CIS: Russia's economic improvement and OPEC oil agreement bode well for the region
October 5, 2016
In the first half of this year, the Commonwealth of Independent States (CIS) navigated through difficult waters as the region adjusted to the slump in commodities prices, the prolonged recession in Russia—by far the region’s largest economy—and a deceleration of the Chinese economy. Lower export and fiscal revenues following the drop in oil and gas prices constrained economic activity in the region’s main energy exporters Azerbaijan, Kazakhstan, Russia, Turkmenistan and Uzbekistan. Most of these countries adjusted government budgets, which, in turn, caused public investment to plummet. An aggregate estimate elaborated by FocusEconomics showed that, in Q2, the region’s GDP contracted a further 0.5% annually, though this was less pronounced than the 1.1% contraction in Q1. Downward pressure on the region’s growth eased in the second quarter owing principally to an improvement in the economic situation in Russia, which is having positive spillovers in other economies in the region. Russia provides the bulk of remittances mainly to energy importers Armenia, Georgia, Kyrgyzstan, Tajikistan and recent data suggest that the decline in transactions from Russia to these economies appears to have stabilized in the second half of the year.
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In recent news, OPEC members reached a historic agreement to freeze oil production at an informal meeting in Algeria in late September. The agreement, the first of its nature since the financial crisis hit the global economy in 2009, aims to keep production to between 32.5 and 33.0 million barrels a day. The decision prompted global oil prices to jump 6% on 29 September and defied all expectations, since the brinkmanship between major producers Saudi Arabia and Iran has been ongoing since January and previous attempts to come up with deal to cut or freeze output had failed. The new production target entails a decrease of between 240,000 and 740,000 barrels per day from the 33.24 million the cartel pumped in August. These developments provide a silver lining for CIS oil and gas producers, but the execution of the deal remains pending. OPEC will create a committee to work out how the output reduction will be split among members and will provide details at its next formal meeting in November. Between now and then, the oil cartel has huge obstacles to overcome to agree a binding deal.
The CIS is a region dominated by aging autocrats that are unlikely to be deposed other than by death or a revolution, though the death of Uzbekistan’s President Islam Karimov on 2 September could encourage regimes to make sure they have a concrete succession plan in place. On 8 September, the Uzbek parliament appointed Prime Minister Shavkat Mirziyoyev as acting president in defiance of a constitutional stipulation that the head of the Senate should take on the president’s duties in the event of incapacitation and until new elections are called. The vote confirms the view of political analysts and observers that Shavkat Mirziyoyev will be the front-runner of the presidential elections scheduled for 4 December. Although four candidates are registered, it will be carefully stage-managed to ensure a large win for Mirziyoyev. Experts warn that if the succession process is not smooth, it has the potential to create regional instability, in particular in Kyrgyzstan and Tajikistan, the most impoverished and unpredictable members of the CIS.
Region’s prospects improve on brighter H2
Growth forecasts for the CIS were raised in October, which represented a fourth improvement in the last five months. The economic experts we surveyed expect the region’s GDP to contract 0.3% this year, which, if confirmed, will represent a milder contraction than 2015’s 2.6% decrease. Prospects for the second half of the year are brighter after a weak first half and oil prices are expected to continue increasing. Nonetheless, downward risks to the outlook remain in the form of heightened geopolitical tensions between Russia and Ukraine and prospects that the U.S. dollar will strengthen toward the end of the year, if the Federal Reserve increases interest rates in December.
Looking at the individual countries, analysts raised their 2016 GDP forecasts for Kazakhstan, Kyrgyzstan, Moldova, and Russia, while they left their growth outlooks for Armenia, Azerbaijan, and Tajikistan unchanged. Belarus and Uzbekistan were the only economies for which analysts cut their 2016 GDP growth projections. Regarding the three countries that are not included in the regional estimate, the 2016 GDP growth forecast for Georgia was raised over the previous month, while it was cut for Turkmenistan and Ukraine.
Our panelists expect commodities prices, led by oil and gas, to gradually increase this year and next, which bodes well for the region’s energy producers. They project that the economy of the Commonwealth will bounce back strongly in 2017 and expand 1.6%.
BELARUS | Opposition returns to parliament
Belarus’ economy remained firmly entrenched in recession in Q2 and contracted 1.4% over the same period last year (Q1: -3.7% year-on-year). The pace of contraction has been easing recently but high-frequency indicators suggest that weakness still persisted in Q3: industrial production and retail sales both shrank in July and August. In the political arena, legislative elections held on 11 September confirmed supporters of President Alexander Lukashenko as the leading parliamentary force with 108 of 110 seats. However, the fact that two representatives of the opposition secured seats for the first time since 2004 is interpreted by analysts as a sign that the government is seeking a better relationship with the West.
