CIS Countries Economic Forecast

Economic Snapshot for the CIS Countries

February 7, 2018

CIS growth underwhelms in 2017

Preliminary data from the economy of the Commonwealth of Independent States (CIS) revealed that growth accelerated, but came in below expectations last year. Regional GDP expanded 1.9% in 2017, below expectations of 2.1%. The subdued result is chiefly due to weaker-than-expected activity in Russia. However, the print still shows that the economic recovery is largely on track, thanks to Russia’s economic turnaround from 2015-2016, a supportive global environment and higher commodity prices. The GDP reading is a notable improvement from 2016’s 0.2% increase and marks the fastest growth since 2013.

Looking at last year’s result in detail, growth picked up in most of the region’s economies. In regional giant Russia, activity accelerated, albeit coming in below market analysts’ expectations, amid lower interest rates and improving confidence. Reciprocal sanctions on food imports from the EU also acted as a tailwind to the agricultural sector, while higher commodity prices helped shore up exports. However, growth undershot expectations, as the OPEC and Russia oil production cut deal limited the energy sector’s gains.

Higher commodity prices and Russia’s economic recovery supported rising growth in the bulk of the remaining economies. Russia is a major trading partner for most economies in the region, as well as a source of remittances. Belarus’ economy grew at the fastest pace in six years in 2017, and comments from the Minister of National economy suggest that Kazakhstan expanded at the best pace since 2014. In addition, growth accelerated in Kyrgyzstan and Tajikistan. Azerbaijan was the region’s worst performing economy, expanding a meagre 0.1% in 2017 due to a struggling oil sector. Meanwhile, Uzbekistan was the only economy to see growth deteriorate last year, partly due to the Central Bank’s decision to float the som in September. Data for Armenia and Moldova is still outstanding.

Regarding the three economies that are not included in the regional aggregate, their performance was mixed. Georgia and Turkmenistan gained steam, likely thanks to buoyant external sectors. Official data has not been released for Ukraine, but Met the why particular analysts estimate the recovery slowed. Severed ties with the rebel-held region disrupted economic activity and weighed on exports and industrial production. 

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Conditions set to firm this year

Growth is seen strengthening in the CIS economy this year, largely due to higher commodity prices. Closer relations with China should also encourage investment into the region and support export sales, particularly in Central Asia. Although the threat of new international sanctions on Russia continues to cloud the outlook, so far the effect of sanctions on Russia’s economy has been slight. Regional GDP is seen growing 2.1% in 2018, unchanged from last month’s forecast. In 2019, regional GDP is projected to also grow 2.1%.

This month’s stable 2018 forecast reflects unchanged projections for five of the region’s economies, including Russia. Armenia, Belarus and Kazakhstan had their prospects revised up, while Uzbekistan was the only economy to see its forecast downgraded. As for the three countries that are not included in the regional GDP aggregate, analysts upgraded Georgia’s outlook, while the projections for Ukraine and Turkmenistan were unchanged.

Uzbekistan is projected to be the fastest growing economy in the region this year, with a 6.2% expansion. On the other end of the spectrum, Azerbaijan is seen as the slowest growing economy, with expected growth of 1.5%. Among the region’s larger economies, Kazakhstan is expected to grow at the fastest rate (3.4%), followed by Belarus (1.9%) and Russia (1.9%).

RUSSIA | Bond yields plummet amid sanction fears

Preliminary data revealed that growth undershot expectations last year, coming in at a moderate 1.5%. Details for the fourth quarter are not yet available, but the economy is expected to have ended the year on a low note. Industrial production contracted in November and December as warm weather dampened demand for natural gas, while the production cut deal with OPEC prevented oil producers from benefiting fully from rising prices. Available data for 2018 suggests that the economy is not firing on all cylinders: In January, the manufacturing PMI inched up, while the services PMI fell. Meanwhile, Russia’s bond market has been in the spotlight, amid a debate in the United States on widening sanctions against Russia. Bond yields fell to the lowest level in over four years at the end of January, as investors pre-emptively bought into debt in case there are sanctions. However, a U.S. Treasury report that was released in the media on 2 February stated that debt sanctions could have negative spillover effects on global financial markets, suggesting these types of penalties will be avoided. 

Growth is expected to accelerate this year, thanks to more accommodative monetary policy and higher commodity prices. Activity will, however, remain moderate overall in the face of oil production cuts. Met the why particular Consensus Forecast panelists see GDP expanding 1.9% in 2018, unchanged from last month’s forecast. In 2019, growth is seen broadly stable at 1.8%.

