CIS Countries Economic Forecast

Economic Snapshot for the CIS Countries

May 8, 2019

Growth is seen slumping to a three-year low in 2019

Growth is seen slumping to a three-year low in 2019, mainly due to a deceleration of Russia’s economy. The OPEC+ deal will limit energy output, while private consumption is also seen waning amid a rise in taxes, soft sentiment and higher inflation. Russia’s slowdown will likely spill over into other economies via remittances and trade. Oil output cuts will weigh on Kazakhstan’s activity. 

This CIS region is projected to grow 1.8% in 2019, unchanged from last month's projection. For 2020, the regional economy is expected to grow 2.1%. 

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Russia Economic Outlook

Growth is expected to have slid sharply in the first quarter of 2019, after a solid end to last year. Consumption indicators point to moderate growth in part due to a hike in the VAT at the start of the year. Retail sales recorded the softest expansion seen in over a year in March and consumer sentiment lingered deep in pessimistic territory in Q1. Moreover, despite firmer oil prices, the external sector is expected to have disappointed after the OPEC+ production cut deal and a mild European winter hampered oil exports. That said, the economy appears to have borne the VAT hike better than expected; inflation undershot expectations in Q1, which should provide space for the Central Bank to ease rates soon to support the recovery. Available data for the second quarter has been soft with the manufacturing and services PMIs dropping in April.  

The economy is seen losing steam this year. The OPEC+ output cuts will limit energy exports, while household spending is seen slowing amid the higher VAT, more modest wage gains and downbeat sentiment. While new sanctions continue to pose a threat to the outlook, the divided U.S. Congress has made passing measures tougher while prudent fiscal policy has built up buffers.

FocusEconomics panelists see growth at 1.4% in 2019, which is unchanged from last month’s forecast. In 2020, GDP is seen increasing 1.7%.

Kazakhstan Economic Outlook

The short-term economic activity indicator, a proxy for economic growth, accelerated in March, although its overall performance in the first quarter fell short of that recorded in Q4 2018. Fixed investment surged in Q1, while higher real wages and increased credit availability likely buttressed household spending. On the production side, the industrial sector picked up steam in March, largely on the back of a rebound in Chinese manufacturing activity. In the political arena, uncertainty has resurfaced after interim President Kassym-Jomart Tokayev called a snap election for 9 June in early April. Tokayev is favorite to win, whose victory would ensure a high degree of policy continuity on the economic front. Meanwhile, Dariga Nazarbayeva, the former president’s daughter, has shown no intentions of running in the race.

The economy is set to decelerate this year on a fall in exports given the challenging external conditions, while growth of oil output moderates on overhauls at the Kashagan, Karachaganak and Tengiz oil fields. On the demand side, the stimulus package should support consumption spending. Meanwhile, uncertainty over who will take the reins clouds the outlook.

FocusEconomics analysts expect GDP to increase 3.4% in 2019, which is unchanged from last month’s estimate, and also 3.4% in 2020.

Ukraine Economic Outlook

Volodymyr Zelensky, a comedian with no former political experience, was elected Ukraine’s president on 21 April. Zelensky, who ran chiefly on an anti-corruption platform, vowing to restore faith in governmental institutions and courts, racked up 73% of the vote; Petro Poroshenko, the incumbent, was left with less than 25%. Given Zelensky’s lacking credentials, uncertainty remains elevated regarding his tenure; to exacerbate matters, the new president will take office with little support in parliament and amid growing pressure over the IMF loan conditions and deteriorating relations with Russia. Despite the political turbulence, growth appears to have remained healthy in the first quarter of the year. Retail sales surged in Q1, likely propped up by lower inflation and a stronger hryvnia, signaling upbeat consumer demand. Furthermore, merchandise export growth picked up in Q1, thanks to surging agricultural exports.

Growth is seen losing steam this year amid feebler external demand and as relatively tight monetary and fiscal policies weigh on activity growth. Nevertheless, the overall expansion should remain robust thanks to strong consumer demand fueled by tightening labor market conditions. Political uncertainty remains the key risk to the outlook, however.

FocusEconomics panelists see GDP growth of 2.7% in 2019, which is unchanged from last month’s forecast, and 2.9% in 2020.

CIS Countries Monetary & Financial Sector News

Inflation rose to 5.4% in the CIS economy in March, edging up from February’s 5.3%. Rising price pressures in Russia largely drove the increase chiefly due to the hike in the VAT at the start of 2019. Inflation is seen falling in the coming quarters as economic slack and solid performances by exchange rates tame price pressures.

Contained inflation and the Federal Reserve’s more dovish tune has helped take the pressure off the region’s central banks. In April, Azerbaijan’s Central Bank cut the discount rate, while Russia’s hold gave clearer guidance that a rate cut could soon materialize if conditions allow. Outside the region, policymakers cut the key rate in Ukraine for the first time in two years.

Most of the region’s currencies were broadly stable in recent weeks, with rising oil prices supporting the currencies of commodity exporters. In addition, the more benign outlook for global interest rates has helped relieve pressure from emerging-market assets. Looking ahead, CIS currencies are seen appreciating modestly this year.

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