Contraction in the region's economy begins to stabilize in Q3
February 10, 2016
The combination of factors that determined the plunge in the economy of the Commonwealth of Independent States (CIS) in the second quarter of 2015 persisted in the third quarter. These factors included the sharp fall in commodities prices, restrictions on access to international capital markets due to sanctions against Russia and a deceleration in China, which is the region’s main trading partner. However, a more complete set of data provided assurance that the economic deterioration did in fact bottom out in mid-2015 and begin to stabilize in Q3 2015. An estimate elaborated by FocusEconomics shows that the CIS’s GDP contracted 2.9% year-on-year in Q3, which came in above the 3.2% decrease registered in Q2. The improvement in Q3 primarily reflected a stabilization in GDP in both Russia—by far the region’s largest economy—and Belarus. Although economic conditions in the majority of the CIS economies were challenging in Q3, differences in growth dynamics persisted. Oil and gas exporting countries, namely Azerbaijan, Kazakhstan, Russia and Turkmenistan, saw economic conditions deteriorate rapidly as a result of the sharp fall in energy prices. Meanwhile, most of the labor-exporting countries (Armenia, Kyrgyzstan, Moldova and Tajikistan) saw a softer deterioration in growth rates mainly due to strong production in the agricultural sector and, in some cases, increased activity in the extractive sector. Moldova’s political difficulties caused it to be the only country in the region to see a steep drop in economic growth.
Economic conditions, particularly in emerging economies, became more difficult in the end of 2015 and beginning of 2016. The Commonwealth is not an exception and the adjustment to a new normal of low commodities prices and tighter global financial conditions is taking a heavy toll on the region’s economies. Officials from the International Monetary Fund (IMF) and the World Bank headed to Baku in early February to discuss, according to international media, a possible USD 4.0 billion emergency loan package for Azerbaijan. The visit to Baku came in response to the currency crisis in Azerbaijan at the end of 2015 in the wake of the collapse in oil prices, but also amid increasing concerns within the two multilateral institutions regarding oil producers in the emerging world from Central Asia to Latin America. The negotiations are at an early stage and the Azerbaijani government will have to decide whether or not borrow from the multilateral lenders. Nonetheless, the decision to open negotiations with these international organizations is an indication of how serious the pressure on the country’s finances from the collapse of oil prices is. Azerbaijan depends on oil and gas for about 95% of its exports and the downturn in energy prices has caused its currency to plummet, which has sparked a series protests across the country. On 19 January, Azerbaijan became one of the first countries in the world to restore to capital controls in response to the fall in oil prices.
Recession on the 2016 horizon for the Commonwealth of Independent States
In light of Russia’s weaker-than-expected economic recovery and due to expectations that commodities prices will increase only gradually this year, the 2016 growth forecast for the CIS economy was revised downward over the previous month’s projection. The Consensus view among analysts is that, after an expected 2.5% contraction in 2015, the region will remain in recession this year. Economists surveyed for this month’s FocusEconomics Consensus Forecast foresee that CIS’ GDP will contract 0.3% in 2016. This month’s projection contrasted the 0.4% expansion that forecasters had expected in January. Analysts foresee that GDP growth will rebound in 2017 and pick up to 1.8%.
This month’s cut to the 2016 economic outlook for the Commonwealth reflected downward revisions to the GDP growth forecasts for Armenia, Azerbaijan, Belarus, Kazakhstan, Moldova, Russia, Uzbekistan, Kyrgyzstan, Tajikistan were the only CIS economies for which forecasts remained unchanged over the previous month. Regarding the three countries that are not included in the regional GDP aggregate, the 2016 GDP growth forecasts for Georgia, Turkmenistan and Ukraine deteriorated.
BELARUS | Spillover effects from Russian recession take a heavy toll on the economy
Belarus’ economy contracted a notable 3.9% last year, according to a preliminary estimate, which represents a significant decline from 2014’s 1.7% growth. The economy has been plagued by spillover effects from Russia’s slowdown and plummeting exports, which likely drove the steep fall. On the political front, the government outlined its economic and social development plan for this year in January. Key goals include export diversification, continuing accession talks to join the World Trade Organization and improving the ease of doing business.
The economy’s prospects are bleak. Subdued domestic dynamics and external challenges will likely cause the economy to contract again in 2016. FocusEconomics Consensus Forecast panelists see GDP falling 0.4% in 2016, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel projects that the economy will rebound to a 1.5% expansion.
