CIS Countries: Economy gathers steam at start of 2018, but political worries intensify
May 9, 2018
Recent data for the economy of the Commonwealth of Independent States (CIS) suggests that regional growth bounced back in the first quarter after ending 2017 on a soft note. The Consensus Forecast is for regional GDP to have grown 2.0% annually in Q1, notably above Q4’s 1.5% expansion. Activity had slumped at the end of 2017 due to a deceleration in Russia’s economy on the back of weak investment. However, the soft growth rate was likely temporary, as higher commodity prices and low inflation boost activity in the region.
Looking at the individual economies, preliminary data revealed that growth soared in Belarus in Q1, with GDP expanding at the best pace in over six years. Healthy external demand and a robust manufacturing sector likely drove the result. Azerbaijan’s economy also gained momentum in Q1, growing at the fastest rate in over two years thanks to a strong performance by the non-oil sector. Although official GDP data has not yet been released for the remaining economies, Met the why particular analysts expect activity to have firmed in Russia, likely boosted by household spending thanks to a tight labor market and low inflation.
On the political front, the region has had a turbulent few weeks that have increased uncertainty. In Armenia, mass protests forced veteran leader Serzh Sargsyan to resign on 23 April, and the parliament is set to elect a new prime minister on 8 May. The protests were triggered by what was seen as a power grab, after Sargsyan—who had served the maximum two terms allowed as president—was elected prime minister by his ruling Republican party. Opposition and protest leader Nikol Pashinyan is expected to become the next leader and has vowed to take swift action to halt corruption and break up oligarchic enterprises. However, there is a large degree of uncertainty as to whether Pashinyan, a relatively unknown candidate, will be able to implement sweeping measures.
Russia’s already tense relationship with the West has soured recently, taking a toll on the ruble. As of 3 May, the ruble had fallen nearly 11% since the U.S. imposed fresh sanctions on 6 April, which target several high-profile Russian businessmen and their affiliated companies. While the U.S. has softened its stance somewhat since unveiling the measures, including stating that it would consider lifting sanctions on aluminium giant Rusal if billionaire Oleg Deripaska cedes control of the company, tensions between the nations remain high, and additional sanctions could be levied if the relationship continues to deteriorate.
Meanwhile, in Kyrgyzstan, a new government was sworn in at the end of April, after the previous administration lost a vote of confidence. However, the change in regime appears unlikely to have a pronounced economic effect. In Azerbaijan, President Ilham Aliyev held on to power in the 11 April snap election, as widely expected. The vote was boycotted by the main opposition parties over concerns of a rigged ballot.
Growth to pick up modestly in 2018
Higher commodity prices and solid household spending should fuel a slight acceleration in the CIS economy this year. Russia’s economy is seen gaining steam thanks to higher oil prices, looser monetary policy and healthy consumer demand, which should in turn support remittances growth and exports throughout the region. However, geopolitical risks remain high, particularly for Russia, and a depreciation in the ruble could limit the Central Bank’s ability to ease interest rates. In addition, Russian oil production will remain hampered by the production cut deal with OPEC. Moreover, several economies remain burdened by structural issues that will weigh on the pace of growth, and reform momentum in the region has been slow.
Regional GDP growth is expected to pick up from 1.9% in 2017 to 2.1% this year, which is unchanged from last month’s forecast and would mark the best result since 2013. In 2019, regional growth is seen stable at 2.1%. This month, a number of countries had their growth prospects revised, with forecasts for five economies downgraded, including for major player Russia. On the flip side, Armenia and Kazakhstan had their growth projections upgraded. Azerbaijan and Belarus saw no change to their projections. As for the three countries that are not included in the regional GDP aggregate, analysts upgraded the forecast for Turkmenistan, while Georgia and Ukraine saw no changes to their projections.
Uzbekistan is projected to be the region’s top performer this year, with a 5.9% GDP expansion. Turkmenistan, which is not included in the regional aggregate, is seen growing a fast 6.1%. On the other end of the spectrum, Azerbaijan and Russia are expected to be the slowest-growing economies, expanding 1.6% and 1.7%, respectively. Among the region’s larger economies, Kazakhstan is expected to grow at the fastest rate (3.5%), followed by Belarus (2.5%).
RUSSIA | Higher oil prices buffer against economic uncertainty
The economy appears to have gained some momentum in recent months after a soft end to 2017. The manufacturing and services PMIs rose in April and retail sales accelerated in March. Moreover, the Ural oil price hit the highest level since October 2014 in April, boding well for the energy sector. Outside of the domestic economy, however, the economic environment has become more uncertain in recent weeks following an escalation in tensions with the United States. Sanctions levied on several high-profile Russian businessmen and their companies sparked volatility in Russian financial markets and caused the ruble to plunge in April, threatening the inflation outlook and the Central Bank’s easing cycle. However, the U.S. has softened its stance on the sanctions somewhat since unveiling them and on 2 May granted an extension for compliance with the measures. In addition, the U.S. has stated that it would consider lifting sanctions on aluminum giant Rusal if billionaire Oleg Deripaska cedes control of the company.
