CIS Economic Outlook January 2018

CIS economy shifts into higher gear in  2017

CIS: CIS economy shifts into higher gear in 2017

January 10, 2018

The economy of the Commonwealth of Independent States (CIS) got back on track last year, putting the 2015–2016 recession firmly in the past. FocusEconomics expects GDP for the region to have grown 2.1% in 2017, which would be the best result in five years, as higher commodity prices, strong global appetite for exports and emerging market assets bolstered activity. The result is a notable turnaround from the recession that saw activity contract 1.9% at its height in 2015. The downturn was caused chiefly by a collapse in commodities prices and exacerbated by macroeconomic fragility across the reading, such as relatively poor business climates, structural distortions and weak public finances.

While growth has become entrenched in the region, the economic recovery is still fragile. Several economies suffer from weak diversification and are heavily reliant on natural resources for growth; they are therefore susceptible to price fluctuations. In addition, the region has a challenging business environment, which acts as a headwind to investment. Furthermore, geopolitical concerns remain. Russia continues to have a difficult relationship with the West, and the threat of additional sanctions lingers; the breakaway region of Transnistria is causing friction between Moldova and Russia; and Ukraine remains in a military conflict with rebel-held regions, without a lasting resolution in sight.

According to the most recent GDP data, activity lost some steam in Q3, after the recovery peaked in Q2. Comprehensive data revealed that regional GDP grew 2.3% annually in Q3, a solid result but below Q2’s 2.8% increase. Growth surged in Belarus amid a healthy stream of remittances inflows and a rebound in investment. Activity in Azerbaijan also improved in the quarter, although the economy continues to linger in recession. Meanwhile, momentum waned in major player Russia, driving the regional deceleration as investment growth slowed from Q2’s multi-year high. Activity is expected to have remained on even footing in the fourth quarter of 2017, and the FocusEconomics panel forecasts that regional GDP increased 2.3%.

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Healthy growth ahead thanks to firm oil prices 

The recovery should continue into 2018 and growth is seen remaining stable. Regional GDP is seen expanding 2.1% in 2018, unchanged from last month’s forecast. High oil prices will fuel the steady growth momentum, and higher-than-expected prices are an upside risk to the region’s growth forecast. At the start of January, oil prices touched a three-year high, and the 30 November extension of the OPEC and Russia production cut deal should keep the gradual rebalancing of the global oil market in place in the coming year. However, tighter sanctions on Russia pose a downside risk to the regional outlook. Many economies are trying to deepen relations with China, a move which could bode well for investment. In 2019, regional GDP is projected to also grow 2.1%.

This month’s stable 2018 growth forecast reflects unchanged projections for all but two of the region’s economies. Uzbekistan’s prospects were revised up, while Kyrgyzstan’s outlook was downgraded. Regarding the three countries that are not included in the regional GDP aggregate, analysts upgraded the 2018 GDP forecast for Georgia, while the projections for Ukraine and Turkmenistan were unchanged. However, downside risks to Ukraine’s outlook are high as political willpower to undertake reforms has dissipated, threatening the country’s IMF funding.

Uzbekistan is projected to be the fastest growing economy in the region this year, with a 6.4% expansion. On the other end of the spectrum, Azerbaijan is seen as the slowest growing economy, with expected growth of 1.5%. Among the region’s larger economies, Kazakhstan is expected to grow at the fastest rate (3.3%), followed by Russia (1.9%) and Belarus (1.7%).

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RUSSIA | Election seen having limited economic implications

Comprehensive data confirmed that the economy lost steam in the third quarter on a slowdown in investment growth. The recovery nonetheless remained on track, and private consumption grew at a multi-year high rate amid an improving labor market and low inflation. Early data for Q4 suggests that the recovery gained steam modestly. Oil prices rose to an over two-year high in the period, exports soared in October and the manufacturing PMI jumped in December. In December, President Vladimir Putin confirmed he will run for a fourth term in the March elections. Putin is virtually guaranteed to win given his 80% approval ratings and a lack of opposition. On 30 December, the Supreme Court rejected an appeal from the strongest opposition candidate, Alexei Navalny, who was banned from running due to a fraud conviction. Navalny has stated that the conviction and ruling were politically motivated and called for a nationwide protest at the end of January. On 30 November, Russia and OPEC nations agreed to extend oil production cuts until the end of 2018.

Higher commodity prices, lower interest rates and low inflation are expected to fuel another year of moderate growth in 2018. The upcoming elections do not pose a risk to our forecasts, as economic policy will likely not be affected. FocusEconomics Consensus Forecast panelists see GDP expanding 1.9% in 2018, unchanged from last month’s forecast and only slightly above 2017’s projected 1.8% expansion. In 2019, growth is seen broadly stable at 1.8%.

