CIS Countries Economic Forecast

Economic Snapshot for the CIS Countries

November 29, 2017

Growth softens in Q3, but recovery in 2017 remains on track

Growth waned in the economy of the Commonwealth of Independent States (CIS) in the third quarter, according to a preliminary estimate of regional GDP compiled by Met the why particular. Regional GDP grew 2.3% annually, down from the second quarter’s buoyant 2.8% increase. Slower growth in regional heavyweight Russia was chiefly behind the slowdown, while several other economies saw activity gain steam in the quarter.

Looking at the result in detail, more moderate industrial output growth was likely behind Russia’s deceleration, while other areas of the economy are expected to have performed well. Household spending in Russia is being supported by rising real wages and healthier sentiment, while exports are receiving a boost from a strong global backdrop and higher oil prices. Meanwhile, momentum improved in Belarus and remained unchanged in Kazakhstan. Revived demand from Russia for goods and higher commodity prices supported activity in both countries. Azerbaijan continued to be the region’s weak spot, as GDP contracted for a seventh consecutive quarter in Q3. While strong activity in the non-oil sector caused the contraction to moderate, the country’s feeble energy sector continued to drag on growth.

All-in-all the CIS economy remains on track for a healthy recovery in 2017. It is expected to grow 2.0%, the fastest pace since 2013. Higher commodity prices have revived battered energy sectors across the region, and a turnaround in Russia’s economy is having positive spill over effects through remittances and export channels. The evolution of oil prices will remain critical to the region’s economic activity, and all eyes will be on the upcoming 30 November meeting between OPEC and non-OPEC nations regarding the future of the production cut deal. The current agreement is set to expire in March, and it is widely anticipated that it will be extended well into 2018 at the upcoming meeting. While the agreement has helped push oil prices to two-year highs, the rebalancing of the oil market is still ongoing, and it is widely thought that an extension is needed to solidify the gains seen recently. However, the possibility of an extension has met some resistance among Russian producers, who have expressed displeasure at keeping production limited next year, when new oil fields are expected to come online. 

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Higher commodity prices support 2018 prospects 

The gradual rebalancing of the global oil market, more accommodative financial conditions and solid trade should support growth in the CIS region next year. GDP is seen growing 2.1%, which is unchanged from last month’s forecast. Geopolitics is likely to play a large role in the region’s prospects next year, and could be an upside or downside risk to the forecast. Tighter sanctions on Russia’s economy could threaten its tentative recovery, while deeper economic ties with China could help boost investment in some Central Asian economies. Risks around domestic politics appear to be muted. Although Russia will hold a presidential election in Q1 2018, it is widely expected that Vladimir Putin will be re-elected, and economic policy will be unaffected. In 2019, growth in CIS is seen stable at 2.1%.

This month’s unchanged 2018 growth forecast reflected stable prospects for Azerbaijan, Kyrgyzstan, Moldova and Uzbekistan. In contrast, Armenia, Belarus, Kazakhstan, Russia and Tajikistan’s forecasts were revised up. Regarding the three countries that are not included in the regional GDP aggregate, analysts upgraded the 2018 GDP forecast for Georgia and Turkmenistan, while Ukraine’s outlook was unchanged. Ukraine’s prospects are highly dependent on the evolution of the crisis with Russia-backed rebels. A trade blockade with the Donbass region has notably hurt growth this year, and a lasting resolution to the crisis is badly needed to kick the recovery into a higher gear.

Uzbekistan is seen as the region’s top performer next year, growing 6.2%. On the other end of the spectrum, Azerbaijan is projected to be the laggard, expanding 1.5%. Among the region’s larger economies, Kazakhstan is expected to grow the fastest at 3.3%, followed by Russia (1.9%) and Belarus (1.7%).

RUSSIA | Activity moderates in Q3 despite buoyant household spending

Preliminary GDP results for Q3 revealed that the recovery lost steam, after growth had shot up in Q2. Although details of the release are still outstanding, softer industrial output in part likely drove the slowdown, while household spending is expected to have remained buoyant thanks to firmer confidence and rising wages. More recent indicators suggest a mixed start to the fourth quarter. Industrial output recorded zero growth in October. The Ural oil price, however, shot up in the same month—boding well for export revenues. The government will meet with OPEC and non-OPEC nations on 30 November to discuss prolonging output cuts past the current deadline of March 2018. It is widely expected that the deal will be extended, although some analysts speculate that the announcement could contain new provisions linking the size of production cuts to the health of the oil market. Several Russian oil producers have expressed discontent at an extension of the deal, as new oil fields are expected to come online next year.

