CIS Countries Economic Outlook June 2018

CIS Countries: Recovery picks up in the first quarter of 2018

June 4, 2018

Preliminary GDP figures for the economy of the Commonwealth of Independent States (CIS) reveal that the regional recovery bounced back at the start of 2018, regaining some of the momentum lost in the fourth quarter. Regional growth came in at 1.9% annually in Q1, picking up from Q4’s soft 1.5% expansion. Higher commodity prices, low inflation and a recovery in Russia’s economy are fuelling the region’s recovery.

The upswing was driven chiefly by faster growth in major player Russia, which accounts for over 80% of the region’s nominal GDP. Although the details behind the headline figure have not yet been released, household spending is expected to have driven growth as it rides numerous tailwinds including low unemployment, rising wages and improving sentiment. In addition, activity also accelerated in Azerbaijan, Belarus and Kazakhstan in the first quarter. Notably, Azerbaijan’s economy grew at the quickest pace in over two years thanks to a solid performance by the non-oil sector. Faster growth in the manufacturing and services sectors helped fuel an uptick in GDP growth in Kazakhstan.

Preliminary data for Ukraine, which is not included in the regional aggregate, also revealed that growth picked up pace in the first quarter. Rising real wages likely gave a boost to household spending, while industrial activity also improved in the period. However, the rate of growth was still moderate overall, considering the positive base effects from the economic blockade against the rebel-held areas which started in the first quarter of 2017. The economy still faces important challenges including an ongoing conflict with the rebel-held regions and a lack of progress in the IMF program.   

On the political front, events in the region have calmed somewhat following a turbulent April. Although Russia’s relationship with the West remains tense, several high-profile management figures stepped down in May from large corporations, in an attempt to win exemptions from the sanctions imposed in April and safeguard the companies from further financial turbulence. The ruble also regained some lost ground in the month, although it remains below its March value. Meanwhile, a political shakeup has taken place in Armenia in the wake of mass demonstrations against corruption in the government. A new government was sworn in on 21 May led by opposition leader Nikol Pashinyan as prime minister, with the primary objective of holding new elections, which should help calm the political environment.       

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Activity to strengthen gradually this year

Regional growth is seen picking up slightly in 2018 after coming in at 1.9% last year. Firmer commodity prices, a favorable external environment and reviving household consumption should boost growth to 2.1% this year, which is unchanged from last month’s forecast. That said, geopolitical risks remain high, especially for Russia, and structural weaknesses in the region still need to be addressed by policy makers, especially regarding poor business environments and a lack of diversification. In 2019, growth is seen remaining stable at 2.1%.

This month, regional giant Russia, as well as Kyrgyzstan and Tajikistan, saw no changes to its growth projections, keeping the regional outlook stable overall. However, four economies had their prospects upgraded, including Belarus and Kazakhstan. In contrast, Moldova and Uzbekistan were the only economies to have their growth forecasts downgraded. As for the three countries that are not included in the regional GDP aggregate, analysts held the forecasts for Georgia and Ukraine unchanged, while Turkmenistan’s prospects were downgraded.

Turkmenistan is projected to grow a robust 5.9% in 2018, while Tajikistan and Uzbekistan are expected to be the region’s top performers, both growing over 5.5%. In contrast, Azerbaijan and Russia are projected to be the laggards, growing 1.8% and 1.7%, respectively. Among the region’s larger economies, Kazakhstan is expected to grow at the fastest rate (3.6%), followed by Belarus (2.9%).

RUSSIA | Government projects budget surplus for the first time in seven years

Preliminary GDP figures revealed that the economy regained some lost momentum in the first quarter of the year, after slowing substantially at the end of 2017. Healthy private consumption likely drove the pick-up thanks to a low unemployment rate, rising wages and improved consumer confidence; a detailed breakdown of the result is not yet available. Moreover, data for the second quarter has been largely positive so far, with industrial production growth accelerating in April and the Ural oil price strengthening in both April and May. This year’s oil price rally allowed the Ministry of Finance to revise the 2018 budget in May, projecting a budget surplus for the first time since 2011. However, the imposition of additional sanctions by the U.S. continues to cast a cloud on the economic outlook. In recent weeks, several high-profile management figures have stepped down from aluminum giant Rusal and energy company EN+ Group, in an attempt to win exemptions from sanctions. Meanwhile, the country is gearing up to host the FIFA World Cup in mid-June. The tournament should see a boost in tourism revenue, although the economic impact is expected to be slight overall. 

