CIS: Geopolitical risks and monetary tightening in the U.S. threaten nascent recovery
November 2, 2016
Economic dynamics are gradually improving in the Commonwealth of Independent States (CIS) this year following a turbulent 2015. Last year was mostly plagued by the effects of the EU and U.S. economic sanctions on Russia in response to its military intervention in Ukraine and the fall in commodities prices. Although macroeconomic conditions remain challenging in the CIS, the region’s economic outlook has been somewhat strengthened by the gradual recovery in commodities prices, the stabilization of the region’s economic anchor Russia and reduced volatility in the financial and exchange rate markets. An aggregate estimate produced by FocusEconomics shows that the region’s GDP likely fell 0.4% annually in Q3, which marked an improvement over the 0.5% drop in Q2 and the softest contraction in two years.
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The Organization of the Petroleum Exporting Countries (OPEC) continues working on an agreement to cut oil production by around 700,000 barrels per day, despite doubts about its implementation and whether members will comply with it. The deal, which is expected to be rubberstamped at the OPEC’s ordinary meeting on 30 November, is intended to prop up global oil prices as a majority of oil-producing countries are struggling against a dramatic drop in crude revenues, which translates into heightened turbulence in the financial markets and severe cuts in government spending. An increase in oil prices should take some pressure off the Azerbaijani, Kazak and Russian economies—the region’s largest crude exporters. This, in turn, will benefit a number of countries in the region which rely heavily on remittances from Russia. A final agreement among all OPEC members is still uncertain as some producers such as Iran, Iraq, Libya and Nigeria are seeking special treatment since their production has been hit by years of conflicts. On a positive note, Russian President Vladimir Putin stated that the country will join OPEC’s efforts to cap oil production in order to stabilize the oil market.
While the economic outlook for the coming months appears to be brighter, some factors threatens to derail the region’s nascent economic recovery. The fragile ceasefire in eastern Ukraine, Russia’s controversial involvement in Syria and NATO’s military build-up on Russia’s borders could cause tension between the Federation and the international community to resurface. Beside latent geopolitical tensions, December’s envisaged rate hike in the United States has the potential to unnerve financial markets in the region and put local currencies under strain.
2016 economic outlook stabilizes this month
Risks to the CIS economic outlook appear to be broadly balanced. The economic recovery in Russia, the region’s largest economy, is gradually gathering pace, which bodes well for a majority of the CIS countries. Moreover, if the OPEC agreement to reduce crude output in order to prop up oil prices materializes, it has the potential to improve the outlook for the region’s oil-exporting economies. However, risks that political tensions between Russia and Ukraine could escalate and spillovers from a possible rate hike in December in the United States continue to constrain the region’s economic outlook. In other developments, recent statements by the United Kingdom’s Prime Minister Theresa May signaling a “hard” Brexit could hit growth in Europe, which would reverberate across the CIS. Against this backdrop, the economic experts we surveyed expect the region’s GDP to contract 0.3% this year, which, if confirmed, will represent a milder contraction than 2015’s 2.6% decrease.
Looking at the individual countries, analysts left their 2016 GDP forecasts for Azerbaijan, Belarusand Russia unchanged, while they raised their growth estimates for Armenia, Moldova, Tajikistanand Uzbekistan. Kazakhstan and Kyrgyzstan were the only economies for which analysts cut their 2016 GDP growth projections. Regarding the three countries that are not included in the regional estimate, the 2016 GDP growth forecasts for Georgia and Turkmenistan were raised from the previous month, whereas that for Ukraine was downgraded.
Our panelists expect commodities prices, led by oil and gas, to gradually increase this year and next, which bodes well for the region’s energy producers. They project that the economy of the Commonwealth will bounce back strongly in 2017 and expand 1.5%.
BELARUS | Economic weakness carries over into Q3
Activity in the third quarter did not look promising for Belarus’ economy: in September, industrial production contracted for the fourth consecutive time and retail sales declined at the steepest rate since the beginning of the year. This follows the decrease in GDP growth seen in Q2, suggesting the economy remains in the doldrums. Q2’s deceleration was softer than in Q1 thanks to a milder drop in fixed investment, though private consumption decreased at a sharper rate, likely on the back of stagnant household income. This notwithstanding, the IMF lauded the Belarusian government for its efforts to stabilize the economy in talks in early October. The Fund intends to visit the country later this year, which increases the prospects of a loan agreement being reached soon. In other news, Gazprom and the government in Minsk agreed on a deal where Belarus will settle an old debt to Russia and receive subsidized Russian gas in turn.
