Commonwealth's economy battered by external shocks
May 11, 2016
Economic activity in the Commonwealth of Independent States (CIS) deteriorated substantially in 2015, owing to a combination of factors. Among these were the massive and sustained decline in commodities prices, wide-ranging spillovers from Russia’s recession, as well as the slowdown and rebalancing of China’s economy. An aggregate GDP estimate elaborated by FocusEconomics showed that the region’s GDP growth deteriorated from a 2.8% year-on-year contraction in Q3 to a 3.0% decrease in Q4. In 2015 as a whole, the economy of the Commonwealth took a hard hit and contracted 2.6%, which contrasted a five-year period in which the region grew by, on average, 3.3%. The last time the Commonwealth experienced an economic downturn was in 2009 at the height of the global financial crisis. Although currency depreciation—and in some cases devaluation—and fiscal easing have helped to mitigate the impact of the aforementioned external shocks, inflation shot up and vulnerabilities in the financial sector increased, which were, in some cases, exacerbated by uncertainty in the economic policy.
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Economic weakness and heightened volatility in financial markets persisted at the beginning of the year and continued taking a heavy toll on growth. In the first months of 2016, the region continued to face strong headwinds in the form of a renewed plunge in commodities prices, a deterioration in investor confidence, heightened financial volatility and a more challenging global economic backdrop. Consequently, the economic contraction in the Commonwealth observed at the end of 2015 carried over into the first quarter this year, although it is expected to have been less severe than in the previous period. According to the GDP estimate for the region, the economy is expected to have contracted 2.0% on annual basis in Q1 and since some of these external shocks are expected to remain, the short-term outlook suggests that economic growth in the next quarters will be weak at best.
Oil plays an important role in the CIS and the recent nascent recovery in global oil prices bodes well for the region’s oil producers. However, despite the recent rise in global prices, falling oil production and decreasing public investment in these economies is likely to persist this year. Moreover, private consumption will remain weak, in part reflecting low consumer confidence and still-high inflation. Meanwhile, low oil prices have prompted importers to reduce the import bill and, consequently, to improve their external accounts. However, a positive impact on private consumption from cheap gas at the pump has been limited as domestic fuel prices fell only modestly, owing to low competition and currency depreciation.
Recession will persist in the Commonwealth, but outlook stabilizes on gradual rise in commodities prices
A difficult external environment will continue to exert downward pressures on the Commonwealth’s economic outlook, but an expected increase in commodities prices, particularly in oil prices, will likely provide some relief for the region’s economy. Following a painful contraction in 2015, the economy is expected to remain in recession this year and is seen recovering only modestly in 2017. Economists surveyed this month by FocusEconomics expect the CIS economy to contract 0.8% this year, which was unchanged over the previous month’s projection. Next year, analysts project CIS’ GDP to bounce back and expand 1.6%.
This month’s stable result reflected unchanged forecasts for Armenia, Kyrgyzstan and Russia. Meanwhile, GDP growth projections for the economies of Azerbaijan, Belarus, Moldova, Tajikistan and Uzbekistan were cut, while Kazakhstan was only economy for which analysts raised the growth forecast over the previous month.
Regarding the three countries that are not included in the regional GDP aggregate, analysts lowered the 2016 GDP growth forecasts for Turkmenistan and Ukraine, while they left their forecast for Georgia unchanged over the previous month.
BELARUS | Government announces major pension reform amid economic weakness
Reduced remittances inflows and the spillover effect from Russia’s economic downturn caused the Belarusian economy to contract sharply in 2015. Although it likely bottomed out in 2015, the latest economic indicators from Q1 confirm that economic activity remains weak. In March, retail sales contracted for the third consecutive month and industrial production decreased for the 15th month running. After securing a much-needed USD 2 billion loan from the Eurasian Fund for Stabilization earlier this year, the government announced an ambitious pension reform, which includes raising the retirement age by three years. The reform aims not only to shore-up public finances, but also to make the country eligible for a USD 3 billion loan from the IMF to honor its debt commitments of USD 3.3 billion that are due this year alone.