Higher oil prices, recovering household consumption and a solid fiscal position should prop up growth this year, even in the face of geopolitical and sanctions-related uncertainty. FocusEconomics Consensus Forecast panelists see GDP expanding 1.7% in 2018, unchanged from last month’s forecast. In 2019, growth is seen at 1.8%.

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KAZAKHSTAN | FDI inflows support economic development

Preliminary data showed that the economy grew at a robust and slightly faster stride in the first three months of the year compared to the 12-month period of last year. A breakdown by production shows that a broad-based increase across almost all sub-sectors supported growth. Exports grew at an especially strong pace in the period. Going into the second quarter, economic activity lost considerable momentum in April, although the expansion remained solid. Retail sales surged in the month, growing at the fastest pace in four months amid declining inflation and a low level of unemployment, which kept household spending buoyant. Moreover, the economy continued to attract a high level of overseas capital. Industrial production, however, grew at a slightly weaker rate in April, losing momentum for the third month running.

Recovering oil prices and higher domestic demand aided by declining inflationary pressures should support the economy this year. Growth is expected to moderate from the previous year, however, due to a notable anticipated slowdown in exports and as the government phases out its countercyclical fiscal policy to bring the budget deficit down to 1.1% from 2.6% in 2017. Diversifying the economic structure away from oil by increasing investment in the tradable non-oil sector will be crucial to the economy’s long-term development and boosting its resilience to external shocks. FocusEconomics panelists see GDP growing 3.6% in 2018, which is up 0.1 percentage points from last month’s forecast, and 3.5% in 2019.  

UKRAINE | Growth gains steam in Q1

The economy kicked into a higher gear in the first quarter, expanding 3.1% in annual terms, on strong industrial production growth and buoyant domestic demand. The sustained tightening of labour market conditions and some moderation in inflation likely bolstered household consumption in Q1, reflected in robust, albeit decelerating, growth in retail sales. Industrial production growth also supported economic activity, accelerating markedly from last year’s sluggish expansion, although the growth rate was partly inflated due to a base effect. Meanwhile, despite cooling somewhat from Q4, exports rose robustly in Q1, however, more rapid import growth led to an increased trade deficit in the quarter. Lastly, amid a more stable political backdrop and macroeconomic stabilization, analysts expect significant fixed investment growth in Q1, as foreign investors improved their perception of the country’s investment climate.

Strengthening domestic demand led by solid private consumption and sustained investment activity growth will allow the economy to expand faster this year. Meanwhile, industrial production should benefit from fading effects of last year’s trade embargo, and healthy external demand. Nevertheless, growth potential will likely remain dampened by ongoing geopolitical concerns and uncertainty over the government’s commitment to long term economic and anti-corruption reforms. FocusEconomics panelists see GDP rising 3.0% in 2018, which is unchanged from last month’s forecast, and 3.1% in 2019. 

BELARUS | Positive data flows in for Q2

The economy’s solid growth momentum appears to have largely carried over into the second quarter, after growth hit an over six-year high of 5.1% in annual terms in the first quarter, according to a preliminary estimate. Economic growth decelerated marginally in March and April, but this was mostly due to a fading base effect. In April, the external sector likely remained buoyant, following a jump in exports by over a quarter in Q1. Meanwhile, a nearly double-digit annual increase in industrial production in the January–April period was led by a burgeoning manufacturing sector, reflecting robust external demand for Belarusian exports. Lastly, strong retail sales pointed to an increase in household consumption in the same period amid tight labor market conditions and more moderate inflationary pressures. 

Growth in economic activity is seen rising notably this year on the back of healthy domestic demand and a strong external sector. Moderating price pressures and an increasingly accommodative monetary environment should support private consumption, while export growth will be led by surging demand from the EU and CIS countries, particularly Russia. Nevertheless, as the last year's base effect fades away, growth is expected to moderate in the coming months before roughly stabilizing over the short term. FocusEconomics panelists see the economy expanding 2.9% in 2018, which is up 0.4 percentage points from last month’s forecast, and 2.6% in 2019.

MONETARY SECTOR | Regional inflation steadies in April

A preliminary estimate of regional inflation revealed unchanged price pressures in April. Inflation in the CIS region came in at 2.8%, matching March’s reading. Price pressures are at a historically low level, thanks in part to moderate food prices. However, the recent depreciation of the ruble on the back of new sanctions in April, together with a broad sell-off of emerging markets assets, will likely cause inflation going forward.

Inflation is expected to rise to 4.3% by the end of the year, which is unchanged from last month’s forecast. In 2019, inflation is expected to edge up to 4.4% by year-end.

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Angela Bouzanis

Senior Economist 


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