KAZAKHSTAN | Energy sector benefits from rising oil prices 

Kazakhstan’s economic recovery is progressing at a steady pace: The economy grew 4.2% year-on-year in the third quarter of 2017 (Q2: +4.3% year-on-year), thanks to buoyant export growth and solid domestic demand. Recent months have seen an upsurge in oil prices, which—along with a recovery in Russia, an important trading partner—is helping catalyze growth in the oil-exporting economy. Economic growth has picked up since the start of 2017 after being severely dented in 2015 and 2016 due to low oil prices, further exacerbated by a slowdown in China and a recession in Russia. Available data for Q4 suggests the economy continued to perform robustly in the final quarter of 2017. Exports soared in October and industrial production growth bounced back to a strong level in November as the mining sector regained lost ground from October. Moreover, annual retail sales growth was resilient in November amid slowing inflation, albeit moderating slightly from October. At the start of 2018, Kazakhstan signed a three-year agreement with the European Bank of Reconstruction and Development, aimed at boosting competitiveness and diversifying the economy to help it better cope with external shocks.

Strong export growth supported by flourishing trade with China, Russia and the Euro area; a boost in investment; and healthy domestic demand should keep the economy’s recovery on track this year. The banking sector’s high level of non-performing loans continue, however, to pose a threat to long-term financial stability. FocusEconomics panelists project 3.3% growth in 2018, which is unchanged from last month’s forecast, and expect growth to rise to 3.5% in 2019.   

UKRAINE | IMF program stalls amid lack of reforms 

Lackluster performances across components of the economy caused growth to once again continue to slide in the third quarter. The recovery gradually lost steam throughout 2017, weighed down by an economic blockade with rebel-held areas, which has dented industrial production and severed linkages within the country. Data for the fourth quarter points to another period of moderate expansion. Industrial output barely grew in November, while retail sales expanded robustly. In the political arena, a lack of progress on structural reforms is delaying the next tranche of aid from the IMF. Political willpower for reforms has dissipated; in December, the IMF criticized Ukraine for backtracking on efforts to fight corruption. 

Growth should gain speed this year as the impact of the 2017 trade blockade fades. However, downside risks to Ukraine’s outlook are mounting. Structural reforms are badly needed, but political willpower is likely to evaporate ahead of the 2019 elections. On top of this, Ukraine faces a heavy load of debt repayments in 2019, which it may struggle to fulfill, and continued delay with the IMF programme risks dampening investor confidence. FocusEconomics panelists see GDP rising 2.9% in 2018, which is unchanged from last month’s forecast. In 2019, growth is expected to pick up to 3.2%.  

BELARUS | Growth firms in Q3 thanks to soaring investment

The economy’s recovery from a two-year recession continued to firm up in the third quarter of 2017. Annual GDP growth shot up to 2.9% on the back of a jump in domestic demand, led by a surge in fixed investment. Recent data from Q4 suggests that the economy remained on course in the final quarter. Industrial production expanded at a strong pace in November, albeit moderating from October’s five-month high, and retail sales soared in the month, supported by higher wages and slowing inflation, which tumbled to an all-time low. President Alexander Lukashenko signed the nation’s 2018 budget into law on 31 December, which prioritizes enhancing competitiveness to spur higher export growth, reducing the external debt burden, and maintaining price stability. Seeking to reap the gains from higher oil prices, the government’s decision to levy higher custom duties on crude oil and petroleum products exported beyond the Eurasian Economic Union came into effect on 1 January.

Healthy private consumption, strong trade with Russia and the EU, and higher investment should keep the economy’s recovery on track. The discovery of two new oil fields at the end of 2017 will likely help increase economic activity as extraction operations get underway. A high level of non-performing loans in the financial sector, along with the need to reform state-owned enterprises, continue to cloud the outlook, however. FocusEconomics Consensus Forecast panelists expect the economy to grow 1.7% in 2018, which is unchanged from last month’s forecast, and project growth inching up to 1.8% in 2019.   

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MONETARY SECTOR | Inflation falls to historic low in November

Preliminary data revealed that price pressures continued to dissipate in the CIS economy in November. Inflation dropped from 3.6% in October to 3.3%, the lowest level in over a decade. Inflation fell notably in 2017, largely due to favorable exchange rate dynamics. Most of the economies saw their exchange rates strengthen against the U.S. dollar last year, keeping price pressures in check. A notable exception to this, however, is Uzbekistan, which allowed the som to float in 2017, causing a major depreciation.

Low price pressures also allowed central banks to ease monetary policy in recent weeks. In December, policymakers in Russia slashed rates in the face of record-low inflation.

This year, inflationary pressures are expected to rise slightly. Higher commodity prices will exert upward pressure on prices, while exchange rates are likely to come under pressure due to the tightening of interest rates in the U.S. Inflation is seen ending 2018 at 4.6%, which is unchanged from last month’s forecast. In 2019, inflation is expected to fall to 4.5% by year end.

Angela Bouzanis

Senior Economist 

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