CIS Countries Economic Outlook April 2018

CIS Countries: Economic Snapshot for the CIS Countries

April 11, 2018

Growth dips temporarily in Q4


Comprehensive data for the economy of the Commonwealth of Independent States (CIS) revealed that regional growth slumped in the final quarter of last year, undershooting expectations. Regional GDP expanded 1.6% annually in Q4, below last month’s preliminary reading of a 2.2% increase. The result marks a notable deceleration from Q3’s 2.6% expansion and is due to subdued growth in Russia’s economy, which accounts for over 80% of the region’s nominal GDP. FocusEconomics analysts, however, expect the sharp slump in growth to have been largely temporary and forecast GDP to have expanded 2.1% in the first quarter of 2018.


Looking closer at Russia’s Q4 result, activity in the fourth quarter was dragged down by a negative contribution from inventories and fixed investment growth also waned in the quarter. Aside from these components, however, economic dynamics were largely healthy: private consumption growth edged up amid historically-low inflation and a tight labor market while exports also gained steam, suggesting  the recovery remained largely on track.


Outside of Russia, nearly all of the CIS economies accelerated in the final quarter of 2017, supported by higher commodities prices and the stabilization of Russia’s economy. Russia is a major trading partner for several economies and is also a source of remittances, which soared during Q4. Azerbaijan expanded for the first time in two years in Q4 and growth hit multi-year highs in Armenia, Belarus and Tajikistan. The only exception was Kazakhstan, which saw growth slow, although activity remained healthy overall.


On the political front, recent elections played out as expected in recent weeks, ensuring policy continuity in the region and few implications for the region’s economy. In Russia, President Vladimir Putin was re-elected for another term on 18 March as widely predicted, winning over 75% of the votes, thus ensuring policy continuity. Likewise, parliamentary elections were held on 25 March in Turkmenistan and yielded no surprises, as the parties that claim loyalty to President Gurbanguly Berdymukhamedov came out on top. A similar outcome is expected in Azerbaijan’s presidential elections scheduled for 11 April. President Ilham Aliyev appears set for a fourth mandate as the main opposition party has stated that they will boycott the vote over unfair terms.  


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Geopolitical events heighten risks to CIS growth outlook


After a disappointing final quarter of 2017, the regional recovery is expected to gather steam this year thanks to higher commodities prices, improving household consumption and a healthy global backdrop. Regional GDP growth is expected to pick up from 1.9% in 2017 to 2.1% this year, which is unchanged from last month’s forecast and would mark the best result since 2013. In 2019, regional growth is seen stable at 2.1%.


Geopolitical risks to the region’s outlook linger from fresh economic sanctions and a rise in global trade protectionism. New sanctions by the U.S. against several high profile Russian businessmen and their companies enacted on 6 April and sparked volatility in Russia’s stock market. The measures could dent investment going forward as the affected companies are cut off from U.S. customers.  The U.S. also slapped large tariffs on steel and aluminum products in March, but since the region has a low exposure to U.S. trade, the effect is expected to be relatively limited.


This month’s stable 2018 forecast reflects unchanged projections for Azerbaijan, Kazakhstan, Russia and Uzbekistan. Meanwhile, five economies saw their growth prospects lifted this month including Belarus. As for the three countries that are not included in the regional GDP aggregate, analysts upgraded the forecasts for Georgia and Ukraine, while the projection for Turkmenistan was left unchanged.


Uzbekistan is projected to be the region’s star-performer this year, with a 6.2% GDP expansion. On the other end of the spectrum, Azerbaijan is expected to be the laggard, growing a moderate 1.6%. Among the region’s larger economies, Kazakhstan is expected to grow at the fastest rate (3.4%), followed by Belarus (2.5%) and Russia (1.8%).


RUSSIA | Markets react negatively to fresh sanctions


Comprehensive GDP data revealed that the recovery lost steam in the fourth quarter of last year, with growth weighed on by inventories as well as slowing fixed investment. Recent indicators, however, suggest that activity likely bounced back in the first quarter of 2018 and that overall the recovery remains on track if lackluster. Consumer confidence improved in Q1 and the unemployment rate inched down in February, boding well for household spending in the quarter. Positive signs emerged from the external sector as well with exports growth hitting a 10-month high in January and the Ural oil price jumping in March, which should support export revenues. On the political front, as widely expected, President Vladimir Putin won the 18 March election, securing over 75% of the votes. More recently, on 6 April, the United States unveiled new sanctions against several high-profile Russian businessmen and their affiliated companies. The measures freeze their U.S. assets and ban Americans from conducting business with them.  The sanctions caused turmoil in Russian financial markets, with the main stock index diving and the ruble depreciating over 4.0% on 9 April.


