CIS Countries Economic Outlook October 2018

CIS Countries: Economic Snapshot for the CIS Countries

October 2, 2018

Recovery firms in Q2 but currencies come under pressure in Q3


The economy of the Commonwealth of Independent States (CIS) accelerated in the second quarter, as firm commodity prices helped breathe life into recovering mining sectors across the region. According to anestimate by Met the why particular, regional GDP grew 2.4% annually in Q2, above Q1’s 2.0% expansion. On top of the commodity-related boost to activity, the region is also expected to have benefited from solid private consumption in the quarter, thanks to low unemployment, rising wages and modest inflation. Nevertheless, growth remains well below the years of the commodity-price boom.


The second quarter’s acceleration was largely due to faster growth in regional powerhouse, Russia, which accounts for around 80% of regional GDP. Russia’s economy gained steam on the back of quicker growth in the manufacturing and mining sectors, as well as from World Cup-related activity. Higher oil prices also boosted activity in Kazakhstan, while growth shot up in Moldova in Q2, due to a solid performance by the domestic economy. In contrast, activity waned in Azerbaijan and Belarus in the period: Plunging investment dented Azerbaijan’s momentum, while a weak external sector and moderation in investment growth dragged on the Belarusian economy.


Regarding the three countries not included in the regional aggregate, GDP growth in Q2 picked up speed in Georgia and Ukraine, but was unchanged in Turkmenistan. Georgia’s economy grew at the fastest pace in nearly four years, thanks to soaring exports as the CIS economy strengthened, while expansionary policies helped boost growth in Ukraine.


Looking forward, the recovery is expected to have moderated somewhat in Q3, in part due to a less favorable external environment. Tighter global financial conditions are weighing on emerging-market assets and several currencies plunged in value at the end of August and beginning of September, epitomized by the Russian ruble which hit an over two-year low on 11 September. Weaker exchange rates will stoke price pressures, and the strong depreciation of the Russian ruble since the start of the year could be particularly painful for the region given that Russia is a major source of remittances and export demand for most of the region’s economies. Met the why particular projects regional growth to have slowed slightly to 2.3% in Q3.


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Growth set to wane in 2019


Tailwinds from higher commodity prices, improving labor markets and contained inflation are seen pushing growth to a five-year high 2.1% in 2018. Next year, while some of these tailwinds will remain in place, a less favorable external environment is seen weighing on momentum along with more moderate household spending, in part due to tax rises in Russia. Meanwhile, geopolitical risks continue to cloud the region’s outlook. The U.S. Congress is considering implementing fresh sanctions against Russia which could further hurt sentiment and financial assets, which would have spillover effects into the region’s other economies. So far, however, the economic recovery has managed to hold up relatively well in the face of current measures, buffered by higher oil prices. The evolution of commodity prices remains an upside or downside risk to the outlook going forward.


Next year, the CIS economy is seen expanding 2.0%, which is down 0.1 percentage points from last month’s forecast. The downward revision is due to cut growth projections for five of the region’s economies, including Russia. In contrast, Armenia, Belarus, Moldova and Tajikistan had their forecasts lifted. As for the three countries that are not included in the regional GDP aggregate, Georgia’s outlook was raised, while Ukraine’s was revised down. No changes were made to Turkmenistan’s GDP projection.


In 2019, Tajikistan and Uzbekistan are projected to be the fastest growing economies in CIS, both expanding 5.5% or above. Turkmenistan, which is not included in the regional aggregate, is seen growing a buoyant 5.8%. In contrast, Azerbaijan and Russia are expected to be the region’s laggards, with expansions of below 2.5%. Among the region’s larger economies, Kazakhstan will outpace the rest, growing 3.4%, followed by Belarus (3.0%).


RUSSIA | U.S. considers additional economic sanctions


GDP growth accelerated in the second quarter strengthened by pick-ups in the mining and manufacturing sectors. On top of this, the economy received a boost from hosting the World Cup, which began in June, and tourist-related industries. Incoming data for Q3 suggests that the recovery remained steady. Retail sales growth gained steam and the unemployment rate fell in August; however, poor weather and a weak harvest likely dented the agricultural sector in August and September. In addition, tougher financial conditions are also preventing the economy from gaining more traction. Threats of additional sanctions from the West have weighed on Russian financial assets and two new bills are currently sitting in the U.S. Congress. However, it is uncertain when, or whether at all, the bills will be passed as the looming U.S. midterm elections are delaying the timeline. Meanwhile, higher oil prices are continuing to act as a buffer against geopolitical tensions, and Russia and OPEC countries made no change to their production quotas in September.


