CIS Countries Economic Outlook December 2018

CIS Countries: CIS Countries

November 28, 2018

CIS economy stutters in Q3; tensions between Russia and Ukraine flare up

A preliminary estimate revealed that growth slid notably in the Commonwealth of Independent States (CIS) in the third quarter. Regional GDP expanded 1.8% annually, well below Q2’s 2.4% increase and the worst reading seen so far this year. Poor agricultural output hampered regional growth in the quarter, due to poor weather and a late harvest, while sluggish momentum in Russia likely spilled over into some of the region’s smaller economies.

Looking at the individual economies, growth slowed notably in regional giant Russia in the third quarter. A shift in the harvest season weighed on agricultural output, while downbeat consumer confidence— which has deteriorated notably since the announcements of the unpopular pension reform and VAT hike—also likely hampered spending. On top of that, a weak ruble and tight monetary conditions are also weighing on the economy, and the lacklustre recovery likely spilled over and affected remittances growth in other CIS economies.

Outside of Russia, growth also slowed in Armenia, Azerbaijan and Belarus, while economic activity was broadly stable in Kazakhstan in the third quarter. As in other economies in the region, Armenia and Belarus’ dynamics were weighed on by poor performances in their agricultural sectors, while Azerbaijan remains one of the region’s weakest links amid broad-based malaise in the oil and non-oil sectors.

Similarly, growth also dropped notably in Ukraine, which is not included in the regional aggregate. While a breakdown by components is not yet available, the slowdown is likely also due to contracting agricultural output due to poor weather.

On the political front, tensions between Ukraine and Russia have risen significantly in recent days after Russia seized three Ukrainian naval vessels off the Crimean peninsula on 25 November. The Russian move was swiftly condemned by several Western nations and Ukrainian President Petro Poroshenko responded by initiating 30 days of martial law the following day. The two countries have been locked in a largely frozen military conflict since the annexation of Crimea by Russia in 2014, which caused Ukraine’s economy to collapse. The rapid escalation underlines the tense state of affairs.

The effects on either economy are unclear, if additional sanctions are imposed on Russia’s economy, it could hurt momentum. Meanwhile, it remains unclear what the Ukrainian government will do with martial law and if the policy will have any effect on the upcoming elections. Regardless, it appears the military escalation could be in part political: Russian President Vladimir Putin has seen his popularity decline after increasing the retirement age, while Poroshenko is also facing low approval ratings ahead of the March election. The military conflict could help shore up both leaders’ support. 

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2019 prospects downgraded amid tougher external backdrop

This month, the CIS economy’s 2019 forecasts were revised down a notch, following a weak third quarter and against the backdrop of a tougher external environment and moderating consumption. After growing 2.1% this year, the recovery is seen slowing to 1.9% next year. A tax hike in Russia will weigh on consumption in the region and likely dampen remittances to many economies, while the evolution of commodity prices is clouding the regional outlook. Oil prices fell sharply in October due to soaring production, especially in the U.S. Lower-than-expected commodity prices could strike a blow to the region’s recovering energy and mining sectors. In addition, the possibility of fresh sanctions on Russia continues to loom large, further adding to uncertainty. In 2020, regional growth is seen at 2.1%.

Five CIS economies, including Russia, had their 2019 prospects chopped this month, driving the downgrade in regional growth. Kazakhstan and Armenia’s prospects were unchanged. As for the three countries that are not included in the regional GDP aggregate, Ukraine’s growth forecast was trimmed, while Georgia and Turkmenistan saw no changes to their prospects.

Next year, Tajikistan and Uzbekistan are projected to be the region’s fastest growing economies, both exceeding 5.0%. Turkmenistan, which is not included in the regional aggregate, is also seen expanding a robust 5.7%. In contrast, Azerbaijan and Russia are expected to be the region’s laggards, with expansions of 2.0% and 1.5% respectively. Among the region’s larger economies, Kazakhstan will outpace the rest, growing 3.4%, followed by Belarus (+2.9%).