The economy’s outlook is grim. Weak external and domestic dynamics coupled with debt repayments in foreign currencies will constrain growth prospects. Furthermore, a weak economic recovery in Russia will keep remittances inflows and export growth depressed. FocusEconomics Consensus Forecast panelists see GDP falling 1.2% 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 | Country’s credit rating cut due to economic weakness
Economic activity weakened substantially in 2015, expanding just 1.2%. Latest GDP data, which includes a breakdown by expenditure components, showed a considerable degree of weakness in private and government consumption and a deterioration in exports of goods and services. The silver lining to the heavy economic clouds that hung over the Kazakh economy last year was fixed investment, which maintained a healthy, albeit more moderate, growth trend relative to 2014. A strong rebound in growth at the beginning of the year was not in the cards and recent data on industrial production corroborate that weakness persisted through March. Adding to the country’s economic complications, Fitch cut Kazakhstan’s sovereign credit rating from BBB+ to BBB. The agency cited that the government’s off-balance spending amid prolonged low oil prices are severely affecting the country’s fiscal position.
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 0.3% in 2016, which is an upward revision from the 0.1% rise expected last month. For 2017, the economy is expected to accelerate and grow 2.1%.
RUSSIA | Economic activity remains weak in Q1 and fragilities persist at the outset of Q2
Following a strong contraction Q4 2015, Russia’s economic activity decreased in Q1, although the drop is expected to be less severe than in the previous quarter. Industrial production took a step back from an incipient recovery in March as output contracted following February’s modest expansion. Moreover, a continuous deterioration in economic conditions prompted unemployment to rise in March. On the external front, weakness in global demand coupled with the country’s deep recession prompted exports to contract at a double-digit rate again in March. Heading into Q2, leading indicators suggest that the economy is still fragile. In April, the manufacturing PMI fell to an eight-month low, while the services PMI continued to improve. These results highlight the diverging performance between Russia’s goods producers and services providers once again.
The economy will remain in recession this year. Weak private consumption is expected to be the main drag on growth in 2016 as high inflation, low wages and rising unemployment will continue to hit households’ spending. However, a gradual rise in oil prices and the stabilization of the currency will provide some support to growth. Analysts expect the economy to contact 1.3% this year, which is unchanged from last month’s forecast. For 2017, forecasters expect the economy to increase 1.3%.
UKRAINE | Parliament approves Volodymyr Groysman as PM amid improving political and economic conditions
Good news is trickling out of Ukraine. After the crisis-torn economy contracted almost 10% last year, the situation appears to be improving significantly in the first half of 2016. A reduction in military clashes and exchange rate stability are contributing to an improvement in economic data and the political crisis that has characterized the country since February appears to be resolved. In April, the Parliament approved Volodymyr Groysman as the new prime minister, thus ending months of political deadlock and paving the way for the government to turn its attention back to passing the reforms the IMF has demanded. Since Groysman and the new cabinet came into power, reform implementation has picked up pace and a new energy tariff system was passed at the end of April. The end of the political crisis is encouraging news and the IMF will return to Ukraine this month to review the country’s progress on implementing reforms. A successful review should pave the way for a much-needed tranche of fresh funds.
The economy is expected to return to growth this year, however, it will remain in a fragile state. The IMF-mandated reforms should help correct government accounts, but they will hurt private consumption in the near term. The FocusEconomics panel sees the economy growing 1.1% this year, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel sees the country accelerating to a 2.5% expansion.
INFLATION | Inflation continues to fall in March
Recent data show that inflation in the CIS region continued to fall in the first quarter. It dropped to 7.9% in March (February: 8.5%), which marked the fifth consecutive decline from a peak of 13.8% in October 2015. March’s fall mainly reflected lower inflation rates in Azerbaijan, Kyrgyzstan, Moldova, Russia and Tajikistan. Georgia and Ukraine, which are not included in the regional estimate, also registered lower inflation in March. Meanwhile, inflation in Belarus seems to have peaked in March.
Inflation in the region fell rapidly in the first quarter, but significant upward pressures remain. Economists surveyed this month by FocusEconomics expect inflation in CIS to end this year at 8.0%. This month’s forecast was revised down 0.2 percentage points over the previous month’s estimate and is mainly the result of a cut in the projections for Armenia, Belarus, Kyrgyzstan, Moldova, Russia and Uzbekistan. The forecasts for Azerbaijan and Tajikistan were revised up, while projections remained stable for Kazakhstan. Meanwhile, the inflation forecast for Ukraine, which is not included in the regional estimate, was cut over the previous month. Looking forward, analysts predict that inflation in the region will fall further to 6.3% in 2017.
Written by: Ricardo Aceves, Senior Economist
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