Following the deep recession in 2015, some economies are facing painful adjustments
April 13, 2016
The pace of contraction in the economy of the Commonwealth of Independent States (CIS) quickened somewhat in the final quarter of 2015, as suggested by more complete data. An aggregate GDP estimate showed that the Commonwealth’s economy decreased 3.0% year-on-year in Q4 2015 (Q3: -2.8% yoy) and that it contracted 2.6% in the full year. As a result, the Commonwealth of Independent States entered into recession for the first time since the global financial crisis hit the region in 2009. The region’s dismal performance was mainly the result of a deep contraction in the Russian economy and its spillover effects in other economies. Some countries that were resilient to the region’s downturn were Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan where economic growth was healthy despite their strong economic ties with Russia, particularly through trade and remittances.
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Overall weakness in the region will persist this year as the economies of the Commonwealth continue facing complex headwinds. Against a backdrop of a protracted recession in Russia and adverse global and regional developments, the prospects for many CIS economies are for weak growth at best. However, several of the headwinds actually also carry seeds for future growth. The collapse in oil prices, weakening global and regional demand as well as volatility in financial markets are paving the way for some CIS economies to transition to a new normal.
Oil and other commodities exporters in the Commonwealth are facing an adjustment to low commodities prices. This adjustment, although painful, is providing the opportunity for these economies to diversify and become less dependent on the production and exports of commodities. Moreover, in response to the price collapse, some governments are making progress in moving forward with economic reforms. The initial adjustments that have been seen so far are changes in monetary and exchange rate regimes to enable authorities to react promptly and more efficiently to external shocks; fiscal reform to put public finances on a stable path; and a decrease in vulnerabilities and important fragile areas of the banking sector. Geographically speaking, the current recession in Russia and the Chinese deceleration provide the opportunity for many CIS economies to be more competitive, even if the downturn in Russia and the transformation of China’s economy may have a negative impact in some parts of the region. The aforementioned changes, while difficult and required to take place within a harsh economic environment, are likely to have a positive impact in the economies where they are applied. A key challenge is still improving institutions and governance in most of the countries in the region.
CIS heading into a second year of recession
While a gradual pick-up in oil and other commodities prices this year will bring some relief, a protracted recession in Russia will continue to exert pressure in the region’s economy. Following a deep contraction in 2015, the economy of the Commonwealth is expected to remain in recession this year. The Consensus view among our panel of economic experts is that the region’s GDP will contract 0.8% this year. This month’s forecast was cut by 0.3 percentage points from forecasters’ projection in March. Looking forward, analysts expect CIS’ GDP to bounce back and expand 1.6% in 2017 due to a further increase in commodities prices and a rebound in the Russian economy.
This month’s cut to the 2016 economic outlook for the CIS economy stemmed from a downward revision to the GDP growth forecasts for almost all of the economies surveyed. Armenia was the only economy for which analysts left the growth forecast unchanged compared to the previous month.
Regarding the three countries that are not included in the regional GDP aggregate, analysts cut the 2016 GDP growth forecasts for Turkmenistan and Ukraine. Georgia was the only economy for which analysts left their forecast unchanged over the previous month.
BELARUS | Country receives financial support from Russia amid deep recession
The economic recession in Belarus shows no sign of abating as the economy contracted 4.2% annually in the last quarter of 2015. The reading followed Q3’s 4.4% fall and indicates that the economy likely bottomed out in 2015. The latest indicators from the first quarter of this year show that the economy continues to struggle: in February, industrial production tallied its fourteenth consecutive contraction and retail sales declined for the second month in a row. Meanwhile, Belarus secured a USD 2 billion loan from the Russia-led Eurasian Fund for Stabilization and Development to tackle the crisis. The two-year loan is conditional on the implementation of economic reforms focused on liberalizing prices, removing subsidies, improving fiscal consolidation and the privatization of state assets.
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 1.0% in 2016, which is down 0.2 percentage points from last month’s forecast. For 2017, the panel projects that the economy will rebound to a 1.5% expansion.
