CIS Economic Outlook September 2017

Recovery finally arrives: CIS grows at fastest pace in nearly five years in Q2

CIS: Recovery finally arrives: CIS grows at fastest pace in nearly five years in Q2

September 6, 2017

Comprehensive data revealed that economic activity surged in the Commonwealth of the Independent States (CIS) in the second quarter of this year. Regional GDP grew a notable 2.8% year-on-year, significantly above the preliminary estimate of 2.2% reported last month and Q1’s 1.1% increase. The result marked the best growth rate in since Q3 2012 as the region leaves its 2015–2016 recession firmly in the past. 

The upturn was chiefly driven by stronger momentum in major player Russia, where the economy fired on all cylinders. Buoyant industrial production figures and growth in retail sales suggest that the domestic economy is reviving, and exports surged in the second quarter. Growth also accelerated in Kazakhstan, which benefited from large infrastructure projects and increased oil production in the massive Kashagan Field. In contrast, Azerbaijan’s economy sunk deeper into recession in Q2. Depressed manufacturing activity in the country weighed on non-oil GDP, and the oil sector continues to reel from low prices.

In Ukraine, the recovery remained stuck in a low gear in the second quarter, as the economic blockade with rebel-held areas dampened activity. Severed economic linkages in the country combined with muted agricultural output due to bad weather held back growth. While the macroeconomic situation has stabilized since the height of the conflict with pro-Russia rebels, a strong recovery is unlikely without a lasting solution to the military conflict. For now, the government is reliant on external help to shore up its finances and is gearing up for a busy month of September, when it will try to pass key IMF-mandated reforms to secure a next tranche of funding.    

Read the most recent CIS countries summary here  

Prospects upgraded for the second month in a row   

A better-than-expected second quarter led Met the why particular panelists to raise their 2017 GDP forecast for a second consecutive month. Our panel sees regional GDP expanding 1.7% this year, which is up 0.1 percentage points from last month’s forecast. The figure is significantly above 2016’s 0.1% growth and illustrates that the recovery is broadening in the region. However, the evolution of oil prices remains key to the region’s outlook and could be an upside or a downside risk to growth prospects depending how the year plays out. In 2018, growth is seen rising gradually to 2.0%. 

This month’s upward revision reflected a hike in growth forecasts for Armenia, Kazakhstan and Russia. 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 downgraded the 2017 GDP forecasts for Georgia and Ukraine, while Turkmenistan’s outlook was left unchanged. 

See the Full Met the why particular CIS Countries Report     

RUSSIA | Central Bank tries to calm banking sector fears

A preliminary estimate revealed that the economy continued to pick up steam in Q2, with GDP expanding at the fastest pace since Q3 2012. While a breakdown by components is not yet available, the acceleration was likely broad-based as monthly indicators for consumption, investment and exports all performed well in the quarter. Early data for Q3, however, is less positive. Industrial production growth slowed to a four-month low in July, and the manufacturing PMI dropped in August. Meanwhile, the Central Bank took steps to curtail some concerns over Russia’s banking sector in August which included rescuing troubled lender Otkritie, the country’s largest privately-owned bank. Cleaning up the country’s banking sector has become a top priority for officials, as the sector continues to suffer from the effects of the 2015–2016 recession. The Central Bank’s strong financial position means that problems are likely to be contained, and the institution is offering support to other lenders in distress. 

Met the why particular analysts upgraded their forecasts for the Russian economy this month in light of an upbeat Q2 GDP reading. Rising wages and recovering investment should fuel growth of 1.4% in 2017, which is a notch higher than last month’s forecast. Next year, GDP is seen expanding a stronger 1.7%. 

