CIS Countries: Growth softens in Q3; temporary pick-up likely in Q4
January 9, 2019
A more complete dataset revealed that the economy of the Commonwealth of Independent States (CIS) grew faster-than-previously estimated in the third quarter of 2018, with regional GDP expanding 1.9% annually. The result is above last month’s preliminary estimate of 1.8% and chiefly due to an upward revision in Russia’s Q3 growth rate. Despite the growth upgrade, activity still slowed overall from Q2’s 2.4% as Russia’s flagging economy, adverse weather and tighter financial conditions weighed on regional dynamics.
Russia’s economy lost steam in the third quarter on the back of weakening consumption dynamics and a poor performance by the agricultural sector. Household spending slid, plagued by plunging consumer sentiment after the announcement of an unpopular hike in the retirement age and the VAT tax, although continued to receive some support from a tight labor market. On the flip side, fixed investment growth gained steam despite tighter financial conditions and geopolitical uncertainty.
Elsewhere in the region, Belarus’ economy also cooled as rising inflationary pressures hit household spending and fixed investment growth moderated. In addition, growth lost pace in Armenia, Azerbaijan, Kazakhstan and Moldova. Ukraine’s economy, which is not included in the regional aggregate, also decelerated, in part due to a weak harvest and challenging external environment.
Incoming data for the final quarter of 2018 suggests that regional growth firmed somewhat and FocusEconomics estimates GDP grew 2.5%. Recovering agricultural output in several economies, along with higher oil production in Kazakhstan and Russia likely propelled output. That said, the pick-up is expected to be short-lived as the VAT hike in Russia, higher inflation, tight financial conditions and constrained oil production weighs on the giant’s growth in Q1. Moreover, the slower momentum in Russia will likely dent remittances inflows and could spill over into other economies in the region.
In the political arena, several of the region’s energy producers agreed to cut oil production along with OPEC countries in December. The move should take 1.2 million barrels per day off the market for the first half of 2019 and is designed to boost oil prices after they plunged over 30% in the weeks prior to the meeting. While the region has become less sensitive to oil price volatility after the low-oil price induced slump in 2015-2016, the evolution of prices and production is still a defining factor in the regional outlook.
Growth set to wane this year
The CIS economic recovery is seen sputtering this year, with growth forecast to decelerate from a projected 2.1% in 2018 to 1.9%. 2019’s forecast is unchanged from the previous publication. In 2020, regional growth is seen rising slightly to 2.1%.
Cooler dynamics in regional giant Russia are expected to drive this year’s slowdown, as the VAT hike cuts into consumers’ incomes and pushes up inflation. At the same time, the Russian economy faces several other growth hurdles including uncertainty over U.S. sanctions, tight financial conditions, constrained oil output, as well as structural issues. Outside of Russia, commodity prices and output will continue to play a significant role in other countries’ economic momentum in the region. In addition, several economies should also feel the sting from slowing Russia, which is a major trading partner and source of remittances.
Over half of the CIS economies, including Russia, saw no changes to their 2019 growth forecasts this month. In contrast, Armenia and Kyrgyzstan had their forecasts upgraded, while Belarus had its projections cut. As for the three countries that are not included in the regional GDP aggregate, Georgia’s growth forecast was trimmed, while Ukraine and Turkmenistan saw no changes to their prospects.
Armenia, Tajikistan and Uzbekistan are projected to be the region’s best performers this year, with expansion rates of 5.0% or above. Turkmenistan, which is not included in the regional aggregate, is also seen expanding rapidly at 5.7%. In contrast, Azerbaijan and Russia are expected to be the region’s slowest-growing economies, with expansions of 2.1% and 1.5% respectively.
RUSSIA | Growth drops in Q3; government agrees to cut oil production
Comprehensive GDP data revealed a stronger expansion in the third quarter of 2018 than previously estimated, revising growth up to 1.5% annually. Despite the upward revision, the recovery still lost steam overall in the third quarter, as deteriorating consumption dynamics and a poor performance by the agricultural sector weighed on activity. Available data for the fourth quarter suggests that growth likely gained steam. Rising oil production likely buttressed activity, despite the fact that the price of Ural oil sunk to the lowest level since June 2017 in December. In the political arena, OPEC, Russia and other allies agreed to further limit oil production on 7 December, in an attempt to boost failing oil prices. On a bright note, in the same month, the U.S. Treasury announced plans to lift sanctions on several Russian companies linked to Oleg Deripaska, including aluminum giant Rusal, after Deripaska ceded control.
The economy is expected to slow this year, chiefly due to decelerating household spending. A hike in the VAT will likely limit private consumption, while constrained oil output will continue to hold back the energy sector. Softer than expected oil prices or additional tough sanctions remain key risks to Russia’s outlook. FocusEconomics analysts project GDP to grow 1.5% this year, unchanged from last month’s forecast. In 2020, GDP is seen increasing 1.7%.