Belarus is set for another contraction this year, due to persistent structural weaknesses—including the dominance of inefficient state-owned enterprises and macro-financial vulnerabilities—and a difficult external environment. FocusEconomics Consensus Forecast panelists forecast that GDP will decline 1.9% in 2016, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel projects that the economy will return to growth and record a moderate 0.8% expansion. .
KAZAKHSTAN | GDP growth stays lackluster in H1
GDP growth fell to 0.1% in the first half of 2016 from 1.7% in the same period last year as declining exports and anemic domestic demand dragged down overall economic activity, principally in the country’s industrial sector. Industry contracted 1.8% in H1 as sluggish mining activity and construction reversed an expansion in the same period last year. Recent data continue to suggest that Kazakhstan’s industrial sector remains depressed as industrial production plunged 7.5% annually in August, which followed two mild increases in June and July. On 15 September, the government presented the 2017 budget in which it expects a fiscal deficit of 2.0% of GDP this year and 1.2% of GDP in 2017. The official oil output forecast for 2017 stands at 79.5 million metric tons, an increase on the forecast for this year of 75.5 million metric tons.
Weak oil prices, the impact of the currency devaluation and the recession in Russia prompted GDP growth to slow substantially in the first half and the current deficit to double from the same period in 2015. A silver lining is the re-launch in production in the Kashagan oil field at a time when the outlook for oil prices is positive. Forecasters raised their 2016 GDP forecasts by 0.1 percentage points over the previous month and expect GDP to expand 0.5%. In 2017, GDP growth is seen picking up to 2.2%.
RUSSIA | United Russia gains constitutional majority
The ruling United Russia party (UR) won 54% of the vote and 343 seats in the 450-seat Duma in the 18 September parliamentary election, securing a majority to change the constitution. The election took place under a new mixed electoral system and in the midst of a slow economic adjustment. Under the new system, 225 deputies were elected by proportional representation on the basis of party lists and 225 by individual contests on a constituency basis. Three parties considered loyal to the Kremlin—meaning that they tend to offer little opposition to or even scrutiny of government policy—cleared the 5% barrier required to make it into the Duma. Turnout was reported at 48%, the lowest in Russia’s democratic history, and the overall figure was boosted by an official turnout of over 70% in the North Caucasus, a region characterized by major electoral fraud.
Russia has undergone a painful economic adjustment and the contraction appears to have softened out in H1. Economic activity is seen as strengthening gradually in H2, but the fact that the UR party won a constitutional majority in the Duma suggests that fiscal consolidation will continue. The analysts we surveyed this month raised their GDP growth forecast again and expect GDP to contract 0.6% in 2016, up 0.1 percentage points from September’s projection. In 2017, analysts see the economy rebounding and expanding 1.3%.
UKRAINE | IMF provides much-needed funds
Ukraine’s economy continued to improve in the second quarter, underpinned by a revival in household consumption and booming fixed investment. A stabilizing economy has helped shore up confidence and gains in domestic demand were able to offset a poor performance in the external sector. Exports plummeted amid a Russian ban on transitioning Ukrainian goods and weak global trade flows. Available data for the third quarter suggest that the recovery remains on an even footing: industrial production expanded robustly in August. After a year of delay, the IMF completed the second review of Ukraine’s economic program and gave the country a USD 1 billion cash injection. However, the IMF urged the country to deepen its economic reform momentum and tackle tough measures such as an overhaul to pensions. Meanwhile, the government submitted a draft of the 2017 budget to parliament in September. The budget focuses on security and defense as well as promoting growth, and envisions a fiscal deficit of 3.0% of GDP, which has been called unrealistic by market analysts.
Steady gains in activity should lead the economy to expand this year, however the recovery is expected to be slow and fragile. The FocusEconomics panel sees GDP rising by 1.1%, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel sees GDP growth accelerating to 2.4%.
INFLATION | Inflation falls further in August
Inflation in the CIS continued to fall in August, declining from 8.0% in July to 7.7%, according to a regional estimate. The lower reading reflected a further annual decline in consumer prices in Armenia and a broad-based drop in inflation across the region.
The majority of currencies in the region have stabilized following the aftermath of the Brexit vote and due to the Federal Reserve’s recent decision in September to postpone an interest rate increase. Nonetheless, central banks across the CIS are maintaining a tight monetary policy and expect inflation to continue falling in the coming months. The forecasters we surveyed this month expect inflation in the CIS to end this year at 6.9%. This month’s forecast was cut by 0.3 percentage points over the previous month’s Consensus and marked a fourth consecutive downward revision. Looking beyond this year, analysts predict that inflation in the region will fall further to 5.8% in 2017.
Written by: Ricardo Aceves, Senior Economist