CIS Countries Economic Forecast

Economic Snapshot for the CIS Countries

February 6, 2019

Activity improves in 2018 despite sanctions and EM turmoil

The economy of the Commonwealth of Independent States (CIS) gained momentum in 2018, despite a rollercoaster of a year for emerging-market economies. According to a preliminary estimate, regional GDP grew 2.6%, notably above 2017’s 2.0% increase. Recovering energy and mining sectors likely held up growth despite a volatile year for commodity prices. That said, multiple other headwinds were in play last year and prevented a stronger acceleration, including geopolitical uncertainty and sanctions on Russia, tighter global financial conditions and easing global trade. 

A first estimate showed that growth jumped in the regional giant, Russia, driving the broader acceleration in regional activity. A booming construction sector and gains in the mining sector chiefly led the pick-up. Notably, Rosstat made a significant upward revision to construction data earlier this year, which translated into higher growth in 2018 than expected. The revision, however, has triggered some uncertainty among analysts over the true growth picture of the Russian economy. Moreover, data for other areas of the economy has been weak, especially for private consumption which is likely hurting from the ruble’s depreciation and downbeat consumer sentiment.   

Elsewhere in the region, official data revealed that Belarus’ economy accelerated in 2018 on the back of solid domestic dynamics. Azerbaijan’s recovery also firmed, while an impressive jump in mining and quarrying output fueled a healthy expansion in Uzbekistan, although growth eased slightly from the previous year. Meanwhile, Kyrgyzstan’s economy lost steam in 2018 chiefly due to slower gold production at the all-important Kumtor mine and subdued gold prices. Official national accounts data is still outstanding for the remaining economies. 

Growth prospects chopped on sour outlook for Russia

The CIS economy is facing more subdued growth prospects for this year. Russia’s economy is expected to lose steam as a hike in the VAT hits consumer spending and pushes up inflation, while other economic challenges—including the possibility of additional sanctions, constrained oil output and structural issues—are abound. Many economies in the region could also feel the pinch of tighter global financial conditions and downbeat remittances from Russia, while the evolution of commodity prices remains a key risk to the regional outlook.   

Regional growth is expected to 1.8% this year. 2019’s forecast was chopped 0.1 percentage points this month. In 2020, regional growth is seen accelerating slightly and clocking in at 2.0%.

Over half of the CIS economies had their prospects lowered this month, including Russia for which downbeat data emerged at the start of 2019. In contrast, Tajikistan was the only economy to see its growth forecast lifted, while Kazakhstan and Uzbekistan’s prospects were held steady.

As for the three countries that are not included in the regional GDP aggregate, Georgia and Ukraine’s growth forecasts were trimmed this month, while Turkmenistan’s was held steady. Political uncertainty in Ukraine is clouding the country’s outlook. Fulfilling the country’s commitments to the IMF is crucial for its debt outlook, although it is uncertain whether a government with enough political muscle and willpower will emerge victorious in the country’s crucial elections this year. 

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RUSSIA | Government finances improve in 2018

According to a preliminary estimate, growth picked up notably in 2018, hitting a six-year high. The result was due in part to booming construction activity, which had been revised up significantly by Rosstat recently, as well as an improvement in the external sector. Elsewhere economic data has been more downbeat. Retails sales growth slid in Q4 amid souring consumer confidence and a rising unemployment rate, while industrial activity waned throughout the quarter after a solid October. Despite a lackluster 2018 with sanctions-related uncertainty pounding the ruble and oil production cuts weighing on revenue, the country’s external position solidified notably in the year. The current account surplus hit a record high, surging over USD 110 billion in 2018, and the country’s external debt was chopped by over 11%, falling from USD 518 billion in 2017 to USD 454 billion.  Meanwhile, the economy likely had a rough start to the new year, as January’s VAT hike ate into consumers’ wallets and probably pushed inflation up. In addition, initial signs from the manufacturing sector are disappointing, with the manufacturing PMI dropping in January.

Our analysts are still taking into account the a stronger-than-expected 2018 outturn, which has increased upward risks to our forecast. Generally, constrained oil production, the hike in the VAT, sanctions-related uncertainty and tight financial conditions will weigh on activity this year. Growth is seen at 1.4% in 2019, which is down 0.1 percentage points from last month’s forecast. In 2020, GDP is seen increasing 1.7%.

