Commonwealth of Independent States Economic Outlook October 2017

CIS economy gets back on track

Commonwealth of Independent States: CIS economy gets back on track

October 4, 2017

Growth has firmed up in the economy of the Commonwealth of the Independent States (CIS), as the region recovers from an abysmal 2015–2016. Comprehensive data confirm that regional GDP grew a solid 2.8% year-on-year in the second quarter, notably above the first quarter’s 1.1% increase. Stronger growth was seen in the majority of the region’s economies, with regional heavyweight Russia expanding at the fastest pace since Q3 2012. Large-scale investment projects helped fuel the Russian domestic economy, along with lower inflation, improved confidence and easier monetary policy.

The Russian economy’s recovery had positive spillover effects for a number of other CIS economies, in the form of robust demand for exports and higher remittances. GDP expanded at the fastest pace since Q3 2014 in Belarus, thanks to higher household spending. Kazakhstan also recorded firmer activity, while Azerbaijan was the region’s standout weak spot. Azerbaijan is the only economy that has not yet exited recession as the energy sector drags down activity. 

After large variations in regional growth in the past year, FocusEconomics panelists see activity stabilizing at just over 2.0% in the coming quarters. Growth will proceed at a more moderate pace largely due to the end of the one-off factors that boosted Russia’s economy in Q2. Higher oil prices, more accommodative monetary policy and improving government balance sheets should support economic momentum and help usher in a period of stable, if lackluster, growth. FocusEconomics analysts see GDP expanding 2.1% annually in both Q3 and Q4. 

See the Full FocusEconomics CIS Countries Report    

Activity to pick up in 2018

Regional GDP growth is seen picking up from a meager 0.1% in 2016 to 1.8% in 2017, on the back of a recovery in the Russian economy. Next year, the FocusEconomics panel sees the CIS economy strengthening further as growth broadens across the region. GDP is seen growing 2.0% in 2018, which is unchanged from last month’s forecast.

This month’s stable 2018 growth forecast reflected unchanged forecasts for five economies in the region. However, Belarus, Kazakhstan and Russia all saw hikes to their growth forecasts, while Azerbaijan was the only economy to receive a downgrade.

Regarding the three countries that are not included in the regional GDP aggregate, analysts upgraded the 2018 GDP forecast for Georgia, while the outlooks for Ukraine and Turkmenistan were left unchanged.

Head on over to our CIS page for more recent economic news on the region.

RUSSIA | Macro story becomes more positive

The recovery likely hit top speed in Q2, as booming fixed investment and recovering household spending drove GDP to expand at the fastest pace since Q3 2012. Large infrastructure projects, primarily in the energy and transportation sectors, fueled investment growth, while low inflation and improving confidence supported private consumption. Available data for Q3 suggests that momentum remained healthy, although growth is expected to wane from Q2’s peak. Industrial production accelerated and the unemployment rate inched down in August, while the manufacturing PMI rose in September. Moreover, the Ural oil price soared in September, recording the highest average monthly price since September 2015. The improving economic backdrop, along with a weak USD, has caused the ruble to gain ground this year and appreciate over 6.0% year-to-date. Meanwhile, the Ministry of Finance released a prudent fiscal plan for 2018–2020 in September, with a conservative USD 40 per barrel oil price and a target deficit of 1.4% of GDP in 2018.      

FocusEconomics analysts upgraded their 2018 forecasts for the Russian economy this month as the recovery seems on stronger footing than previously believed. Higher oil prices should support economic activity next year, although a troubled banking sector is a risk to the forecast. GDP is seen expanding 1.8% in 2018, which is up 0.1 percentage points from last month’s forecast. This year, the economy is projected to grow 1.6%.

