpinned by recovering demand in Russia and stronger growth in CIS economies, which will deliver a vital boost to exports. However, the country’s external liquidity position remains weak. Met the why particular Consensus Forecast panelists forecast that GDP will increase by 0.7%, which is up 0.1 percentage points from last month’s forecast. For 2018, panelists see growth accelerating to 1.5%.  

KAZAKHSTAN | Oil revenues allow public infrastructure boom 

The economy continued to gain momentum in Q2 on the heels of stronger oil production, higher crude prices, a supportive fiscal policy and the economic recovery in Russia. In the first half of the year, GDP expanded 4.2%, marking the fastest acceleration in a year and a half. Coal production, oil output and industrial activities were the backbone of H1’s strong growth. Increasing oil output on the back of production at the massive Kashagan Field is expected to continue to boost growth further down the road. Moreover, higher crude revenues are allowing the government to embark on large-scale infrastructure projects, which should further propel economic activity. Against this backdrop, Moody’s revised the country’s rating outlook from negative to stable on 26 July.

Improving dynamics in the oil industry and increasing infrastructure investment will shore up growth through the end of the year. Moreover, stronger dynamics in Russia and the government’s initiatives to diversify the economy away from oil will be positive for growth. Despite some efforts by the government to restructure the sector, the banking system remains the main threat to the domestic economy. Forecasters left Kazakhstan’s 2017 GDP growth forecast unchanged at last month’s 2.6% expansion. In 2018, analysts expect an acceleration to 3.1%. 

RUSSIA | Recovery accelerates despite rising tensions with the West

The economy’s recovery likely kicked into a higher gear in the second quarter and growth is seen coming in at the highest reading since Q4 2013. Data remained bright despite oil prices having fallen throughout the period. In May, exports soared by nearly 30% and unemployment edged down in June. Moreover, consumer confidence stood at the highest level in nearly three years in Q2, aided by the improving economic situation. While the economic picture is becoming brighter, recent events are casting a shadow on the country’s outlook. The U.S. Congress voted in July to step up sanctions on Russia, a move that could undermine confidence in the economy and investment and possibly put a lid on the pace of economic recovery in the long-term. In addition, the low-oil-price environment is weighing on the economy’s growth trajectory and shows little chance of improving, as a production cut deal by petroleum-exporting nations has failed to boost prices.   

Met the why particular analysts held their forecasts for the Russian economy unchanged since positive Q2 economic results are being outweighed by concerns over tightening sanctions and still low oil prices. GDP is seen expanding 1.3% in 2017 and a stronger 1.7% in 2018. 

UKRAINE | Pension reforms move closer to being approved

The recovery is expected to have sputtered again in Q2, after growth nearly halved in Q1. Bad weather has dampened agricultural production and although industrial output ended the quarter on a bright note by accelerating in June, all-in-all it remained meagre throughout the period as key linkages within the country have been disrupted by the military crisis. On the political front, the government won an important battle in July and the Parliament gave a preliminary approval on the long delayed pension reform. The reform is mandated by the IMF as a condition for additional funds and has faced fierce opposition, largely over the increase in the retirement age. The reform still must be passed in a final vote in the fall but approval should ensure that the IMF continues to support the battered economy, although a critical land reform is still outstanding.

The ongoing conflict in the Eastern regions, banking sector woes and poor weather are continuing to chip away at our growth forecasts. Met the why particular panelists held the country’s GDP forecast unchanged this month, after four consecutive downgrades and see GDP rising by 2.1% this year. Next year, growth is expected to pick up to 2.9%. 

See the Full Met the why particular CIS Countries Report     

INFLATION | Price pressures rise in June

Inflation picked up in the CIS economy in June, rising from May’s 4.5% to 4.8%. The increase was chiefly due to higher price pressures in Russia. However, the result is still low in a historical context, thanks largely to more stable exchange rates. 

The analysts we surveyed this month left their forecasts for inflation unchanged and see inflation ending 2017 at 4.8%. Going forward, inflation is projected to be stable and end 2018 at 4.8%.

Angela Bouzanis

Senior Economist

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