Belarus is set for another contraction this year, as the private sector is persistently weak since the government’s progress in introducing more market-friendly reforms remains slow. FocusEconomics Consensus Forecast panelists forecast that GDP will decline 1.9% in 2016, which is unchanged from last month’s forecast. For 2017, the panel projects that the economy will return to growth and record a moderate 0.7% expansion.
KAZAKHSTAN | Oil from the Kashagan oil field finally starts flowing
The economy returned to growth in Q3 after contracting 0.1% in the first half of the year, driving accumulated growth in the first nine months of 2016 to 0.4%, according to Minister of National Economy Kuandyk Bishimbayev. Lower interest rates, a more stable Kazakhstani tenge and higher commodities prices shored up growth in the three months up to September. Nevertheless, a sharp drop in oil production in August due to scheduled maintenance at the Tengiz field plagued growth in the same period. On 14 October, the Kashagan oil field made its first shipment after more than a decade of delays. According to official sources, the oil field will produce around 370,000 barrels per day in 2017 and it will represent an important source of revenue that will help to improve the country’s external position.
This year, growth has been constrained by weak oil prices, the impact of the currency devaluation and the recession in Russia. Going forward, GDP will benefit from higher commodities prices and increased oil production due to the reopening of the Kashagan oil field. Forecasters cut their 2016 GDP forecasts by 0.2 percentage points from last month and expect GDP to expand 0.3%. In 2017, GDP growth is seen picking up to 2.1%.
RUSSIA | Russia and Turkey sign on gas pipeline to Europe
Russia’s shaky economic recovery likely continued in the third quarter, after GDP recorded the smallest fall since Q4 2014 in Q2. The manufacturing PMI rested in expansionary territory for the second consecutive month in September and exports recorded the smallest fall in nearly two years in August. The unemployment rate has remained on a firm downward trend since March and the improving environment was underscored by retail sales recording the smallest contraction since December 2014 in September. In October, Fitch Ratings upgrade Russia’s outlook to stable from negative due to positive policy measures that have been enacted as a result of the low oil price environment. Meanwhile, Russia and Turkey signed an agreement to build a major undersea gas pipeline as the countries normalize ties. The pipeline will help Russia increase its position in the European gas market and diversify transit away from Ukraine.
Economic activity should continue to strengthen gradually and the economy is expected to enter a shallow recovery next year. The analysts we surveyed this month held their GDP forecast and expect the economy to contract 0.6% in 2016. In 2017, analysts see the economy expanding 1.3%.
UKRAINE | Political turmoil threatens nascent economic recovery
Ukraine’s modest recovery likely continued in Q3, after GDP growth hit an over two-year high in Q2. Hard data for the quarter suggests the recovery is on an even footing as industrial production posted growth for the second consecutive month in September and international reserves rose to a two-year high. However, economic reforms remain critical to improving the country’s growth potential and receiving funds from the IMF, but the political willpower to follow through with the required measures is uncertain. The government has a slim hold on parliament and deeply unpopular pension reform along with tough anticorruption measures are conditions of further IMF financing. In October, peace negotiations over a resolution to the conflict in the eastern regions of the country resumed after a year pause. A lasting resolution to the crisis remains key to improving Ukraine’s outlook.
While the economy is moving in the right direction, bleak domestic and external conditions will limit momentum this year. The FocusEconomics panel sees GDP rising by 1.0%, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel sees GDP growth accelerating to 2.4%.
INFLATION | Inflation slows to over two-year low in September
Inflation in the CIS declined from 7.7% in August to 7.2% in September, which marked the lowest value since May 2014, according to a regional estimate. The lower reading reflected a broad-based drop in inflation across the region, particularly in Georgia, Kazakhstan and Kyrgyzstan. Conversely, inflation in Azerbaijan climbed to a nearly eight-year high in September due to the depreciation of the Azerbaijani manat.
More stable financial and foreign exchange markets, together with a tightening bias by most central banks in the region, prompted the forecasters we surveyed this month to cut their 2016 inflation projections for the region by 0.2 percentage points to 6.7%. This marks the fifth consecutive downward revision. Looking beyond this year, analysts predict that inflation in the region will fall further to 5.6% in 2017.
Written by: Ricard Torné, Head of Economic Research