CIS Countries Economic Outlook March 2017

 2016 was a better year, but the costs were high

CIS Countries: 2016 was a better year, but the costs were high

March 8, 2017

Available data for Q4 2016 indicate a more favorable scenario for the economy of Commonwealth of Independent States (CIS). GDP rebounded in the final quarter of 2016, increasing 1.2% from the same quarter of the previous year (Q3: -0.3% year-on-year), helped by the easing of the recession in Russia, financial market stabilization and a gradual increase in commodity prices. Q4’s result prompted the region’s economy to increase 0.1% in the full year 2016, which contrasted the 2.0% contraction in 2015.

Trends in regional growth dynamics in the final months of 2016 and at the beginning of 2017 point to the start of a recovery in the CIS economies. The Russian economy gained in resilience in the final quarter of 2016 and preliminary data showed overall economic output contracting just 0.2% in 2016 as a whole, suggesting the economy grew slightly over 1.0% year-on-year in Q4 after a streak of seven quarters in contraction. Elsewhere in the region, low oil prices, the erosion of foreign exchange reserves being used to support currencies and high inflation caused economic activity to slow in Kazakhstan to 1.0% in 2016 (2015: +1.2%) and to contract 3.8% in Azerbaijan (2015: +1.1%). Following the commodity price bust, these two economies decided to abandon fixed exchange rates in favor of a floating regime in Kazakhstan and a managed floating regime in Azerbaijan. Recent developments suggest that the acute phase of shock is over in both economies, but activity was held back by contractions in the non-oil sector, particularly in services and construction. Recessions in Azerbaijan and Russia and subdued 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 Belarus, GDP fell 2.6% in 2016, which followed a contraction of 3.9% in 2015, taking the cumulative contraction for the two years to 6.5%. Although GDP fell at a slower rate in 2016 than in 2015, this does not suggest that the recovery is solid. Capital investment declined by 17.9% last year, on top of a 17.5% contraction in 2015. Within this, purchases of productive machines and equipment fell by 21.7% in 2016, reducing the country’s productive capacity to ashes. Meanwhile, on the consumption front, inflation remained stubbornly high last year despite easing, corroding the real income of households, which fell 7.5% in 2016, after a 5.5% decline in 2015.

In Ukraine, GDP grew 2.1% in 2016, rebounding from the nearly 10.0% contraction in 2015. The recovery was driven by a pick-up in industry and trade and, particularly, a late surge in agriculture. Ukraine’s improvement in economic activity was also helped by the easing of the conflict in eastern Ukraine together with the implementation of significant economic reforms. 

A return to more solid growth is in the cards in 2017

A gradual improvement in the region’s economic backdrop, the easing of geopolitical tensions and the expected recovery in commodity prices will support faster growth in the Commonwealth of Independent States this year. According to the Consensus of analysts surveyed this month, the economy of the CIS is projected to increase 1.5% in 2017, which matched the previous month’s forecast. As momentum is expected to continue, economists see the region’s economy accelerating further to 2.0% growth in 2018.

The region’s improvement this year is chiefly the result of a return to growth in Russia. Meanwhile, an adjustment to the negative shocks in Azerbaijan and Kazakhstan is expected to level off this year, as commodity prices rise and economic imbalances narrow. Strengthening economic activity in AzerbaijanKazakhstan and Russia will support growth in the sub-regions of Central Asia and the Caucasus.

Looking at the individual countries, analysts left the 2017 GDP forecasts unchanged for most of the economies surveyed in this report, with the exception of BelarusMoldova and Russia. The growth estimate for Belarus was slashed from the previous month’s projection, while Moldova and Russia were the only economies for which economists raised their forecasts.

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BELARUS | Contraction eases in 2016 but recovery is vulnerable 

After recording a notable contraction last year as spillover effects from Russia’s slowdown dragged on growth, high-frequency data for the start of the year paint a mixed picture of the economy: while industrial production growth hit an over two-year high in January, retail sales recorded the sharpest contraction in over seven years. January’s steep decline in sales highlights the effects of Belarus’ prolonged economic recession, which has eaten away at people’s purchasing power. In the political arena, on 27 February the European Union extended sanctions against Belarus by one year. The measures include an arms embargo and freezing the assets of four people linked to the disappearance of two opposition leaders.