KAZAKHSTAN | President Nazarbayev calls for early elections amid bad economic situation
Recent economic activity data indicated that growth was sluggish toward the end of 2015. Although the pace of contraction in industrial production softened in December, output decreased for the sixth consecutive month. The Kazakh economy was significantly impacted last year by lower commodities prices and harsh financial conditions. Meanwhile, on 20 January, President Nursultan Nazarbayev called an early parliamentary election for 20 March. The President stated that the elections are necessary to provide a new mandate for the government to tackle the deteriorating conditions in the economy. Analysts expect that political parties loyal to Nazarbayev should continue to control the Parliament fully, although the composition of seats might change slightly in favor of minor parties.
The largely predictable result of the coming parliamentary election is not expected to have a direct impact on the economy as the Parliament’s importance when it comes to domestic decision-making processes is limited. However, low commodities prices, Russia’s protracted recession and China’s slowdown will hit the economy this year. After an expected 0.8% increase in 2015, forecasters expect the economy to expand 0.6% in 2016—a sharp 0.8-percentage-point downward revision from last month’s forecast. For 2017, the economy is expected to accelerate and expand 2.3%.
RUSSIA | Preliminary data confirm economy’s sharpest contraction since 2009
The Russian economy registered the steepest economic contraction in six years in 2015 on the back of low oil prices and international sanctions. Data showed that private consumption took a hard hit last year due to the steep depreciation of the ruble and the subsequent spike in inflation, which caused real wages to deteriorate. Other factors weighing on the economy in 2015 were a massive decline in investment, which was in response to harsh financial conditions, a drop in corporate profitability and a cut in many commodities producers’ investment projects. Lower oil prices also challenged the effectiveness of Russian authorities’ response to the crisis, as fiscal revenues were lower than expected, which limited government spending last year. Volatility and persistent weakness in oil prices put additional pressure on the ruble at the outset of the year and the currency reached an all-time low in January.
Following 2015’s contraction, the economic recession in Russia is likely to be protracted. Analysts surveyed this month by FocusEconomics expect GDP to contract 0.8% this year. Oil prices fell to a new record low in early 2016, extending the price slide since OPEC’s December meeting. Continued weakness in oil prices and prospects that they will recover slowly this year are making the Russian economy more vulnerable and therefore analysts cut the 2016 GDP forecast by 0.6 percentage points from last month’s survey. For 2017, analysts see the economy recovering gradually to a 1.5% expansion.
UKRAINE | War-hit economy continues to show signs of gradual stabilization
Tentative signs of stabilization continue to emerge from Ukraine’s battered economy. The fall in GDP moderated for the second consecutive quarter in Q3 and data for Q4 point to further improvements, with industrial production recording the smallest slide since May 2014 in December. However, on the political front, stability has been deteriorating. Support for the government—both publically and within the coalition—has been drastically eroded in recent months and friction within the administration was highlighted on 3 February when Economy Minister Aivaras Abromavicius resigned. Abromavicius accused members within the governing elite of paralyzing reforms implementation and cited widespread corruption as the reason for his resignation.
Private consumption and fixed investment should begin to recover this year as the economy becomes more stable. However, ongoing fiscal consolidation as demanded by the IMF bailout will continue to limit growth prospects. The FocusEconomics panel sees the economy growing 1.2% this year, which is down 0.2 percentage points from last month’s forecast. For 2017, the panel sees the country accelerating to a 2.6% expansion.
INFLATION | Inflation ends 2015 at a seven-year high
Inflation in the Commonwealth of Independent States fell drastically from November’s 13.5% to 12.1% in December. Despite the moderation over November, inflation in the CIS region averaged 12.5% in 2015, which marked the highest level since 2008. Inflation in the majority of the economies in the region rose in 2015 and, in some cases, it ended the year at double-digit rates. Inflationary pressures in the Commonwealth resulted mainly from the sharp depreciation, or, in some cases, devaluation, in national currencies. The weakness in national currencies in 2015 was the result of global volatility in financial markets, the drop in commodities prices and persistent capital outflows.
Inflation in the region remained high in 2015 and is expected to moderate in 2016. The Consensus view of analysts is that inflation in the Commonwealth will fall to 8.3% in 2016. This month’s projection was nonetheless hiked by 0.5 percentage points over the previous month’s forecast and mainly reflects an upward revision to the forecasts for Armenia, Azerbaijan, Kazakhstan and Russian. Forecasts for Belarus, Kyrgyzstan, Tajikistan, and Uzbekistan were left unchanged. Moldova was the only country for which panelists cut the projection. The inflation forecast for Ukraine, which is not included in the regional estimate, was cut over the previous month. Meanwhile, for 2017, analysts predict that inflation in the region will fall to 6.4%.
Written by: Ricardo Aceves, Senior Economist
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