CIS Countries Economic Forecast

Economic Snapshot for the CIS Countries

August 1, 2018

CIS economy keeps healthy pace in Q2

Incoming data for the economy of the Commonwealth of Independent States (CIS) suggests that regional growth held up well in Q2, after a sharp pick up in Q1. Regional GDP is expected to have grown 1.9% annually in Q2, unchanged from the 1.9% expansion recorded in the previous quarter. Higher oil prices, rising wages and a healthy labor market are supporting a recovery in  Russia’s economy, which is, in turn, fueling solid remittances inflows and export demand in the neighboring economies. Although the region is clearly recovering after the slump produced by low commodities prices in 2015–2016, growth is still notably below the commodities boom years.

Official national accounts data for Q2 is still outstanding for all CIS economies; however, preliminary figures for H1 revealed solid growth dynamics in Azerbaijan, Belarus and Kazakhstan. The non-oil sector led Azerbaijan to grow 1.3% annually in the first two quarters of 2018, notably above last year’s meagre 0.1% growth. However, activity did lose steam from the 2.3% expansion in Q1. Likewise, Belarus’ economy held up well in H1, according to a preliminary estimate that revealed a robust 4.5% expansion. Tailwinds from low inflation, falling unemployment and higher oil prices fueled Kazakhstan’s economy to grow 4.1% in H1, matching Q1’s result.

Growth dynamics are expected to have been largely unchanged in Russia in Q2, with solid household consumption and firmer energy prices driving momentum. In addition, the economy is expected to have received a mild boost from hosting the World Cup, thanks to buoyant tourist spending. Economic conditions are expected to have firmed slightly in Ukraine, which is not included in the regional aggregate. Reviving household consumption and investment likely stoked activity, although continued delays with IMF reforms and political uncertainty are preventing a stronger recovery. 

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Higher commodity prices bolster regional growth prospects, but sanctions-related risks remain

Revived energy and mining sectors, along with strong consumer demand, should lift growth this year and act as a buffer against geopolitical uncertainty. However, tougher international sanctions on Russia and restricted foreign investment continue to weigh on the region’s growth prospects. In contrast, higher-than-expected commodity prices are an upside risk to the region’s outlook, while the recent protectionist measures imposed by the U.S. are not expected to have a major effect on regional growth given the region’s low trade exposure to the U.S. The CIS economy is seen expanding 2.1% in 2018, which is unchanged from last month’s forecast. The result will mark the fastest growth rate in five years if confirmed. Next year, growth is seen holding steady at 2.1%.

This month, the bulk of the CIS economies—including that of Azerbaijan and Russia—saw no changes to their growth projections for 2018. However, prospects were upgraded for Armenia, Belarus and Kazakhstan. There were not any countries for which the outlook was downgraded this month. As for the three countries that are not included in the regional GDP aggregate, forecasts for Turkmenistan and Ukraine were unchanged, while Georgia’s GDP forecast was revised up.

Tajikistan and Uzbekistan are projected to be the region’s fastest growing economies, both expanding over 5.5%. Turkmenistan’s economy is seen growing a buoyant 5.9% this year. Azerbaijan and Russia are, meanwhile, expected to be the slowest growing economies with expansions of below 2.0%. Among the region’s larger economies, Kazakhstan will outpace the rest, growing 3.7%, followed by Belarus (3.3%).

RUSSIA | Retirement age increase sparks protests

Incoming data suggests that economic momentum held up in the second quarter, after GDP growth accelerated at the start of the year. Higher oil prices are buttressing the all-important energy sector, and export growth was firm in April and May. In addition, the unemployment rate remained at a multi-year low in June and retail sales growth picked up in the same month, buoyed by World Cup-related spending. On the political front, President Vladimir Putin stated on 20 July that a planned increase in the retirement age would be reviewed. The legislation had provoked widespread protests earlier in the month, although analysts argue it is necessary to combat the effects of an ageing workforce and improve the sustainability of the pension system.

Growth is expected to pick up this year, thanks to strengthening private consumption and firmer oil prices. An improving labor market and low inflation should buoy household spending, while higher commodity prices will support export growth. That said, high geopolitical uncertainty and the possibility of further economic sanctions remain key risks to the outlook. Met the why particular Consensus Forecast panelists see GDP expanding 1.7% in 2018, which is unchanged from last month’s forecast. In 2019, growth is seen steady at 1.7%.