The economy is projected to emerge from the recession over the course of this year as loans from international institutions will support activity. However, the overall economic situation will remain bleak as Russia—Belarus’ main trading partner—will not make a strong recovery in 2017. Against this backdrop, FocusEconomics Consensus Forecast panelists forecast that GDP will increase by just 0.4% in 2017, which is down 0.2 percentage points from last month’s forecast. For 2018, panelists see growth picking up to 1.4%. 

KAZAKHSTAN | GDP is poised to accelerate after last year’s moderation

The economy slowed to just 1.0% in 2016 from 1.2% in 2015, as the combination of lower crude oil and industrial metals prices along with a protracted recession in Russia dented growth. Nonetheless, the economy was helped by an expansionary fiscal policy and a gradual relaxation of interest rates as the tenge showed signs of stabilization. Economic activity strengthened gradually throughout 2016 and a substantial increase in industrial production in January suggests that positive momentum carried over into the beginning of the year. Adding to the positive news, officials at state-owned energy company KazMunayGas stated on 15 February that refinery upgrades would be completed by the end of this year, ahead of schedule. This will allow Kazakhstan to be self-sufficient in petrol, diesel and aviation fuel and will end its reliance on Russia for more than a third of its petrol imports.

Higher expected oil production from new oil fields fueled by higher prices and strengthening economic activity in the region will prompt economic activity to pick up momentum this year. Analysts expect Kazakhstan’s GDP to increase 2.1% in 2017, which matches last month’s projection. For next year, the economy is projected to increase 2.8%. 

RUSSIA | Data indicate continuation of nascent recovery 

Preliminary data suggest that the Russian economy absorbed the dual shocks of lower oil prices and the continuation of Western sanctions last year with fortitude, contracting just 0.2%. A tighter fiscal and monetary policy and a flexible exchange rate ensured the smaller-than-expected economic contraction. There are further indications that the nascent economic turnaround in the final quarter of 2016 continued at the beginning of this year, as industrial production expanded in January and the manufacturing and services PMIs continued to indicate an expansion in the sectors. At a NATO conference in Munich on 18 February, Russia’s Foreign Minister Sergei Lavrov announced Russia’s agreement for a fresh ceasefire in the conflict in the Donbas region. That said, on the same day, the Kremlin announced that Russia will recognize travel and other documents issued by separatist groups in the eastern areas of Ukraine. Although Lavrov’s announcement was welcomed, Russia’s recognition of such documents was condemned by Western powers.

The Russian economy responded exceptionally well to adverse shocks last year, emerging from a protracted recession. Economic growth is expected to strengthen this year supported by higher oil prices and Russian authorities’ determination to persist in their prudent policymaking. Economists project the economy to expand 1.3% in 2017, which was revised up by 0.1 percentage points from last month’s forecast. For 2018, the Consensus projects GDP accelerating to a 1.7%. 

UKRAINE | GDP strengthens in Q4 2016 but recovery is slow

Growth surged in the final quarter of last year, ending the year on a bright note. GDP expanded a strong 4.7% annually, more than doubling Q3’s figure and drastically overshooting expectations. Although a breakdown of the result is not yet available, evidence suggests that a strong expansion in agriculture drove the result. Available data for Q1 suggest that the recovery continues: industrial production output hit a 10-month high in January. However, political tensions are still high and are threatening to derail the recovery. A rebel-backed blockade has cut off vital links in the country, including transport of coal and other industrial goods. A prolonged conflict will threaten industrial production as well as Ukraine’s energy supply. 

The stronger-than-expected close to last year is helping lift Ukraine’s forecast, although political risks are still high. The FocusEconomics panel sees GDP rising by 2.5% this year, which is up 0.1 percentage points from last month’s estimate. In 2018, the panel sees growth picking up to 3.1%. 

See the Full FocusEconomics CIS Countries Report     

INFLATION | Inflation falls at outset of 2017

Inflationary pressures in the CIS economy continued to abate at the beginning of this year. An aggregate estimate showed that inflation in the region fell to 5.3% in January from 5.7% in December, marking a new multi-year low. The drop was mainly the result of the easing of inflationary pressures caused by the devaluation of some of the region’s currencies, soft domestic demand and relatively low commodity prices compared to the highs in previous years.

Inflation is expected to stabilize at the current level in the coming months, as commodity prices recover and domestic demand across the Commonwealth improves. Also, 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 left unchanged 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 4.8%.

Written by: Ricardo Aceves, Senior Economist

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