KAZAKHSTAN | Minimum wage hike should bolster growth in 2019

Kazakhstan appears to have performed solidly in 2018. Although economic activity decelerated slightly in the fourth quarter, it remained robust thanks to higher oil production and buoyant domestic demand, following healthy growth in the previous three quarters. Moreover, activity in the industrial sector strengthened despite a marked retreat in oil prices and weaker global growth, while a solid expansion in private credit likely continued to shore up household spending in the final quarter against the backdrop of relatively muted inflationary pressures. Heading into 2019, a 50% rise in the minimum wage, which came into effect at the start of the year, should support private consumption, while a targeted stimulus program announced by President Nazarbayev in late 2018 should boost overall growth.

The economy is seen losing some momentum this year, although the overall expansion will remain healthy. Oil production is expected to climb on growing output in Kashagan and Tengiz oil fields, while elevated investment in the non-oil sector should also buttress activity. A fall in commodity prices, along with a prolonged downturn in the country’s main trading partners—China and Russia—present the main risks to the outlook. Met the why particular analysts expect GDP to increase 3.4% in 2019, unchanged from last month’s estimate, and again 3.4% in 2020.

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UKRAINE | Eyes turn to March elections

Available fourth-quarter metrics suggest growth momentum carried over into the last quarter of 2018. A sustained increase in wages and a strong hryvnia likely propped up private consumption growth in Q4; this was reflected in robust retail sales, which accelerated compared to the previous quarter and despite an uptick in inflation. In addition, export growth picked up pace in the fourth quarter, as booming demand from the EU and Asia more than offset softer demand from CIS countries. That said, industrial output contracted for the first time in three years in Q4, largely due to a slump in the manufacturing sector in December. Meanwhile, in the political arena, President Petro Poroshenko launched his re-election bid on 29 January, as the presidential elections scheduled for 31 March inch closer. Poroshenko is currently languishing in the polls, with opposition leader Yulia Tymoshenko and Volodymyr Zelensky seemingly the frontrunners. 

The economy is expected to slow this year, as tight monetary policy environment dents economic activity growth while upcoming significant public debt repayments will constrain public spending. The overall expansion should be spearheaded by robust private spending which will continue to benefit from rising real incomes due to higher wages and pensions, as well as growing remittances. The uncertainty surrounding presidential and parliamentary elections remains the key risk to the outlook. Met the why particular panelists see GDP growth of 2.7% in 2019, down 0.1 percentage points from last month’s forecast, and 2.9% in 2020.

BELARUS | Activity gains momentum in 2018

According to a preliminary estimate for 2018 national accounts, the economy expanded for the second consecutive year, with annual growth accelerating to 3.0% from 2.5% in 2017 amid upbeat domestic demand dynamics. Household spending remained chiefly in the driver’s seat through much of the year, although appeared to slow in the fourth quarter amid rising inflation. To that effect, fourth-quarter growth is estimated to have drastically undershot analysts’ expectations. Meanwhile, industrial production shifted into a lower gear in 2018, dragged by cooling manufacturing activity through year-end. On a brighter note, on 18 January Fitch Ratings affirmed a stable outlook on the country’s B credit rating, citing moderating inflation, increased income per capita, despite a still high exposure to foreign currency risks. 

Looking ahead, the economy is set to continue along the path of recovery this year, albeit at a slower pace due to a broad-based deceleration in domestic activity. Increased inflation and an uptick in unemployment are seen putting a dampener on household spending. Meanwhile, slower growth across Eastern Europe is expected to bruise external sector gains in the near-term. A slowdown in Russia poses the main downside risk as it is Belarus' main trading partner and an important source of financial support. Met the why particular panelists see the economy expanding 2.6% in 2019, down 0.2 percentage points from last month’s forecast, and 2.5% in 2020.  

MONETARY SECTOR | Inflation picks up in December

A more comprehensive estimate revealed that inflation in the CIS region rose at the end of 2018. Data for December revealed inflation jumped to 4.7% in December, up from November’s 4.3% and notably above December 2017’s 3.5% reading. Higher inflation in Russia, chiefly due to pass-through from a weak ruble, led the increase.

Policymakers in Kazakhstan and Ukraine held their interest rates unchanged at the start of 2019. Lower inflation expectations and contained price pressures caused Kazak authorities to keep the base rate at 9.25%, while above-target inflation has given Ukraine’s Central Bank little space for monetary easing despite moderate economic activity.

Inflation in the CIS economy is expected to rise in the coming months, chiefly due to the VAT hike in Russia. Inflation is projected to peak in H1 2019 and then come down to 5.0% by year-end, which is up 0.2 percentage points from last month’s forecast. Inflation is seen ending 2020 at 4.3%.

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Angela Bouzanis

Senior Economist 

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