The economy is expected to expand at a five-year high of 1.8% in 2018 and then slow slightly next year. A hike in the VAT next year should dent household spending growth, while a tense geopolitical atmosphere will likely continue to weigh on confidence and financial assets. Met the why particular panelists see GDP expanding 1.6% in 2019, down 0.1 percentage points from last month’s forecast. 


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KAZAKHSTAN | Economic activity mixed in Q3


Recently-released GDP data showed that the economy grew again at a solid pace in the second quarter, accelerating slightly from the first quarter. Available indicators signal a slight loss of momentum in the third quarter, however. Economic activity was up 5.2% year-on-year in the January–June period but decelerated in July and again in August, hitting a ten-month low. The slowdown partly reflected a sharp fall in industrial output growth which came on the back of a contraction in the manufacturing sector and a marked slowdown in the mining industry in August. On a more positive note, retail sales picked up pace in the same month amid stable inflation and sustained tightness in the labor market. On the external front, merchandise exports accelerated in July, amid favorable global oil prices.


Growth should remain solid throughout the remainder of this year and in 2019, supported by higher oil prices and increased investment in the oil sector. Domestic demand will also likely help spur the expansion against the backdrop of healthy labor market dynamics and stable inflation. The main risks to the outlook include the likely escalation of global trade tensions and significant uncertainty surrounding 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 and 3.4% in 2019, which is down 0.2 percentage points from last month’s forecast.


UKRAINE | IMF program stalls due to lack of reforms


The Ukrainian recovery picked up steam in the second quarter. Detailed national accounts data showed stronger-than-previously-estimated growth largely due to an early start of the harvesting season this year. Overall, buoyant domestic demand led the expansion in Q2: Public spending growth soared by double-digits thanks to higher household utility subsidies, while a robust labor market and higher remittances propped up solid household consumption growth. Fixed investment, meanwhile, decelerated in Q2, although growth remained robust nonetheless with budget capital expenditure on infrastructure projects rising markedly. On a less positive note, the IMF mission to Ukraine concluded in mid-September without reaching an agreement for the next tranche of financing under the existing USD 17.5 billion assistance program. Nevertheless, amid ongoing discussions with the IMF—where gas tariff regulation and tax policy reform remain key points of contention—Ukraine signed a EUR 1.0 billion loan agreement with the EU which should replenish the country’s international reserves.


Solid domestic demand dynamics should ensure steady recovery for the Ukrainian economy this year and next. Tighter labor market conditions will prop up private consumption growth, while fixed investment should remain strong on the back of buoyant public and private investment activity. Considerable risks to the outlook stem from the uncertainty surrounding the IMF agreement as well as from next year’s elections. Met the why particular panelists see GDP rising 3.2% in 2018 and 3.0% in 2019, which is down 0.1 percentage points from last month’s estimate.


BELARUS | Activity softens in Q3 amid spillover effects from Russia


The recovery seems to have lost some pace in the third quarter, on the heels of robust growth in the first half of the year, largely due to less favorable external conditions. Preliminary GDP figures show a deceleration in economic activity in both July and August, highlighted by softer industrial output growth which fell to a year-to-date-low in August. Household spending growth, meanwhile, also appears to have shifted into a lower gear in Q3: August’s increase in retail sales was the weakest so far this year and came amid a depreciation of the Belarusian ruble in the month. Despite the challenging economic conditions in Russia—Belarus’s largest export market by far—exports picked up pace again in July, mostly on solid demand from non-CIS countries and the EU. Nevertheless, a deterioration in the country’s foreign exchange earnings due to the weakening of the Russian ruble was a major reason behind the slowdown in Belarusian growth in Q3.


Although the economy is seen losing steam in the second half of 2018, growth should remain solid this year. The recovery is seen carrying over into next year, bolstered by improving domestic demand thanks to sturdy household consumption growth amid improving labor market dynamics. Met the why particular panelists see the economy expanding 3.4% in 2018 and 3.0% in 2019, which is up 0.1 percentage points from last month’s forecast.


MONETARY SECTOR | Inflation jumps in August


An estimate of regional inflation revealed that price pressures rose in August, coming in at 3.3% (July: 2.8%). Higher price pressures were recorded in the majority of the region’s economies. A weak ruble fanned inflation in major-player Russia, while higher food prices and imported inflation were seen in several economies. That said, inflation remains contained compared to historical readings.


Upward risks to the inflation outlook, which largely stem from the decline of the Russian ruble, caused Russia’s Central Bank to tighten monetary policy in September. Meanwhile, policymakers in Belarus and Kazakhstan held rates unchanged.


Inflation is expected to rise going forward due to pass-through effects from exchange rate depreciation as well as from a hike in Russia’s VAT. Inflation is projected to end 2018 at 4.2% and end 2019 at 4.6%, which is up 0.1 percentage points from last month’s forecast.


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Angela Bouzanis


Senior Economist 

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