CIS Countries: Regional economy bottoms out in 2016
February 8, 2017
The economy of the Commonwealth of Independent States (CIS) unexpectedly managed to return to growth in 2016, albeit increasing only 0.1%. This was mainly due to the strengthening of the Russian economy toward the end of the year, which accounts for 70% of regional GDP. A combination of stabilizing commodity prices and reduced geopolitical tensions—particularly between Russia and Ukraine—also supported exchange rates and improved overall confidence in the CIS region.
The Russian economy gained in resilience in the final quarter of 2016. A preliminary estimate released on 3 February showed overall economic output contracting just 0.2% in the full year 2016, suggesting the economy grew around 1.0% year-on-year in Q4 after seven consecutive quarters of contraction, if no revisions are made to the data for previous quarters. Russia’s overall contraction in 2016 was shallower than expected since total investment bottomed out quickly after firms started rebuilding inventories and the contraction in consumption eased as inflation declined to pre-crisis levels. Elsewhere in the region, economic activity slowed in Kazakhstan and overall output contracted in both Azerbaijan and Belarus in 2016. A protracted recession in Azerbaijan and Russia and lackluster economic activity in Kazakhstan continued to weigh heavily on Central Asia and the Caucasus, where growth remained well below long-term trends.
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In war-hit Ukraine, the economy maintained a modest growth trajectory toward the end of 2016, showing a broad-based recovery after two years of sharp recession. The recovery in part reflected the easing of the conflict in eastern Ukraine, along with the impact of significant reforms undertaken since 2015 to stabilize the economy. The IMF’s second review of Ukraine’s program was approved in September 2016, which allowed the release of some previously committed but long delayed funds. However, relations with the IMF hit another hurdle after its mission to Ukraine in mid-November. In a statement, the IMF assessed that although good progress has been made, the Ukrainian authorities will require more time to implement policies to ensure fiscal sustainability in the medium term. This prevented the release of the next USD 1.3 billion tranche of Ukraine’s four-year USD 17.5 billion Extended Fund Facility.
A return to more solid growth is on the cards in 2017
This year, the economy should embark on a more solid recovery supported by a continued, but modest rise in commodity prices and easing geopolitical tensions. The analysts FocusEconomics surveyed this month expect the CIS economy to expand 1.5% this year, which is up 0.1 percentage points from last month’s Consensus. Going forward, economists forecast regional economic growth to pick up to 2.0% in 2018, supported by higher commodity prices.
The expected improvement in the region this year reflects a return to growth in Russia as oil prices gradually recover, though the expansion in the region’s largest economy will still be well below its long-term trend of 4.0%. Meanwhile, the adjustment to the negative terms-of-trade shock in Azerbaijan and Kazakhstan is expected to level off this year, as commodity prices rise and economic imbalances narrow. Strengthening economic activity in Azerbaijan, Kazakhstan and Russia will support growth in Central Asia and the Caucasus.
Looking at the individual countries, analysts left their 2017 GDP forecasts unchanged for Azerbaijan, Kazakhstan, Russia, Tajikistan and Uzbekistan this month, while they raised their growth estimates for Belarus, Kyrgyzstan and Moldova. Armenia was the only economy for which analysts cut their projections. Of the three countries that are not included in the regional aggregate, the 2017 GDP growth forecasts for Georgia and Ukraine were left unchanged from the previous month, whereas Turkmenistan’s was cut.
See the Full FocusEconomics CIS Countries Report
BELARUS | Recession continues to abate slowly
According to a flash estimate released on 18 January, Belarus’ GDP contracted 2.6% in 2016. The annual drop was softer than in 2015 but the improvement was not visible in all parts of the economy and a steep road to recovery still lies ahead. Positive signs emerged in industry in particular, with full-year data showing that industrial production contracted at a remarkably softer pace than in 2015 thanks to strong growth in vehicle production, which offset most of the contractions in other categories. In contrast, domestic demand remained subpar. Household consumption continued to deteriorate, as a sharp drop in retail sales in 2016 shows, dragged down by an ongoing decrease in real income. The Central Bank’s initiative to lower the lending rate in 2016 has not translated into increased credit activity; private banks remain weak and fixed investment likely plunged again last year.
