CIS: Preliminary Q3 data show softest contraction since 2015
November 30, 2016
For the Commonwealth of Independent States (CIS), 2016 has been a challenging year. Low commodity prices, a protracted recession in regional giant Russia—which had to painfully adjust to low oil prices and international sanctions—and mediocre global economic activity have all weighed heavily on the region’s growth performance. Having tanked in 2015, the economic contraction in the region stabilized in the first half of 2016 and more recent data suggest that the Commonwealth’s economy is showing signs of emerging from the recession. According to a FocusEconomics preliminary estimate for aggregate GDP, the economy of the CIS region decreased just 0.2% in the third quarter from the same period last year (Q2: -0.4% year-on-year). If confirmed, this would represent the softest decrease since the regional economy began to contract in Q1 2015.
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Although the region still has a long way to go to fully recover, the worst seems to be over. Most countries in the Commonwealth underwent a sizable economic adjustment throughout 2016 and the immediate results from this adjustment have been a moderate improvement in the region’s industrial production and a stabilization in most currencies. These developments have also been buttressed by a shallow improvement in commodity prices, particularly in oil prices, which have recovered from the lows seen at the beginning of 2016. That said, still negative output gaps persist across the CIS, which translates into slow growth in credit and wages and, consequently, subdued private consumption and weak gross fixed investment.
In the first half of 2016, the recession bottomed out in Russia and the economies in the Caucasus, while official data across Central Asia showed a further economic deceleration. The drop in remittances from Russia to both the Caucasus and Central Asia stabilized—in local currencies—in the first half of 2016, while in USD terms their value declined further, due to the effect of different currency devaluations across the region. These two effects mainly reflect the somewhat better situation in the Russian economy together with the relative weakness of the Russian ruble against other CIS currencies. In the coming months, remittances are likely to improve in both U.S. dollars and local currencies on the back of a better economic outlook for Russian and a stabilization in regional currencies.
Mild recovery seen in 2017 following 2016 adjustment
In 2016, the economy of the Commonwealth of Independent States continued to adjust to a painful and new reality of low commodity prices, geopolitical risks and subdued global growth. Following a 2.6% contraction in 2015, the CIS economy will record another year in recession and contract 0.3% in 2016. However, the recession has been less severe in 2016 with data showing that economic activity has slowly revived in the second half of the year, buttressed mainly by an upward movement in commodity prices, especially in crude oil. Going forward, the FocusEconomics Consensus Forecast for the CIS economy projects that growth will pick up further in 2017 and reach 1.5%, which is unchanged from last month’s Consensus Forecast.
The region’s projected improvement in 2017 is mainly the result of better economic prospects in Russia, which is expected to return to modest growth next year as oil prices gradually recover. Meanwhile, in Central Asia—a region closely linked to Russia and highly dependent on commodity prices—economic growth is projected to gain momentum in 2017, after a slowdown in 2016, while in the Caucasus economic activity is expected to recover, mainly reflecting that Azerbaijan will rebound and return to growth.
Looking at the individual countries, analysts left their 2017 GDP forecasts unchanged for Azerbaijan, Kazakhstan, Tajikistan and Uzbekistan, while they cut their growth estimates for Belarus, Kyrgyzstan, Moldova and Russia. Armenia was the only economy for which analysts raised their projection. Regarding the three countries that are not included in the regional estimate, the 2017 GDP growth forecasts for Georgia and Turkmenistan were lowered from the previous month, whereas that for Ukraine was left unchanged.
BELARUS | 2017 budget projects another surplus amid tepid recovery
Belarus’ economy is showing timid signs of recovery in the second half of 2016, after a poor first half following a deep contraction in 2015. In October, industrial production expanded a soft 0.3% after four consecutive months of contraction and the unemployment rate edged down. The Parliament passed the 2017 budget that month, which projects a fiscal surplus of 1.4% of GDP. Its main focus is on improving competitiveness and social conditions, as defined in Belarus’ social and economic development program for 2016-2020. However, fiscal revenues from the external sector remain subject to volatile factors such as global demand for potash and oil-related products—Belarus’ main exporting goods—and the stability of the Belarusian currency. The World Bank and the European Bank for Reconstruction and Development have however announced that they will shore up funding next year, which should help the economy regain strength.