KAZAKHSTAN | Incoming data points to soft end to 2018
Incoming data suggests that the economy lost some steam in the final quarter of 2018, after growth edged downin the third quarter. Economic activity decelerated in November amid slower growth in the industrial sector. In addition, oil prices fell sharply in the fourth quarter, boding poorly for the important energy sector. However, lower oil prices were likely partly offset by rising crude production: In December, Energy Minister Kanat Bozumbayev stated that oil output hit a record in 2018, thanks to increased production at the Kashagan oil field. However, oil production will likely be contained in 2019 due to scheduled maintenance work at several oil fields. In addition, Kazakhstan also committed to limit production in the first half of 2019 in conjunction with OPEC quotas in December.
Growth is seen decelerating this year after the 3.9% pace expected for 2018. FocusEconomics analysts expect GDP to increase 3.4% in 2019, unchanged from last month’s estimate. Moderating momentum from the energy sector will likely drive the softer print, while activity in the non-oil sector should gain steam thanks to reform efforts.Risks to the outlook include lower-than-expected commodity prices, rising global protectionism and financial market volatility. GDP is seen remaining stable at 3.4% in 2020.
UKRAINE | Moody’s raises credit rating after renewed IMF support
A comprehensive GDP release confirmed that dynamics remained resilient in the third quarter, despite the generally disappointing outturn. Booming domestic demand, led by surging household consumption amid tightening labor market conditions and rising remittances, spearheaded the expansion. However, strong domestic demand dynamics were partly offset by a marked contraction in exports due to weather-related factors and a challenging external environment. Available fourth-quarter metrics suggests momentum remained largely stable. Retail sales edged up in November, against the backdrop of higher consumer confidence and despite an uptick in inflation. On a less positive note, industrial output contracted in the same month, reflecting weakness in the all-important manufacturing sector. Meanwhile, on 21 December, Moody’s upgraded Ukraine’s sovereign credit rating from Caa1 to Caa2 with a stable outlook. The ratings agency identified the recently approved USD 3.9 billion financing agreement with the IMF as the key driver for the upgrade, while citing the country’s improved external strength, the prospect of renewed access to capital markets, and its progress with anti-corruption reforms.
Buoyant domestic demand will remain firmly in the driver’s seat of the expansion this year, although growth will lose some steam from 2018. Solid private consumption, helped by a tightening labor market and strong investment activity growth, will be somewhat offset by weaker external demand. Meanwhile, election-related uncertainties cloud the outlook. FocusEconomics panelists see GDP growth of 2.8% in 2019, which is unchanged from last month’s forecast, and 3.0% in 2020.
BELARUS | Growth slows in Q3
A detailed release of national accounts data confirmed a loss of momentum in the third quarter, as the domestic economy shifted into a lower gear. Despite a tight labor market, inflation appeared to put a dampener on household spending. In addition, fixed investment decelerated further, logging its worst reading in over a year, partly due to cooling manufacturing output. On the external side, a slightly weaker ruble deterred imports and notched up exports. Meanwhile, available fourth quarter data suggests that household spending continued to ebb, dragged by decreasing retail sales. In December, President Alexander Lukashenko failed to negotiate lower oil prices from Russia, amid deteriorating relations between the two countries.
The recovery will continue, underpinned by a solid domestic sector and sustained labor market tightness—although a weaker Russian economy is expected to translate into a loss of momentum in the beginning of the year. Meanwhile, improving fiscal metrics and a reduction in government investment at state-owned firms should begin to shift focus towards the private sector. External risks loom nonetheless, especially concerning the reliance on Russian imports and financial support in the form of energy subsidies. FocusEconomics panelists see the economy expanding 2.8% in 2019, down 0.1 percentage points from last month’s forecast, and 2.5% in 2020.
MONETARY SECTOR | Inflation rises at end of 2018
An estimate revealed that inflation in the CIS region rose in the final months of 2018. Comprehensive data for November revealed inflation at 4.2%, above October’s 3.9%. Higher inflation in Russia, largely due to pass-through from a weak ruble drove the result. Preliminary data for December showed that price pressures built again, with inflation rising to 4.6%. December’s result is markedly above 2017’s year-end inflation rate of 3.5%.
In response to rising inflation expectations ahead of the hike in the VAT and a weak ruble, Russia’s Central Bank hiked the key rate to 7.50% in December. In contrast, policymakers in Kazakhstan and Ukraine held monetary conditions stable in December.
Inflation in the CIS economy is expected to continue its upward trend in the coming months, chiefly due to the VAT hike and currency depreciation in Russia. Inflation is projected to peak in H1 2019 and then come down to 4.8% by year-end, which is up 0.1 percentage points from last month’s forecast. Inflation is seen ending 2020 at 4.2%.