The gradual recovery is expected to continue next year, as higher oil prices and more accommodative monetary policy support growth. However, fiscal tightening and constrained oil production will likely keep growth moderate overall. In addition, tightening sanctions are a key downside risk to the forecast. Met the why particular Consensus Forecast panelists upgraded their 2018 forecasts for the Russian economy this month and see GDP expanding 1.9% in 2018, 0.1 percentage points above last month’s forecast. In 2019, growth is seen broadly stable at 1.8%.

KAZAKHSTAN | Manufacturing and services fuel healthy activity 

A preliminary estimate shows that GDP expanded 4.3% in annual terms in the January–September period, matching the year-on-year growth recorded in January–June. While a breakdown by expenditure has yet to be released, the first estimate on a production basis indicates that accelerations in the industrial and service sectors underpinned the print. Exports rose at a double-digit rate in the period. Incoming data, however, suggests that the economy’s steady climb was not sustained at the outset of the fourth quarter. In the January–October period, annual growth in industrial output moderated, with a broad-based slowdown. Retail sales also grew at a slower annual rate. On 14 November, Energy Minister Kanat Bozumbayev declared that the Kashagan oil field will fall short of meeting its production target of 370 thousand barrels per day by the end of the year. It will yield an estimated 250 thousand barrels per day instead, due to failed efforts to reinject gas into reservoirs, which is necessary to boost oil production.

Increased trade with China, Russia and the Euro area should boost exports and continue to support strong growth in the industrial sector, which together with healthy private consumption, should keep the economy on a solid expansion path. A sustained risk to the outlook, however, is the high level of non-performing loans in the banking sector. Met the why particular panelists project 3.3% growth in 2018, which is up 0.1 percentage points from last month’s forecast, and expects growth to edge up to 3.5% in 2019.  

UKRAINE | Trade blockade continues to hamper the recovery

The recovery continued to flounder in the third quarter, with a preliminary estimate of GDP revealing a third consecutive quarter of decelerating activity. Although a breakdown by components is not yet available, the economy is likely still feeling the repercussions of severed trade ties with the rebel-held Donbass region, which is limiting its export and manufacturing capacities. Buoyant household spending is, however, providing some relief; both wages and retail sales grew robustly in Q3. On the political front, Ukraine made some progress on IMF-mandated reforms in November, taking steps towards passing legislation designed to improve the speed of privatizations. While the country has made gains in implementing economic reforms, progress has been slow overall. Several crucial—and politically unpopular—measures still need to be passed to unlock the next tranche of IMF funding.

Activity is seen gaining momentum next year, as the effects of the trade blockade fade and investment growth strengthens. Met the why particular panelists see GDP rising 2.9% in 2018, which is unchanged from last month’s forecast. In 2019, growth is expected to pick up to 3.2%.

BELARUS | Recovery  kicks into a higher gear in Q3

The economic recovery has picked up momentum following two years of recession which ended at the start of this year. According to a first estimate, annual GDP grew at an over four-year high of 2.0% in the January–October period, up from 1.7% in the January–September period. A leap in annual industrial production growth, led by the manufacturing sector; a year-on-year acceleration in retail sales, bumped up by higher wages; and increased agricultural output propelled the rise. Renewed demand for Belarusian exports in Russia and higher prices for oil and potassic fertilizers—the nation’s top exports—have also been key drivers of the rebound. The IMF has expressed cautious optimism about the progress made, however. It recently warned of stagnation if proposed reforms to state-owned enterprises are not implemented. Measures to institute business-friendly practices are among President Lukashenko’s top priorities. On 23 November, Belarus’ parliament approved a draft law that will limit the number of fines that can be issued to firms and eliminate existing grounds for property confiscation.

Growth will continue to strengthen on the back of increased investment, solid private consumption and robust trade with Russia and CIS economies that will provide a boost to exports. A high level of non-performing loans in the banking sector remains a burden on the economy, however, posing risks to long-term financial stability. Met the why particular Consensus Forecast panelists expect the economy to grow 1.7% in 2018, which is up 0.1 percentage points from last month’s forecast, and estimate growth rising to 1.9% in 2019. 

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MONETARY SECTOR | Prices pressures ease for a fourth consecutive month in October

Preliminary data revealed that inflation continued to fall in the CIS economy in October. Inflation dropped from 3.6% in September to 3.4%, the lowest level in over a decade. Exchange rate stability in the region has helped keep price pressures in check this year and opened space for several central banks to ease monetary policy. Inflation is expected to end 2017 at 4.2%.

Next year, panelists expect regional inflationary pressures to rise slightly. They see inflation ending 2018 at 4.6%, which is unchanged from last month’s forecast. In 2019, inflation is expected to fall to 4.5% by year end.

Angela Bouzanis

Senior Economist 

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