Belarus will contract again this year, as external headwinds persist. FocusEconomics Consensus Forecast panelists forecast that GDP will decline 2.1% in 2016. Next year, panelists see the Belarusian economy recovering and returning to growth as macroeconomic imbalances reduce, which will enhance domestic and foreign investor sentiment. The panel projects that the economy will record a moderate 0.6% expansion in 2017, which is down 0.1 percentage points from last month’s Consensus.
KAZAKHSTAN | Growth shows resilience in 2016, Kashagan oil field to give boost in 2017
The economy proved more resilient this year. According to preliminary data, GDP increased 0.4% between January and September from the same period last year. The result was better than expected and resulted from an improvement in agriculture, construction and services. Agriculture gave its best performance since 2013, while the improvement in construction was supported by strong public investment in infrastructure. Meanwhile, the services sector showed signs of recovering. Additional data suggest that the momentum has carried over into the final quarter as industrial production expanded for a second consecutive month in October and at the fastest pace in 16 months.
After expected growth of 0.4% in 2016, economists project that the Kazakh economy will firm up next year and increase 2.1%. The 2017 growth outlook was kept on hold from last month’s Consensus as analysts agree that the acceleration will be supported by higher oil production, thanks to the reopening of the Kashagan oil field, a recovery in commodity prices—mainly in base metals and oil—and an improvement in the economic situation in Russia.
RUSSIA | Economy sees light at the end of the tunnel
Tentative signs that Russia could soon exit its recession continued in the final quarter of 2016 after the economy contracted at the slowest pace in Q3 since the slump began nearly two years ago, according to preliminary GDP data. Following sluggishness in domestic demand in the first three quarters, business survey data and industrial production in October signaled a strengthening of economic activity towards the end of the year. Lack of policy support is nevertheless still constraining Russia’s path towards recovery. The Central Bank has decided to keep interest rates on hold, at least until Q1 2017, and the government’s 2017 draft budget set ambitious consolidation targets for the next three years. The government expects to drastically reduce the fiscal deficit by 1% of GDP each year on the back of spending cuts and increased revenues. The latter will be achieved through higher taxes on the extraction of minerals and oil, dividend payouts from state-owned companies and higher excise taxes.
Economic activity should continue to strengthen gradually and the economy is expected to enter a shallow recovery next year, but the fiscal squeeze will prevent a faster pickup in activity. The analysts we surveyed expect the economy to contract 0.6% in 2016, before rebounding and increasing 1.2% in 2017, though this is 0.1 percentage points lower than last month’s 2017 forecast.
UKRAINE | Economy speeds up again in Q3 but serious challenges remain
Ukraine’s economy grew at the fastest pace in nearly three years in Q3, as it proceeds on a modest recovery path following a deep recession. While there have been improvements in economic data, the country is facing exorbitant challenges and remains reliant on external financing. The IMF visited the country in November but postponed completion of the third bailout review, stating that further reform efforts are required. Key areas that the government needs to address include tackling corruption, cutting expenses and reforming inefficient state-owned enterprises. However, unpopular measures have eroded the government’s popularity and sparked large-scale protests. Public anger has been especially high throughout November after new anti-corruption measures revealed vast stores of wealth held by prominent civil servants.
Continued support from the IMF is critical to Ukraine’s outlook, however, slow reform momentum and weak political support mean it could be a bumpy ride. The FocusEconomics panel sees GDP rising by 1.1% this year, before growth picks up to 2.4% in 2017, which is unchanged from last month’s forecast.
INFLATION | Inflation falls further in October, expected to stabilize at year-end
Inflation in the Commonwealth continued to fall in October. According to our regional estimate, inflation in the CIS fell from 7.2% in September to 6.6% in October—a level last seen in February 2014. Although still high, inflation began to fall rapidly in late 2015 due to the fading of inflationary pressures caused by a devaluation in some regional currencies, a negative output gap and the fall in commodity prices.
Inflation in the CIS region is expected to stabilize toward the end of 2016, with economists expecting it to end the year at 6.6%. Heading into 2017, economic experts see the fall in the region’s inflation continuing over the course of the year, despite an expected recovery in global commodity prices. The analysts we surveyed expect inflation in the Commonwealth to end the year at 5.6%—unchanged from last month’s forecast—as downward pressure on consumer prices will come from a still negative output gap, subdued domestic demand and the stabilization in foreign exchange markets. Due to these inflation expectations, central banks across the region are expected to ease tight monetary policies next year.
Written by: Ricardo Aceves, Senior Economist