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Rising oil prices, a healthy labor market and improved consumer confidence should cause growth to gather steam this year. However, limited oil output and structural rigidities will hamper activity, while the impact of the fresh sanctions is still uncertain. FocusEconomics Consensus Forecast panelists see GDP expanding 1.8% in 2018, which is unchanged from last month’s forecast. In 2019, growth is seen stable at 1.8%.


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KAZAKHSTAN | Maintenance work interrupts oil output


The economic recovery continued to make headway in the first quarter amid upbeat global growth, after growth accelerated markedly last year on the back of increased oil production, coming out from an oil-price induced slowdown in 2015–2016. Economic activity picked up in February following a moderation in the previous month. The industrial sector again expanded robustly in February after accelerating in January. Although there was a considerable decline in the growth of retail output in the first two months of the year, seasonal factors could explain the sudden drop. On 4 April, the energy ministry reported that oil output at the Kashagan oil field, one of Kazakhstan’s largest oil fields, had fallen by nearly a third from late March to early April, owing to repair and maintenance works. Production is set to return to the target level of 310,000 barrels per day from 17 April.


A healthy pace of growth is expected this year on the back of recovering oil prices and an upturn in domestic demand amid a continued decline in inflation. Growth is, however, expected to moderate from last year as the government phases out its countercyclical fiscal policy to bring the budget deficit down to 1.1% from 2.9% in 2017. Ongoing efforts to diversify the economy away from oil, by encouraging investment in non-extractive industries, will be crucial to bolstering the economy’s resilience to external shocks. FocusEconomics panelists project the economy will grow 3.4% in 2018, which is unchanged from last month’s forecast, and 3.5% in 2019. 


UKRAINE | Political willpower for reforms dissipates, threatening fresh IMF funds


Recent revisions to GDP data revealed that the economy performed better last year than previously thought. Strong wage growth, higher government spending and robust investment drove growth in 2017, although soaring imports dampened the external sector’s performance. The available data for the first quarter of 2018 suggests that the recovery remains on track, albeit moderate given the severity of Ukraine’s recession. Industrial production growth decelerated in February, while retail sales expanded at a robust pace. On the political front, Prime Minister Volodymyr Groysman stated on 2 April that the government will not raise gas prices this heating season, delaying an IMF-mandated price hike. The slow pace of reforms has caused the country’s bailout program to fall off track and the move could further hurt progress. In addition, lawmakers failed to do away with a controversial law which requires anti-corruption activists to file online asset declarations and is seen as undermining the fight against corruption on 3 April.


Growth is expected to pick up pace this year as the effects of last year’s trade embargo fade. However, activity will remain hampered by limited reform implementation and ongoing geopolitical concerns. FocusEconomics panelists see GDP rising 3.0% in 2018, which is up a notch from last month’s forecast. In 2019, growth is also seen at 3.0%.


BELARUS | Moody’s lifts credit ratings amid improved economic picture


The economy returned to growth in 2017, and recent economic indicators suggest that momentum carried over into the first quarter. According to data released by the National Statistics Committee, the economy grew 5.6% in January–February marking an over five-year high expansion rate. Economic activity was buttressed by strong retail and wholesale trade sectors, each rising nearly 10% in the


Strong domestic demand and a robust external sector are set to drive the economy forward in 2018. Private consumption growth should come on the back of tight labor market conditions, while strong demand from CIS countries and the EU will fuel exports allowing GDP to maintain the momentum gained in 2017. FocusEconomics panelists expect the economy to grow 2.5% in 2018, which is up 0.4 percentage points from last month’s forecast, and 2.3% in 2019.


MONETARY SECTOR | Regional inflation hovers at all-time low in February


Price pressures in the CIS region remained modest in February, with inflation hovering at a historic low. Regional inflation came in at 2.7% in February, the lowest level on record and unchanged from January’s result. A healthy harvest has helped contain food prices, which along with solid performance in the region’s currencies, has helped keep inflationary pressures in check. Preliminary data for March revealed that regional inflation edged up to 2.9%.


Historically low inflation has opened up space for central banks in the region to reduce interest rates in order to stimulate the recovery. On 23 March, the Central Bank of the Russian Federation continued with its easing cycle and cut the key interest rate by 25 basis points to 7.25%. 


Price pressures are expected to rise by the end of the year due to higher commodity prices and stronger economic momentum. That said, inflation will remain historically low and FocusEconomics panelists see inflation ending 2018 at 4.2%, which is down 0.3 percentage points from last month’s forecast. In 2019, inflation is expected to edge up to 4.4% by year-end.


 


Angela Bouzanis


Senior Economist 


 

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