KAZAKHSTAN | Improved economy brightens credit ratings outlook

Kazakhstan is facing brighter economic prospects as recent data points to strong growth in Q3, after the economy grew at the fastest pace since Q4 2014 in Q2. Industrial production surged in August, likely having benefitted from increased oil production in the massive Kashagan Field. In addition, inflationary pressures have been declining, lending support to private consumption. Against this backdrop, both Moody’s and S&P Global Ratings improved their outlooks on the country’s sovereign credit rating on 26 July and 8 September, respectively. Furthermore, Kazakhstan’s gross international reserves remained unchanged in August compared to July and were up from the beginning of the year

Going forward, the economy will be supported by strong industrial production and weaker inflationary pressures. Moreover, the economic recovery in Russia, one of Kazakhstan’s largest export markets, will lend support to the external sector. However, banking vulnerabilities, exacerbated by a large proportion of non-performing loans, weaken the economic outlook somewhat for Kazakhstan. FocusEconomics Consensus Forecast panelists project GDP will rise 3.1% in 2017. In 2018, panelists expect a 3.2% expansion, which is up 0.1 percentage points compared to last month’s projection.

UKRAINE | Slow reform approval clouds outlook

The recovery deteriorated further in Q2, after annual growth halved in Q1. The trade blockade with the eastern regions continued to dampen activity and, together with poor agricultural production, caused exports to plummet. Growth is expected to decelerate further in H2, and incoming data for Q3 has been mixed. On a positive note, the country had a successful return to capital markets in September, raising USD 3 billion through a 15-year Eurobond, the country’s first bond issue since 2015. The return illustrated investors’ reinvigorated confidence in the economy; however, there is a risk that the successful issue could reduce authorities’ resolve to comply with the IMF program. The government has been dragging its heels in pursuing mandated reforms, particularly to address corruption. While pension reform is expected to be passed, the bill has been severely watered down by amendments. Slow reform momentum is delaying the next trance of IMF loans, and the government’s 2018 budget was drafted based on approval of the pension reform—meaning that the government cannot vote on the budget until the reform is passed. 

The recovery is seen picking up pace next year, after weather woes and the economic blockade hold back growth in 2017. FocusEconomics panelists see GDP rising 2.0% in 2017. In 2018, growth is expected to pick up to 2.8%, unchanged from last month’s forecast.

BELARUS | Higher oil prices fuel activity

According to preliminary data, the economy gained traction in August as oil prices continued to climb. Annual GDP growth rose to 1.6%, up from 1.1% in July. Underpinning the positive trend was an accelerated pace of expansion in industrial production coupled with an increase in private consumption, as evidenced by strong growth in retail sales. Retail sales rose at almost twice the rate observed in the previous month amid an upturn in wages and an unemployment rate that is at an over three-year low. The recent rise in oil prices have buoyed exports of refined oil, driving an increase in production and enabling firms to raise wages.

The economy is expected to grow at a mild pace this year following two years of recession, and gain speed next year as resilient demand from Russia and CIS economies supports solid growth in investment and exports. Regional political tensions and the domestic banking sector’s high volume of non-performing loans, which could jeopardize the availability of credit going forward, pose downside risks to the outlook. FocusEconomics Consensus Forecast panelists expect GDP growth to come in at 1.2% in 2017. The panel projects growth accelerating to 1.7% in 2018, which is up 0.2 percentage points from last month’s forecast.

See the Full FocusEconomics CIS Countries Report     

MONETARY SECTOR | Inflation falls to multi-year low in August

Price pressures dropped in the CIS economy in August, falling from 4.3% in July to 3.8%. Lower food prices in Russia along with favorable exchange rates drove the decline. Subdued inflationary pressures have led a number of the central banks in the region to ease monetary policy. In September, policymakers in Belarus and Russia announced they were cutting interest rates.

The analysts we surveyed this month see inflation rising moderately by the end of the year, and coming in at 4.6% on average in 2017. Next year, inflation is expected to be stable and end 2018 at 4.6%, which is down 0.2 percentage points from last month’s forecast. 

Angela Bouzanis

Senior Economist 

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