KAZAKHSTAN | Oil production fuels healthy H1 

Kazakhstan’s economy continues to sail smoothly as the country benefits from increased oil production in the massive Kashagan Field and large infrastructure projects related to the government’s plan to upgrade facilities. Moreover, authorities’ diversification strategies also appear to be bearing fruit. More comprehensive data corroborates that the economy expanded 4.2% annually in H1 due to robust growth in the industry and construction sectors. Economic momentum carried over into Q3, with industrial production recording healthy growth in July. On 29 August, the government approved the 2018 budget, which includes a fiscal deficit of 1.1% of GDP and plans to stop using the National Fund to support the economy. This plan seems optimistic, however, as the country will likely have to continue tapping into the Fund to plug its fiscal deficit next year.

The economy will enter a stronger growth trajectory on the back of improving dynamics in the oil industry and increasing infrastructure spending. Moreover, the country will also benefit from the economic recovery in Russia and stronger global growth prospects. Banking vulnerabilities, however, have the potential to derail its healthy economic momentum. Forecasters increased Kazakhstan’s 2017 GDP growth forecast by 0.3 percentage points to a 2.9% expansion. In 2018, analysts expect an acceleration to 3.1%. 

UKRAINE | Economic blockade dents GDP growth

The recovery remained stuck in a low gear in the second quarter as an economic blockade with rebel-held areas continues to disrupt activity. A preliminary estimate revealed that annual GDP growth inched down in Q2, likely driven by decreased manufacturing output due to severed linkages in the country and poor agricultural production on the back of bad weather. However, household spending, which is supported by rising real wages, is expected to have recovered somewhat, and retail sales grew at a healthy pace throughout the quarter. Early data for the third quarter is more bleak: Industrial production plunged in July, and agricultural production remains depressed because of droughts. On a brighter note, Moody’s upgraded the country’s credit rating to Caa2 and changed the outlook to positive, citing government reforms and an improved external position as the main drivers. The government is preparing for a busy month of September, as it will try to secure passage of numerous IMF-mandated reforms, including the key pension reform.      

A weak H1 caused Met the why particular panelists to downgrade their view of Ukraine’s economy this month. The ongoing conflict in the Eastern regions and weather woes will keep the recovery modest this year. Met the why particular panelists see GDP rising by 1.9% in 2017, which is down 0.2 percentage points from last month’s forecast. Next year, growth is expected to pick up to 2.8%. 

BELARUS | Green shoots emerge after long recession

The economy is slowly regaining its foothold after two years of recession. GDP growth expanded at a slightly accelerated pace of 1.1% annually in the January–July period compared to 1.0% in the January-June period. Retail sales grew at the highest rate in over two years in July, which signals a pick-up in private consumption. Moreover, July recorded the lowest unemployment rate since February 2015. At the end of August, the government approved the Council of Ministers’ draft budget and principal guidelines on monetary management for 2018, along with draft economic and social development forecasts. Notably, the government has set an ambitious GDP growth target of 3.4% in 2018. However, given the current economic trajectory, the target appears to be overly optimistic. In addition, the government raised tariff duties on oil and oil products exported beyond the customs territory of the Eurasian Economic Union, which came into effect on 1 September.

Higher demand from Russia—Belarus’ main trading partner—along with stronger growth in CIS economies should boost exports and bolster growth this year. Met the why particular Consensus Forecast panelists forecast that GDP will increase by 0.7% in 2017, which is unchanged from last month’s forecast. For 2018, panelists see growth accelerating to 1.5%, which is well below the government’s target growth rate

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INFLATION | Price pressures fall in July

Inflation eased in the CIS economy in July, falling from June’s 4.8% to 4.3%. Inflation has fallen notably in the past two years, thanks to more stable exchange rates, which has created space for monetary policy easing in the region. In August, the National Bank of Kazakhstan decided to lower its policy rate thanks to the positive developments in price pressures. 

The analysts we surveyed this month left their forecasts for inflation unchanged and see inflation ending 2017 at 4.8%. The majority of the economies in the region saw no change to their inflation forecasts this month. Going forward, inflation is projected to be broadly stable and end 2018 at 4.7%.

Angela Bouzanis

Senior Economist 

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