CIS Countries Economic Forecast

Economic Snapshot for the CIS Countries

May 10, 2017

Region set for better growth in Q1

More complete data showed that the Commonwealth of Independent States (CIS) ended 2016 on a stronger note than previously expected. The region’s GDP grew 0.6% over the same period of 2015 in Q4, a solid rebound from the third quarter’s 0.2% contraction and the best result since Q4 2014. The recovery was driven primarily by a rebound in Russia’s economy and firming activity in Kazakhstan. Despite the uptick at the end of the year, overall 2016 was a difficult year for the CIS region. Low oil prices and weak external demand put a lid on growth in the region and strained a number of currencies and government balances.

While official GDP data is still missing from most of the economies in the region, growth is expected to have accelerated in Q1 to 1.2%. Activity is likely to have picked up in major-player Russia, thanks to recovering household consumption and investment, although it is seen having remained weak overall. Rising oil prices likely gave a boost to many of the region’s economies and a better performance in Russia likely helped remittances across CIS. However, official data from Azerbaijan show that the economy is on a shaky footing and GDP plummeted in Q1.    

On a positive note, Belarus and Russia resolved an energy dispute in April that should benefit both economies. Russia had cut energy supplies to the country in 2016 due to a dispute over debt and gas pricing. Under the deal, Russia will renew oil supplies and give the country a discounted rate in upcoming years as well as lifting some import restrictions. Following the agreement, Belarus paid off an outstanding debt of USD 726 million to Gazprom.

Better prospects seen in 2017

Growth is expected to pick up in the CIS region this year on the back of higher commodity prices and better activity in Russia. Economists surveyed this month by FocusEconomics expect the CIS economy to expand 1.5%, which is unchanged from last month’s projection. Next year, analysts project that regional GDP will continue picking up steam and expand 2.0%.

This month’s stable outlook reflected unchanged forecasts for four economies in the region, including major-player Russia. Meanwhile, GDP growth forecasts were upgraded for Belarus, Kazakhstan, Moldova and Uzbekistan. Azerbaijan was the only economy for which analysts cut their projections.

Regarding the three countries that are not included in the regional GDP aggregate, analysts lowered the 2017 GDP growth forecasts for Georgia and Ukraine, while they upgraded their forecast for Turkmenistan from the previous month.

See the Full FocusEconomics CIS Countries Report     

BELARUS | Weak government revenues obstruct spending

Recently released indicators show a mixed picture of the economy at the outset of 2017, but it  is unlikely that Belarus has emerged from its ongoing recession. The country’s industry, which specializes in exporting refined oil products, has lost its competitive edge after Russia ended its subsidized oil program to Belarus. On the domestic front, inflation continues to erode households’ income, which will keep a lid on private consumption this year, while the government’s severe fiscal limitations make a recovery in government spending unlikely.

The economy is expected to make a slight recovery this year as a weak local currency and higher prices for the country’s refined oil products should jumpstart export growth. Against this backdrop, FocusEconomics Consensus Forecast panelists forecast that GDP will increase by just 0.3% in 2017, which is up 0.1 percentage points from last month’s forecast. For 2018, panelists see growth picking up to 1.4%.

KAZAKHSTAN | Green shoots emerge in battered economy

This year, the economy is gradually recovering from headwinds that plagued growth in 2016. Higher oil prices, combined with stronger crude supply following the restart of the Kashagan oil field, are boosting economic activity. Moreover, a more benign economic environment is supporting the tenge, helping to stabilize financial markets and improving credit conditions. The economy is also benefiting from more proactive fiscal policies and lower interest rates as inflation is on a consolidated downward trend. Against this backdrop, industrial production, led by solid gains in the mining and manufacturing industries, expanded at the fastest pace in over six years in March. In an attempt to counter risks stemming from soaring non-performing loans, the banking sector is planning a massive concentration process and the government is preparing for a possible recapitalization of the sector.

Higher commodity prices, stronger crude supply and the economic recovery in Russia will boost growth this year. Moreover, lower inflation is expected to shore up household spending, while lower interest rates and a brighter outlook for the oil industry will support investment. Analysts polled this month raised Kazakhstan’s 2017 growth forecast by 0.1 percentage points relative to last month’s estimate and expect GDP to increase 2.3%. For 2018, our Consensus Forecast shows a 2.8% expansion.

RUSSIA | Sanctions to continue despite rare meeting between Merkel and Putin

The Russian economy returned to growth in the final quarter of 2016 and recent data suggests that the recovery has broadened in the first half of 2017. Industrial production expanded in March and the unemployment rate edged down for a second consecutive month. Moreover, consumer sentiment improved in Q1, although it remains at low levels. However, dynamics are likely to be largely influenced by oil prices, which could be volatile and prices fell in March and April. On the political front, German Chancellor Angela Merkel conducted a rare visit to Russia at the beginning of May. Ties between the two countries have worsened in recent years since the annexation of Crimea and related economic sanctions. The European Union’s sanctions on Russia will expire at the end of July, but are largely expected to be renewed. 

The economy is expected to return to growth in 2017 after two years of falling activity, thanks to recovering private consumption and fixed investment. Higher oil prices should also help shore up government revenues and support exports. Economists project that the economy will expand by 1.3% in 2017, which was left unchanged from last month’s forecast. For 2018, analysts see GDP growth accelerating to 1.7%.

UKRAINE | Central Bank Governor quits

The recovery has been severely weakened by the severance of trade ties with the rebel-held areas of the country. While GDP expanded notably in Q4, growth is expected to have moderated significantly in the first half of 2017 due to trade disruptions and heightened political tensions. Industrial production contracted for a second consecutive month in March and is likely to remain weak as the government cut electricity to some rebel-held areas in April. On the political front, Central Bank Governor Valeria Gontareva resigned in April, raising uncertainty over who will take over the reins of the institution. Gontareva helped usher in a number of reforms demanded by the IMF but faced steep public criticism. Moreover, thin public support for the government is threatening to undermine the tough reform agenda. While the government has made some progress on economic reforms, tough land and labor overhauls still need to be legislated and execution risks are high and could disrupt the smooth continuation of the IMF program.

The country’s outlook was downgraded for a second consecutive month largely due to the economic blockade. Our panelists shaved 0.1 percentage points off Ukraine’s GDP forecast this month. The FocusEconomics panel sees GDP rising by 2.3% this year and growth picking up to 3.0% in 2018.

See the Full FocusEconomics CIS Countries Report     

INFLATION | Inflation continues to fall in March

Inflationary pressures in the CIS economy continued to abate at the end of Q1. An aggregate estimate showed that inflation in the region declined from 4.9% in February to 4.7%, marking a new multi-year low. The drop mainly reflects the stabilization of currencies and still relatively subdued domestic demand.

Inflation is expected to stabilize at the current level in the coming months, and to increase toward the end of the year. The analysts we surveyed forecast inflation to end 2017 at 4.9%, which is down 0.2 percentage points from last month’s projection. Going forward, inflation is projected to fall to 4.7% in 2018.

Written by: Angela Bouzanis, Senior Economist

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