Region's economic deterioration worsens toward the end of 2015
March 9, 2016
The economy of the Commonwealth of Independent States (CIS) deteriorated notably in the second half of 2015; it was mainly dragged down by the Russian recession. However, the deterioration in the region’s economy was exacerbated by a sharp fall in commodities prices and weaknesses in regional currencies. According to a preliminary estimate, the Russian economy contracted 4.0% annually in Q4 (Q3: -4.1% year-on-year), which inevitably had a major impact on the former Soviet economies. An estimate of the region’s aggregate GDP showed that the economy of the Commonwealth contracted 3.3% year-on-year in the fourth quarter, which marked a deterioration over the 3.1% contraction registered in Q3. The deterioration primarily reflected weakness in the region’s economies across the board.
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Following heightened volatility in the region’s currencies in the last three months of 2015, in early 2016 many major currencies in the Commonwealth tumbled further. Their weakening against the U.S. dollar reflected turbulence in global financial markets and additional sharp falls in commodities prices, particularly the prices for oil and base metals. Moreover, the slowdown in China and inertia from the Federal Reserve’s December rate hike put additional pressure on the currencies.
On the geopolitical front, on 17 February, Russia filed a lawsuit against Ukraine at the High Court in London regarding the non-payment of the principal on a USD 3.0 billion Eurobond issued by Ukraine in December 2013. Russia’s authorities are also seeking the repayment of a USD 75 million coupon from December 2015 as along with interest and all legal costs. Russia’s decision to pursue the case through the courts rather than undertaking negotiations further illustrates the country’s determination to maintain economic and political pressure on Ukraine. Meanwhile, Ukraine, which reached a debt-restructuring deal with its private creditors in August 2015, has insisted that it cannot provide Moscow more favorable conditions than those given to its private creditors. Kiev refused to pay even though Russia offered that the bond could be paid in installments—as long as the debt remained classified as official. Due to these difficulties, and as the IMF ruled that the Eurobond was sovereign debt, the Fund amended its rules so that it could continue to lend to countries in arrears on official debt. Consequently, the new ruling means that Ukraine’s access to financing will not be threatened by the bond dispute. Nonetheless, complications and risks are increasing with regard to Ukraine’s return to international credit markets in late 2017, as set by the IMF’s timetable. In addition, the future of Ukraine’s IMF program is in jeopardy, owing to slow progress in the country’s push for reform as well as due to increasing political stability.
Recession in the Commonwealth is expected to be protracted
Last year, the Commonwealth of Independent States entered into recession for the first time since the global financial crisis hit the region in 2009 with an expected contraction of 2.6%. The region’s dismal performance was mainly the result of a deep contraction in the Russian economy, which decreased 3.7%. Moreover, commodities prices, especially energy prices, collapsed last year and this took a heavy toll on most economies in the CIS.
Looking to 2016, and in light of Russia’s weaker-than-expected economic recovery, the analysts surveyed this month by FocusEconomics cut the growth forecast for the CIS economy over the previous month. The Consensus view is that the region will remain mired in recession this year with forecasters foreseeing CIS’ GDP contracting 0.5% in 2016. The projection is down 0.2 percentage points from forecasters estimate in February. Due to a gradual recovery in commodities prices and a rebound in the Russian economy, analysts foresee GDP growth rising in 2017 to 1.7%.
This month’s cut to the 2016 economic outlook for the Commonwealth reflected downward revisions to the GDP growth forecasts for Azerbaijan, Belarus, Kazakhstan and Russia. The growth forecasts for Armenia, Kyrgyzstan, Moldova, Tajikistan and Uzbekistan remained unchanged over the previous month.
Regarding the three countries that are not included in the regional GDP aggregate, analysts cut the 2016 GDP growth forecast for Turkmenistan, while Ukraine’s was raised. The growth forecast for Georgia remained stable in March.
BELARUS | Lifting of sanctions means victory for government, but not for the economic environment
Belarus’ economy started off 2016 on weak footing. After tallying a notable contraction last year as spillover effects from Russia’s slowdown dragged on growth, high-frequency data for the start of the year are lackluster: industrial production and retail sales recorded sharp contractions in January. On the political front, the European Union lifted a number of sanctions against Belarus in February. The move is a victory for President Alexander Lukashenko who has been trying to warm the country’s relations with the EU.
The economy’s prospects are grim. Weak domestic dynamics along with external headwinds are expected to cause GDP to contract for a second consecutive year in 2016. FocusEconomics Consensus Forecast panelists see GDP falling 0.8% in 2016, which is down 0.4 percentage points from last month’s forecast. For 2017, the panel projects that the economy will rebound to a 1.5% expansion.
