CIS Countries: 2015–2016 recession revives ghosts of the past
January 11, 2017
Since the collapse of the Soviet Union, the successor states that formed the Commonwealth of Independent States (CIS) have suffered from various cyclical crises. Although the latest recession that began in 2015 has not yet finished, the situation is improving. Comprehensive data suggest that the aggregate GDP for the CIS region decreased 0.3% in the third quarter from the same period of the previous year (previously reported: -0.2% year-on-year), which followed a 0.4% contraction in Q2. Q3’s result marked the softest decrease since the regional economy began to contract in Q1 2015.
The economic recession in 2015–2016 was caused by a combination of external and domestic factors. The former included tighter monetary policy in the U.S., subdued global growth and a collapse in commodities prices. The latter included the CIS economies’ extreme macroeconomic fragility, which is a legacy from past crises, a relatively poor business climate, structural distortions, weak public finances and government deficits. On top of that, the conflict between Russia and Ukraine has inflicted severe economic pain not only on these two economies themselves, but also on their neighbors.
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Meanwhile, the rapid depreciation of the Russian ruble and of the currencies of other CIS countries in 2015 and 2016 revived worries of macroeconomic instability in the region—a fear that has arisen several times since the Soviet Union’s collapse in 1991. As with previous currency crises, particularly those of 1998–1999 and 2008–2009, the most recent episode was caused by a combination of global, regional and country-specific factors. Most countries’ policy response took the form of foreign exchange interventions—which drained international reserves—and some anti-crisis policies. The latter were not comprehensive enough and led to miscalculations and mistakes, in particular due to inadequate fiscal adjustment and a lack of in-depth structural and institutional reforms to address the deep roots of the crisis. Poor transparency did not help either.
Gradual recovery in sight in 2017
In 2016, the economy of the Commonwealth of Independent States continued to adjust to a painful new reality of low commodity prices, geopolitical risks and subdued global growth. Economists estimate that the region’s economy contracted 0.3% last year, which was its second year in recession. The economic downturn was less severe than in 2015 as the latest data show that economic activity began to revive in the second half of the year. However, against a backdrop of recovering commodities prices, weak economic growth is expected to continue in the coming quarters and this year will be challenging for most economies in the region. The Consensus view among economists is that the CIS economy will expand 1.4% this year, which was revised down 0.1 percentage points from last month’s forecast. Going forward, economists forecast regional economic growth to pick up to 1.9% in 2018, supported by higher commodities prices and the correction of the macroeconomic imbalances observed since 2015.
The region’s projected improvement in 2017 is mainly the result of better prospects for the Russian economy, which is expected to rebound this year as oil prices gradually recover. Meanwhile, in Central Asia—a region closely linked to Russia—economic growth is projected to gain momentum in 2017, after a slowdown in 2016. In the Caucasus economic activity is expected to rebound strongly, mainly due to Azerbaijan’s return to growth.
Looking at the individual countries, analysts left their 2017 GDP forecasts unchanged for Kazakhstan, Russia and Uzbekistan, while they cut their growth estimates for Armenia, Azerbaijan and Belarus. Kyrgyzstan, Moldova, and Tajikistan were the economies for which analysts raised their projections. Of the three countries that are not included in the regional aggregate, the 2017 GDP growth forecasts for Georgia and Turkmenistan were raised from the previous month, whereas that for Ukraine was left unchanged.
BELARUS | Geopolitical uncertainty weighs further on battered economy
Belarus’ economy suffered a broad-based decline in the third quarter of 2016, with private consumption, investment and government spending all falling compared to the same period last year. The country was negatively impacted by the continuing recession in Russia, its largest trading partner, as well as by weak domestic bank balance sheets, which impeded private lending. The energy dispute with Russia is another persistent cloud on the horizon which is causing geopolitical uncertainty and could increase the cost of Belarus’ energy imports. However, some green shoots of recovery are visible in industry, with industrial production growing at the fastest pace in two years in November. Belarus’ economic advancement depends in large part on the implementation of the government’s 2016-2020 action plan, which aims to break up monopolies, improve governance and prepare the country for accession to the World Trade Organization.
Belarus’ economy should return to growth in 2017, aided by expansion in Russia and funding from the World Bank and the European Bank for Reconstruction and Development, although the economy will continue to be hampered by low prices for commodity exports. Met the why particular Consensus Forecast panelists forecast that GDP will increase by 0.5% in 2017, which is down 0.1 percentage points from last month’s forecast. For 2018, panelists see growth picking up to 1.4%.