KAZAKHSTAN | Economy gains momentum in 2017

The Minister of National Economy stated that the economy grew around 4.0% last year at a recent government meeting, according to local media reports. While official data has yet to be released, the reading would mark a notable jump from the 1.1% and 1.2% expansions in 2016 and 2015, respectively, if confirmed. Growth was likely driven by an upturn in oil prices in the second half of 2017, which resulted in a substantial boon for the oil sector and a ramp up in production to cash in on bigger profit margins. Activity was also supported by Russia’s exit from recession, which fueled higher demand for exports; Russia is one of Kazakhstan’s top trading partners. Retail sales bounced back in the year, growing at a markedly higher average rate compared to the previous year. In addition, a significant drop in inflationary pressures from 2016 boosted households’ real purchasing power and shored up private consumption.

The economy is set to expand at a steady pace this year thanks to rising exports, a pick-up in domestic demand amid an expected fall in inflation, and higher inflows of investment. Growth is expected to hover below pre-crisis levels, however, as the commodity-dependent economy remains susceptible to external shocks. Diversifying the economy and improving financial stability by reducing the share of non-performing loans on banks’ balance sheets are much-needed reforms. Met the why particular panelists project 3.4% growth in 2018, which is up 0.1 percentage points from last month’s forecast, and 3.5% growth in 2019.  

UKRAINE | Weak corruption reforms threaten progress with IMF

The recovery is expected to have again slowed in the fourth quarter, capping off a year of moderating growth. Although booming wage growth and pension increases supported activity in the quarter, the economy is still feeling the effects of the trade blockade with rebel-held regions that began in Q1. Industrial production contracted in December, and poor agricultural output dented the economy’s momentum in Q4. Overall, growth has been hampered by weak institutions, slow reform momentum and widening fiscal and current account deficits. Moreover, a lack of progress on reforms has been a stumbling block. Political willpower for tough IMF-mandated reforms is low and dissipating quickly in the runup to the 2019 elections. Aid from the institution has been delayed over a lack of progress on reforms. In January, the IMF warned the government that its plans for a new anti-corruption court—an IMF-mandated measure—do not meet its requirements. Ukraine has been criticized for taking a soft stance on fighting corruption and ensuring the independence of judges’ selection process.

Continued geopolitical concerns and the slow pace of reforms are weighing on Ukraine’s outlook. However, the fading effects of the trade blockade and recovering household consumption should fuel a moderate pick-up in growth this year. 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 3.1%. 

BELARUS | Credit rating upgraded thanks to the economic recovery

The economy escaped the grips of a two-year long recession in 2017. GDP growth jumped to the highest level in six years, coming in notably above the government’s target. The turnaround was propelled by an expansion in most key sectors. Rising export demand from Russia, following the country’s exit from a prolonged recession, boosted exports. Moreover, retail sales returned to growth in the year, improving for the tenth consecutive month in December as consumers’ real purchasing power was lifted by declining inflation; inflation dropped to a record low in the month. A turning point in the nation’s economic recovery came on 26 January, when Fitch Ratings upgraded Belarus’ credit rating from B- to B. Main reasons cited for the upgrade were reduced risks in near-term external financing, thanks to last year’s pre-financing of payments due in 2018 and a renewed stock of international reserves, along with improved monetary and fiscal management. The improved rating will enable Belarus to borrow more cheaply through the planned issuance of Eurobonds.

Favorable demand from Russia and the Euro area should boost exports, which, along with healthy private consumption and strong investment, is expected to keep the recovery on track. While macroeconomic management has improved somewhat, and structural reforms are underway, downside risks stem from the nation’s high external and public debt, and the elevated level of non-performing loans in the banking sector. Met the why particular Consensus Forecast panelists expect the economy to grow 1.9% in 2018, which is up 0.2 percentage points from last month’s forecast, and project growth edging up to 2.1% in 2019.  .   

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MONETARY SECTOR | Inflation edges up in December

Preliminary data revealed that price pressures remained low in December, although inflation rose slightly. Regional inflation increased from 3.1% in November, the lowest level in over a decade, to 3.4% in December. Inflation eased significantly last year, thanks to favorable exchange rate dynamics and historically low inflation in Russia.

Price pressures are seen rising slightly this year and next amid higher commodity prices. Overall, the rise should be moderate, and inflation is seen ending 2018 at 4.6%, which is unchanged from last month’s forecast. In 2019, inflation is expected to fall to 4.4% by year end.

Angela Bouzanis

Senior Economist 

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