KAZAKHSTAN | Economy grows at slowest clip since 2009 in 2015; S&P downgrades sovereign rating
The economy expanded 1.2% in 2015 as a whole, which marked a notable deceleration compared to the 4.1% increase registered in 2014 and represented the slowest growth rate since 2009. The Kazakh economy was significantly impacted last year by a deep recession in Russia, lower commodities prices and harsh financial conditions. The general economic backdrop continued to deteriorate in early 2016, with industrial production contracting 0.7% annually in January—the seventh consecutive decrease in output. On 17 February, Standard & Poor’s (S&P) credit ratings agency cut Kazakhstan’s rating from BBB to BBB-, with a negative outlook. S&P’s recent cut to the global oil price outlook, which also lowered growth prospects for the world’s main exporters, including Kazakhstan, is behind the downgrading of the country’s credit rating.
Weak growth in the region, particularly due to a protracted recession in Russia and Kazakhstan’s budget rebalancing, are expected to have an impact on the economy this year. The impact could be exacerbated if commodities prices fall further this year. Analysts expect the economy to expand 0.3% in 2016, which is down 0.3 percentage points from last month’s forecast. For 2017, the economy is expected to accelerate and expand 2.4%.
RUSSIA | Domestic demand drags on growth in 2015; Russia and other oil producers agree on output freeze
Russia’s economy contracted 3.7% in 2015, according to a preliminary estimate. Although a breakdown by components of expenditure is not available, the economic downturn was primarily driven by a sharp plunge in private consumption, which is expected to have contracted 10.1% in the full year. Retail sales fell 9.7% in 2015 as a whole. The main driver behind the plunge, and thus the drop in private consumption, was the sharp weakening of the ruble and the subsequent spike in inflation, which caused real wages to decrease nearly 10% last year. Another factor weighing on the economy in 2015 was a substantial deterioration in fixed investment as commodities producers cut capital spending in response to international sanctions and lower prices. In an effort to support oil prices, Russia and Saudi Arabia, along with Venezuela and Qatar, have agreed to an oil production freeze. Russia and Saudi Arabia account for nearly a fifth of global output and the two nations ramped up oil production in 2015 in a mutually damaging fight for market share.
The Russian economy is expected to stay in recession at least until Q3 2016. Analysts surveyed this month by FocusEconomics expect GDP to contract 1.1% this year. This month’s forecast was cut by 0.3 percentage points from last month’s projection as weakness in oil prices and geopolitical tensions weigh on the outlook. For 2017, analysts see the economy recovering gradually to a 1.3% expansion.
UKRAINE | Contraction in economic activity lessens in Q4, political instability rises
Preliminary figures show that Ukraine’s battered economy is continuing to inch toward the road of recovery as the fall in GDP moderated significantly in the final quarter. However, the country’s political situation took a turn for the worse in February. Tensions in government over the pace of reforms and corruption allegations hit a breaking point and led to a surprise statement from President Petro Poroshenko calling for Prime Minister Arseniy Yatsenyuk to resign. While Yatsenyuk managed to survive the no confidence vote on 16 February, two parties quit his coalition government, leaving it hanging by a thread.
Economic growth is expected to return in 2016 as private consumption and fixed investment begin to recover. However, ongoing fiscal consolidation as demanded by the IMF bailout will continue to limit growth prospects and the frozen conflict in the east is still clouding the outlook. The FocusEconomics panel sees the economy growing 1.3% this year, which is up 0.1 percentage points from last month’s forecast. For 2017, the panel sees the country accelerating to a 2.7% expansion.
INFLATION | Inflation falls notably at the outset of the year
Inflation in the Commonwealth of Independent States fell drastically from December’s 12.1% to 9.8% in January. January’s drop reflected lower inflation readings in Armenia, Belarus, Kyrgyzstan, Moldova and Russia. Inflationary pressures in the Commonwealth in 2015 resulted mainly from the sharp depreciation, or, in some cases, devaluation, in national currencies. Due to a base effect, it is likely that inflation will continue to moderate in the coming months.
The Consensus view of analysts is that inflation in the Commonwealth will be to 8.3% in 2016. This month’s projection was unchanged over the previous month’s forecast and mainly reflects stable forecasts for Armenia, Kyrgyzstan, Moldova, Russia, Tajikistan and Uzbekistan. Forecasts for Belarus and Kazakhstan were revised down, while Azerbaijan was the only economy for which panelists raised the inflation projection.
The inflation forecast for Ukraine, which is not included in the regional estimate, was raised over the previous month. Meanwhile, for 2017, analysts predict that inflation in the region will fall to 6.3%.
Written by: Ricardo Aceves, Senior Economist
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