KAZAKHSTAN | Oil production cut will not affect 2017 outlook
A stabilization in the country’s financial conditions and higher oil prices led to an improvement in economic activity in the second half of 2016. Industrial production increased for a third consecutive month in November, which suggests that economic growth shifted into a higher gear in the final quarter of 2016. The good economic news came on top of comprehensive data showing that GDP proved more resilient in the January–September period. Oil production picked up toward the end of 2016 due to the end of maintenance work at Tengiz and the opening of the Kashagan oil field. This will provide a boost to the country’s oil sector in the coming quarters, despite Kazakhstan’s agreement with OPEC to reduce its oil output by 20,000 barrels a day.
The outlook for Kazakhstan is bright as higher oil production, on the back of the Kashagan project, is expected to fuel growth in the oil and non-oil sectors in 2017. Analysts agree that the government’s commitment to cut oil output will not impact the GDP growth forecast. They left the country’s 2017 GDP growth forecast unchanged from last month’s 2.1% and see the economy accelerating further to a 2.8% expansion in 2018.
RUSSIA | Return to growth in sight, but recovery will be uneven
After two years in recession, a return to growth is in sight. GDP contracted at the slowest pace in Q3 since the slump began nearly two years ago, following which data from industrial production in November and business surveys results in December signaled a further strengthening of economic activity in the final quarter of 2016. That said, the return to growth is expected to be gradual and uneven, given the absence of fiscal or monetary policy support. Moreover, the shock to Russia’s external sector from low oil prices and international sanctions was substantial in 2016 and a quick recovery is not in the cards for now. Oil prices are projected to increase in 2017 given the agreement to cut production by major oil producers, but international sanctions are expected to prevail. Indeed, the EU has extended its sanctions against Russia by another six months until July 2017 and the outgoing U.S. administration has announced sweeping new sanctions against Russia in retaliation for alleged cyber attacks.
GDP should continue to strengthen gradually and the economy is expected to enter a shallow recovery this year, but plans to reduce the fiscal deficit will prevent a faster pickup in activity. The analysts we surveyed expect the economy to expand 1.2% in 2017, which is unchanged from last month’s projection, before accelerating to a 1.6% expansion in 2018.
UKRAINE | Government takes steps to secure IMF’s next tranche
Ukraine’s recovery picked up steam in Q3 2016, as GDP grew at the fastest pace in almost three years. Surging fixed investment due to an improving business climate and higher household consumption fueled the economy’s acceleration. Data for the fourth quarter suggest that the economy continued on a modest recovery path with industrial production expanded at the fastest pace in eight months in November. In the political arena, the government has taken steps to fulfill the IMF’s demands in order to secure the next tranche of aid. In December, the government took control of the country’s largest bank, Privatbank, in an effort to clean up the floundering banking sector. The government also adopted a 2017 budget which meets the IMF’s requirement of a 3.0% fiscal deficit. These moves should allow the country to receive a crucial USD 1.3 billion in aid in the coming weeks to replenish the Central Bank’s reserves and government coffers.
The government’s cooperation with the IMF bodes well for Ukraine’s outlook and the economy is expected to continue on an upward trajectory. The Met the why particular panel sees GDP rising by 2.4% this year, which is unchanged from the previous month’s estimate. In 2018, the panel sees growth picking up to 3.0%.
INFLATION | Inflation falls again in November, outlook seems positive
Inflation in the CIS economy continued to fall in November. According to our regional estimate, it fell from 6.6% in October to 6.1%—a level last registered in February 2014. Although remaining high, inflation had begun to fall rapidly in late 2015 due to the fading of inflationary pressures caused by a devaluation in some regional currencies, a negative output gap and the fall in commodity prices.
Inflation in the CIS region is expected to have stabilized towards the end of 2016, with economists expecting it to have closed the year at 6.1%. Economic experts see the fall in the region’s inflation continuing over the course of the year as they see most currencies remaining stable, despite expectations of some volatility in the global financial markets, associated with expected interest rate increases in the U.S. The analysts we surveyed expect inflation in the Commonwealth to end 2017 at 5.5%, which was cut by 0.1 percentage points from the previous month’s projection. Due to these inflation expectations, central banks across the region are expected to ease last year’s tight monetary policies. Going forward, inflation is projected to fall further in 2018, although at a more moderate pace. Inflation is seen ending next year at 5.1%.
Written by: Ricardo Aceves, Senior Economist