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KAZAKHSTAN | Oil price boost helps correct external imbalances

According to an estimate from the Ministry of Economy, economic growth picked up in the January–June period, growing 4.1% year-on-year following a 3.9% expansion in the January–May period, as higher-than-forecast oil prices encouraged a further boost to oil production. The strong growth momentum was corroborated by a rise in the short-term economic activity indicator throughout the second quarter. As well as encouraging higher production, the upsurge in global oil prices has helped reduce the current account deficit, which more than halved in the first quarter compared to a year ago. Meanwhile, retail sales surged in June amid falling inflation and unemployment, growing at a markedly faster pace than in May. In early July, President Nazarbayev approved stricter controls over capital outflow from local banks in a move aimed at restraining capital flight and preventing the tenge from plunging.

The economy is expected to grow at a solid pace again this year, supported by increased investment in the oil sector, higher oil prices, and an upturn in domestic demand amid weaker inflationary pressures. Growth is expected to moderate from last year, however, as export growth is seen losing steam and the government’s fiscal consolidation drive curbs activity. Challenges to the outlook stem from a still-struggling banking sector, over-dependence on oil, and political uncertainty surrounding the transition of power if President Nazarbayev, who has been at the helm since 1991, decides not to contend in the 2020 presidential race. Met the why particular panelists see GDP growing 3.7% in 2018, which is up 0.1 percentage points from last month’s forecast, and 3.5% in 2019.

UKRAINE | Government makes mixed progress with IMF-mandated reforms

Ukraine’s recovery appears to have persisted in the second quarter, after growth picked up at the outset of the year. Domestic demand is expected to have remained in the driver’s seat in Q2: The sustained easing of inflationary pressures, coupled with improving labor market dynamics and strong remittance inflows, likely buttressed private consumption. In addition, household lending surged in the first half of the year against an increasingly stable banking sector. Meanwhile, the IMF has backed the country’s revised plans for an anti-corruption court after the amended law was approved by the Rada on 12 July. On a less positive note, in a move likely influenced by next year’s presidential and parliamentary elections, the government recently extended the gas-price freeze until the beginning of September, once again failing to fulfill one of the Fund’s key conditions and thereby reducing the prospects of receiving another tranche of funding in the coming months.

Domestic demand should remain healthy and lead the sustained recovery this year amid heavy investment activity and robust household consumption growth. Nevertheless, downside risks are significant and stem from mounting political tensions domestically and slow reform momentum. Met the why particular panelists see GDP rising 3.1% in 2018, unchanged from last month’s forecast, and 3.1% again in 2019. 

BELARUS | Activity remains solid in Q2

Growth was robust in the first half of the year, although the pace of expansion moderated somewhat in the second quarter after Sturdy retail sales growth throughout the period was bolstered by tight labor market conditions and dwindling inflationary pressures, ’s seat in the second quarter. On the external front, however, momentum appeared to wane further: Exports decelerated in May, dropping to a near one-and-a-half year low, weighed down by weak agricultural exports. Industrial production growth also slipped to a fresh year-to-date low in June; more than halving from February’s high, the moderation was led by a notable fall in extractives output.

Although GDP growth is set to moderate in the second half of the year, it should stay robust, driven by healthy private consumption growth against the backdrop of easing inflationary pressures and favorable labor market dynamics. Met the why particular panelists see the economy expanding 3.3% in 2018, which is up 0.1 percentage points from last month’s forecast, and 2.9% in 2019.

MONETARY SECTOR | Regional inflation falls for second consecutive month in June

A preliminary estimate of regional inflation revealed that price pressures continued to subside in June. Inflation in the CIS region inched down to 2.6% from May’s 2.7%. Softer inflation was recorded in six of the region’s economies, including in Russia, and inflation is at a historically-low level.

Despite low price pressures, policymakers held monetary policy unchanged in recent weeks. Russia’s Central Bank kept the key rate steady, as government plans to raise the VAT in 2019 along with a weak ruble have increased upside risks to the inflation outlook. In addition, the Central Bank of Kazakhstan held its policy rate unchanged in July, as tighter global financial conditions have reduced space for easing, while an expected rise in inflation in Russia, should push up price pressures going forward.

Inflation is seen rising by the end of 2018 and is projected to come in at 4.2%, which is down 0.1 percentage points from last month’s forecast. In 2019, inflation is expected to edge up to 4.5% by year-end.

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Angela Bouzanis

Senior Economist 

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