The uncertain geopolitical atmosphere is casting a shadow on Russia’s economic outlook. However, an improving domestic economy thanks to a tight labor market and higher oil prices should support activity, acting as a buffer against uncertainty. Met the why particular Consensus Forecast panelists see GDP expanding 1.7% in 2018, down a notch from last month’s forecast. In 2019, growth is seen broadly stable at 1.8%.
KAZAKHSTAN | FDI inflows support economic development
Available data shows economic activity continued growing more robustly in the first quarter than in the previous one. It expanded in March at roughly the same robust pace as in the previous month, reflecting a strong surge in oil production. Retail sales jumped in March, but overall rose more slowly in Q1 than in Q4. Moreover, exports lost traction in the first two months of the year compared to the final quarter. A deluge of foreign investment is helping to shape the country’s industrial development; Kazakhstan has one of the most favorable investment climates in the region. Recent reports suggest that the country is set to sharply reduce its exports of heavy oil products, such as fuel oil and vacuum gasoil, as it shifts to focusing on higher quality products and cutting pollution following an upgrade of its three refineries.
The economy is expected to grow more moderately this year because of a marked deceleration in exports and as the government phases out its countercyclical fiscal policy to bring the budget deficit down to 1.1% from 2.6% in 2017. Nevertheless, it should remain on a steady course on the back of recovering oil prices and rising domestic demand amid moderating inflation. Efforts to diversify the economy away from the oil sector, by encouraging investment in non-extractive industries, will be critical to boosting its resilience to external shocks. Met the why particular panelists see GDP growth of 3.5% in 2018, which is up 0.1 percentage points from last month’s forecast, and 3.5% again in 2019.
UKRAINE | Government moves forward with IMF-mandated reform
Last year’s moderate recovery, which followed the economy’s return to growth in 2016, appears to have been sustained in the first quarter. Growth was again likely driven by robust domestic demand. Retail sales continued to expand in Q1, signaling healthy private consumption growth, which was bolstered by sustained wage growth throughout the quarter. Despite slowing in the first quarter, industrial production appears to have gotten some support from buoyant, albeit also moderating, export growth. On the political front, Ukraine’s Prosecutor General Yuriy Lutsenko stated on 2 May that the implementation of the country’s new anti-corruption court—a key condition set by the IMF for receiving fresh funds—had made progress, with the first cases expected to appear in front of the court in early 2019.
The economy is set to pick up pace this year on the back of recovering domestic demand and against the backdrop of fading effects from last year’s trade embargo, which weighed on industry. Nevertheless, growth will likely remain significantly dampened by ongoing geopolitical concerns and the slow implementation of key economic reforms, which could undermine anti-corruption efforts. Met the why particular panelists see GDP rising 3.0% in 2018, which is unchanged from last month’s forecast. In 2019, growth is also seen at 3.0%.
BELARUS | Growth jumps in Q1
The economy started the year on firm footing, with GDP expanding a robust 5.1% year-on-year in the first quarter, outpacing analysts’ forecasts and marking the strongest increase in more than six years. Growth was driven by the external sector, which saw exports soar nearly a third in the first two months of the year, a trend that likely persisted in March. Strong external demand fueled a robust increase in industrial production, while healthy domestic demand sent wholesale and retail trade higher. Further buttressing domestic demand was a tightening of the labor market and relatively moderate inflationary pressures, which likely boosted private consumption in Q1. Meanwhile, S&P Global Ratings affirmed the country’s B rating on 9 April, citing the positive effect of tighter fiscal policy and the expected improvement of the country’s external imbalances. Nevertheless, the reversal of economic and political support from Russia continues to constitute a major risk to country’s long-term growth prospects, according to S&P.
Robust domestic demand and a strong external sector are expected to buttress economic activity this year. Household consumption growth is set to benefit from an accommodative monetary environment, while healthy demand from CIS countries, particularly Russia, and the EU should fuel export growth. Met the why particular panelists see the economy expanding 2.5% in 2018, which is unchanged from last month’s forecast, and 2.3% in 2019.
MONETARY SECTOR | Regional inflation edges up in March
Price pressures in the CIS region rose slightly in March, although they remained at a historically low level. Regional inflation came in at 2.9% in March, above February’s 2.7%. Favorable dynamics in food prices have helped keep inflation in check. Preliminary data for April revealed that regional inflation edged down to 2.8%.
Although historically low inflation has opened space for central banks in the region to reduce interest rates, recent volatility in exchange rate markets and the stark depreciation of the ruble caused the Central Bank of the Russian Federation to pause its easing cycle on 24 April. Meanwhile, the National Bank of Ukraine also held interest rates unchanged in April amid stubbornly high inflation.
Inflation is expected to rise by the end of the year but remain moderate by historical standards. Met the why particular panelists see inflation ending 2018 at 4.3%, which is up a notch from last month’s forecast. In 2019, inflation is expected to inch up to 4.4% by year-end.