Though the current situation is bleak, the economy is projected to emerge from the recession over the course of this year as loans from international institutions will support activity. FocusEconomics Consensus Forecast panelists forecast that GDP will increase by 0.6% in 2017, which is up 0.1 percentage points from last month’s forecast. For 2018, panelists see growth picking up to 1.4%.
KAZAKHSTAN | Uranium production to be cut
The latest data suggest an upturn in growth in the final quarter of 2016. Industrial production increased for the fourth consecutive month in December, expanding at the strongest rate in two years. The upturn is mainly linked to higher oil and gas production. On a negative note, on 17 January, Kazatomprom, the state nuclear agency stated that it will reduce uranium output by about 10% this year relative to production in 2016 as a global uranium glut has driven down prices. The cut in output this year amounts to over 2,000 metric tons, which is equivalent to 3% of total global production. The announcement prompted a sudden rise in the price of uranium as Kazakhstan is the world’s largest producer of the mineral, accounting for some 40% of global output.
GDP growth slowed to 0.7% in 2016, despite continued public investment, budget relaxation and the stabilization of the tenge. This year, the economy remains on course to pick up momentum, helped by higher oil prices, higher oil output from new oil fields and reforms designed to boost FDI. Analysts left the country’s 2017 GDP growth forecast unchanged from last month’s 2.1% and see the economy accelerating further to a 2.8% expansion in 2018.
RUSSIA | Will the U.S. relax sanctions on Russia?
U.S. President Trump has spoken on several occasions of his desire to improve relations with Russia, raising the prospect that he might relax some of the sectoral sanctions imposed on the country in response to its annexation of Crimea and military intervention in eastern Ukraine. Trump does not require congressional approval to lift sanctions, most of which he can end at the stroke of a pen. It is however unlikely that he will relax sanctions unless he can present them as part of a deal with Russia that offers benefits to the U.S., and given the high level of uncertainty, analysts are not yet incorporating this scenario into their macroeconomic forecasts.
The Russian economy is emerging from a two-year recession. A preliminary estimate showed the economy contracting just 0.2% in 2016 and economic activity should strengthen this year supported by higher oil prices and stronger exports. Nonetheless, private consumption will remain weak and fiscal consolidation will weigh on growth. The analysts we surveyed expect the economy to expand 1.2% in 2017, which is unchanged from last month’s projection, before accelerating to a 1.7% expansion in 2018.
UKRAINE | Next IMF cash instalment delayed (again)
Poor news has plagued Ukraine’s feeble recovery in recent weeks. Despite passing measures to win fresh funds from the IMF at the end of 2016, the country’s bailout review has yet to take place, leaving the government without a cash injection. In addition, violence has flared up in Eastern Ukraine, the country’s industrial heartland. Little progress has been made towards peace in spite of a nearly two-year-old ceasefire agreement and the lingering crisis is preventing a fast recovery. Recent economic indicators show that the economy continues to grow on a modest trajectory. Industrial production expanded at the fastest pace in nine months in December, and GDP growth accelerated in Q3.
Continued cooperation with the IMF is key for Ukraine’s outlook. A delay in disbursing funds could hurt the government’s budget and weaken its international reserves. The FocusEconomics panel sees GDP rising by 2.4% this year, which is unchanged from last month’s estimate. In 2018, the panel sees growth picking up to 3.0%.
See the Full FocusEconomics CIS Countries Report
INFLATION | Inflation is expected to fall further in 2017
Inflation in the CIS economy fell again in December. According to our analysts’ preliminary Consensus estimate, it ended 2016 at 6.0%, substantially lower than 2015’s 12.5%. The sharp drop in 2016 stemmed mainly from the easing of inflationary pressures caused by the devaluation of some of the region’s currencies, a negative output gap and relatively low commodity prices observed in 2016 compared to the highs in previous years.
Inflation in the CIS region is expected to continue falling this year, although at a more moderate pace. Economists see most currencies remaining stable, despite expectations of some volatility in the global financial markets, associated with expected interest rate increases in the U.S. The analysts we surveyed forecast inflation at 5.3% in 2017, which was cut by 0.2 percentage points from last month’s projection. Due to these inflation expectations, central banks across the region are expected to ease last year’s tight monetary policies. Going forward, inflation is projected to fall further in 2018, when it is seen ending the year at 4.9%.
Written by: Ricardo Aceves, Senior Economist