CIS Countries: Recovering commodity prices bode well for CIS economy
November 2, 2017
The economy of the Commonwealth of the Independent States (CIS) appears to be on healthier footing, after a challenging 2015–2016. FocusEconomics analysts estimate that regional growth came in at 2.3% year-on-year in Q3, after the recovery likely hit a peak of 2.8% GDP growth in Q2. A healthier economy in regional giant Russia is behind the region’s improved momentum. Inflation has fallen to historical lows, giving a tailwind to consumption, which is also benefiting from a tight labor market and improved consumer confidence. In addition, financial conditions have become more accommodative thanks to Bank Rossi’s easing cycle, and healthy global demand is propping up exports.
The positive dynamics in Russia are also spilling over into the region’s other economies, through stronger export demand and higher remittance flows. Although official GDP data is outstanding for almost all of the region’s economies, our analysts expect Kazakhstan’s economy to have grown healthily in Q3 and activity to have remained broadly steady in Belarus. Meanwhile, official data revealed that Azerbaijan’s economy improved in the third quarter; however, GDP still contracted due to the ailing energy sector.
Looking forward, the recent upward momentum in global commodity prices bodes well for activity in the coming months and suggests that the recovery will continue. Oil prices have hovered around a two-year high in recent weeks, with Brent crude oil spiking above USD 60 per barrel for the first time since July 2015 at the end of October. Higher prices should help breathe life into battered energy sectors across the region and give a boost to governments’ finances. FocusEconomics analysts see the CIS economy growing 2.2% annually in Q4.
Growth seen edging up next year
The CIS economy is seen growing 1.9% in 2017 as a recovery across the region takes hold. In 2018, many of the factors that are driving the current momentum will remain in place, and the economy is seen benefiting from stable exchange rates and more accommodative financial conditions, along with higher oil prices. This month, FocusEconomics panelists raised their 2018 GDP forecast for a notch and see GDP increasing 2.1%. In 2019, growth is also seen at 2.1%.
This month’s upgraded 2018 growth forecast reflected improved prospects for Armenia and Kyrgyzstan. Meanwhile, the forecasts for the bulk of the other economies in the region were held unchanged, including major player Russia. Belarus, Tajikistan and Uzbekistan were the only economies to receive downgrades.
Regarding the three countries that are not included in the regional GDP aggregate, analysts upgraded the 2018 GDP forecast for Ukraine, while the outlook for Georgia was held stable and Turkmenistan’s was downgraded.
Head on over to our CIS Countries page for more recent economic news on the region.
RUSSIA | Fiscal consolidation bears fruit
Incoming data suggests that the economy’s recovery remained largely on track in Q3, although growth is expected to have waned somewhat from Q2’s fast pace. Exports grew at an impressive clip in August, amid an upturn in commodities prices and revived global demand, but industrial production lost steam in September. Consumer confidence also improved in Q3, although it remained entrenched in pessimistic territory; a healthy labor market and historically low inflation is expected to have given a boost to household spending. All-in-all the economy appears to be in a better spot after two years of recession and is on pace to grow at the fastest rate since 2012 this year. The improved momentum along with ongoing fiscal consolidation is helping shore up the government’s deficit. The Finance Ministry recently stated that the budget deficit came in at a slim 0.5% of GDP for the first nine months of 2017.
FocusEconomics Consensus Forecast panelists left their 2018 forecasts for the Russian economy unchanged this month, after upgrading them in the previous publication. Low inflation, looser monetary policy and higher oil production are seen supporting growth next year. The evolution of oil prices is critical to the economy’s outlook and represents both an upside and downside risk to GDP projections. GDP is seen expanding 1.8% in 2018 and in 2019.
KAZAKHSTAN | New budget to encourage economic development
Recent data for Q3 points to a moderation in growth momentum: Economic activity expanded 6.0% year-on-year in September, down from 7.8% in August. The drop reflects slower growth in industrial production, likely due to an oversupply of oil at several large fields, following a boost in oil production in August. The mining and manufacturing sectors both grew at less than half the pace recorded in August. On the flip side, retail sales jumped in September, which suggests a pick-up in private consumption. On 18 October, deputies from the lower house of Parliament approved the government’s planned 2018–2020 budget, which is focused on supporting the development of the agricultural sector, small- and medium-sized businesses, the digitization of the economy, and upgrades of the country’s transport infrastructure.
Robust dynamics in the industrial sector, aided by strong trade with Russia, China and the EU, together with resilient private consumption, should keep the economy on track. The high degree of non-performing loans in the banking sector, however, continues to weigh on the outlook. To combat the outstanding problem, on 18 October the Central Bank approved a USD 1.23 billion assistance package for four local banks. FocusEconomics panelists project 3.2% growth in 2018, which is unchanged from last month’s forecast, and expects growth to edge up to 3.4% in 2019.
UKRAINE | Weak reforms could jeopardize new funding
Recent data suggests that the economic recovery continued to stumble in the third quarter, after GDP growth decelerated notably in the first half of the year. Industrial production dropped in September, but robust real wage growth propped up retail sales. On the policy front, progress is also mixed. The government approved a watered-down version of the pension reform, which had gone through hundreds of amendments, at the beginning of October, and a key healthcare reform was also passed. However, these measures alone are unlikely to be enough to unlock the next tranche of IMF aid, and the government still needs to draft legislation on privatizations and create a new anti-corruption court, an unpopular proposition among lawmakers. Overall, economic reforms have progressed at a very slow pace, and reform momentum could deteriorate further as the 2019 elections approach.
Growth should gain steam next year as the impact from the economic blockade with the eastern regions fades. FocusEconomics panelists see GDP rising 2.9% in 2018, which is up 0.1 percentage points from last month’s forecast. In 2019, growth is expected to pick up to 3.2%.
BELARUS | Credit rating upgraded as economy gains traction
Preliminary estimates show that annual GDP growth inched up to 1.7% in the January–September period, a meagre step up from the 1.6% logged in the January–August period. A continued upward trend in wages supported faster growth in retail sales in September, and a jump in global oil prices boosted exports. Conversely, industrial production expanded at a more moderate pace. A contraction in mining and quarrying over the previous month spearheaded the moderation in growth. Nevertheless, the economy’s better-than-expected performance prompted S&P to raise the country’s long-term credit rating to B from B- on 6 October. Moreover, on 25 October, the state received the fifth tranche of a USD 200 million loan targeting structural economic reforms from the Eurasian Fund for Stabilization and Development.
The economy is expected to pick up steam next year thanks to healthy private consumption, robust investment and strong trade with Russia and CIS economies, which should bolster exports. A downside risk to the outlook arises from the high proportion of non-performing loans (NPLs) plaguing the banking sector, although a loan issued by the European Bank for Reconstruction and Development to state lender Belinvestbank in September aims to restructure USD 60 million in NPLs. FocusEconomics Consensus Forecast panelists project annual GDP growth of 1.6% in 2018, which is down 0.1 percentage points from last month’s forecast. They see growth rising to 1.8% in 2019.
MONETARY SECTOR | Inflation falls to historic low in September
Preliminary data revealed that price pressures continued to drop in the CIS economy in September. Inflation fell from 3.8% in August to 3.6% in September, a multi-year low. Low inflationary pressures have led a number of central banks in the region to ease monetary policy. In October, Russian policymakers decided to cut the key rate.
The analysts we surveyed this month see inflation remaining broadly steady over the course of next year and ending 2018 at 4.6%, which is unchanged from last month’s forecast. In 2019, inflation is expected to fall to 4.3% by year end.