KAZAKHSTAN | Economic impact from parliamentary elections is limited
The Kazakh economy decelerated substantially in 2015, expanding just 1.2% (2014: +4.1%). The deep recession in Russia, Kazakhstan’s main trading partner, low oil prices and a delayed devaluation of the tenge all weighed heavily on growth last year. Recent data suggest that the general economic backdrop remains weak at the beginning of 2016. Industrial production expanded just 0.1% in February, which, while marginal, marked the first increase in eight months. President Nursultan Nazarbayev’s ruling Nur Otan Party won a landslide victory in a snap parliamentary election on 20 March. Two other parties loyal to the president, the pro-business Ak Zhol and the Communist Party, also entered Parliament. Since all parties are loyal to the president and did not offer any substantial criticism of his government, no major policy changes are expected.
After a notable deceleration in 2015, the economy is expected to slow further this year. The spillover effects from a protracted recession in Russia along with still-low commodities prices will weigh on economic growth. Analysts expect the economy to expand only 0.1% in 2016, which is down 0.2 percentage points from last month’s forecast. For 2017, the economy is expected to accelerate and grow 2.1%.
RUSSIA | Green shoots appear following worst recession since 2009
Russia’s economy decreased substantially last year, hampered by a combination of low oil prices, international sanctions, a sharp depreciation of the ruble and structural weakness. GDP decreased 3.8% annually in Q4 2015 as it was dragged down by a steep deterioration in domestic demand. Recent economic indicators, however, suggest that the seeds of an incipient recovery appear to have been sown. In February, industrial production expanded for the first time in a year and unemployment, although still high, continues to be stable. Moreover, oil prices rose further from the multi-year lows seen in February and, with the rally, the ruble has gained part of the ground it had lost in the past weeks. On a negative note, business activity in the manufacturing sector remained depressed in March, but activity in services providers did continue to expand.
Looking at the future, the economy is projected to contract again in 2016, although the recession is expected to ease. Our panel of experts expects GDP to contract 1.3% in 2016 as a weak ruble is likely to shore up exports and falling inflation should support real wages and private consumption. That said, the recovery remains fragile, with oil prices expected to rise only gradually over time and international sanctions set to remain in place for quite some time. Consequently, this month’s forecast was cut by 0.2 percentage points over last month’s projection. For 2017, analysts see the economy expanding 1.2%.
UKRAINE | Prime Minister tenders his resignation due to mounting pressure
After hitting rock bottom in the first quarter of 2015, Ukraine’s economy improved rapidly over the course of last year and the fall in GDP moderated significantly in the final quarter. Exchange rate stability and a reduction in military clashes have led to a broad-based stabilization in the economy, although dynamics are still weak. While recent economic data is encouraging, the government has been at a standstill since February, stalling reforms and increasing risks of fresh elections. After months of political pressure, Prime Minister Arseniy Yatsenyuk announced his resignation on 10 April, paving the way for a new government. Volodymyr Groysman, the current parliamentary speaker and an ally of President Petro Poroshenko, is expected to be nominated as the new Prime Minister on 12 April.
The economy is expected to rebound this year as consumption and investment recover from last year’s sharp falls. However, the ongoing political uncertainties are threatening to stall the next tranche of the IMF bailout and are clouding the outlook. The FocusEconomics panel sees the economy growing 1.2% this year, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel sees the country accelerating to a 2.6% expansion.
INFLATION | Inflation falls for fourth consecutive month in February
Inflation continued to slow in the Commonwealth of Independent States in February. Recent data showed that inflation in the region fell from 9.8% in January to 8.5%. The print marked a fourth consecutive decline from a peak of 13.8% registered in October 2015 and the lowest level in 16 months. Looking at the individual countries, lower inflation was registered in Armenia, Azerbaijan, Kyrgyzstan, Moldova, Russia and Ukraine.
Inflation in the region fell rapidly at the outset of the year. Nonetheless, significant price pressures persist. Analysts surveyed this month expect that inflation will continue falling in the coming months, although at a more moderate pace. The Consensus view is that inflation will end this year at 8.2%. This month’s projection was down 0.1 percentage points compared to March’s forecast and mainly reflects lower forecasts for Armenia, Belarus, Kazakhstan, Moldova and Russia. Forecasts for Azerbaijan and Uzbekistan were revised up, while forecasts remained stable for Kyrgyzstan and Tajikistan.
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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