RUSSIA | Government rebuilds fiscal buffers despite downbeat economic activity

Growth dropped notably in the third quarter, according to a preliminary estimate. While a breakdown by components is not yet available, plunging agricultural output due to a weak and late harvest likely held back activity. In addition, consumption dynamics were likely weak, with consumer sentiment plunging in the aftermath of the government announcing unpopular reforms. However, data for the start of the fourth quarter point to firmer conditions, with both the manufacturing and services PMIs hitting over six-month highs in October. Moreover, the government’s fiscal stance has improved notably thanks to higher oil prices and controlled spending. The budget surplus in the first 10 months of the year soared, putting the country on track to record its first fiscal surplus since 2011 this year. In November, the Duma also passed a prudent three-year budget plan that envisions an over USD 60 billion surplus and could bring the national wealth fund to over USD 200 billion by 2021.   

GDP is seen expanding 1.7% in 2018, before slowing to 1.5% next year as consumption is held back by a hike in the VAT. 2019’s projection is down a notch from last month’s forecast. A tense geopolitical backdrop and tougher than expected new sanctions pose the greatest risks to the outlook. In 2020, GDP is seen increasing 1.7%.

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KAZAKHSTAN | Growth holds up at start of Q4

The economy entered the final quarter on a solid note, with the short-term economic indicator—which covers more than 60% of total activity—growing 5.2% in October. Nevertheless, this was still a moderation from September’s 6.5%, owing to weaker growth in retail trade and industrial production, along with a slowdown in overall investment. On the upside, robust export growth and favorable oil prices led to an improvement in the current account, which shrank more than five-fold in the first nine months from the same period of last year. In other news, the Finance Ministry commenced a week-long roadshow to sell 10-year bonds in euros on 29 October, reflecting the growing trend of emerging markets switching from issuing bonds in dollars to issuing them in euros as the spread between interest rates in the U.S. and Europe widens. The country’s debut euro-dominated issue of EUR 1.05 billion attracted strong investor demand.

Growth should remain strong next year, thanks to rising oil production, an increase in oil prices and an upturn in investment. Moreover, solid labor market dynamics and moderating inflation should continue to support private consumption. However, the government’s drive to strengthen fiscal metrics will likely restrain growth, while the U.S.–China trade war, tighter global financial conditions and uncertainty around the transition of power after President Nazarbayev leaves office pose downside risks to the outlook. FocusEconomics panelists see GDP growing 3.4% in 2019, which is unchanged from last month’s forecast, and 3.5% in 2020.

UKRAINE | Government approves 2019 budget designed to unlock IMF funds

Preliminary GDP data revealed that the recovery lost traction in the third quarter, after growth hit a one-and-a-half year high in Q2. A poor performance of the agricultural sector due to bad weather and a weaker external sector seemed to be chiefly behind the slowdown—merchandise exports decelerated to a two-year low in Q3 amid feeble global trade. On 23 November, the parliament approved the 2019 budget, a critical step that will potentially unlock USD 3.9 billion in financing from the IMF and help to stabilize the economy in the run up to general elections next year. Meanwhile, on 25 November, Russia seized three Ukrainian military vessels just off Crimea after claiming they had entered Russian waters illegally. This marks a major escalation in Russia-Ukraine tensions and the first time the two militaries have come to open conflict in recent years. In response, on 26 November, Ukraine’s parliament approved the introduction of martial law in regions neighbouring Russia effective 28 November. Amid vocal concerns that it might be used as a cover to postpone March’s election, President Poroshenko agreed to limit martial law to 30 days instead of the initially planned 60 days. 

Growth is seen slowing next year as the country faces election-related uncertainties and weaker external demand before it accelerates again in 2020. Domestic demand will remain firmly in the driver’s seat of the expansion in 2019, propped up by solid household consumption amid a tightening labor market and lower inflation, as well as by strong investment activity. FocusEconomics panelists see GDP rising 2.8% in 2019, down 0.1 percentage points from last month’s forecast, and 3.0% in 2020.

BELARUS | Incoming data points to soft momentum at start of Q4

Available data showed that economic activity growth continued to lose traction at the outset of the fourth quarter, on the heels of a marked slowdown in the third quarter. Industrial output growth fell to a 20-month low in October, due to weakness in the country’s all-important manufacturing sector. In addition, agricultural output contracted in October, largely owing to a deterioration in the livestock and poultry sub-sector, coupled with restrictions on Belarussian milk exports by Russia, which is its largest trading partner. Meanwhile, retail sales growth softened to a 10-month low in the same month, signaling potential headwinds to private consumption growth. That said, the latest survey data was more upbeat, with the seasonally-adjusted composite economic sentiment indicator rising in October on improved optimism in the transport sector and higher confidence in the trade sector due to stronger sales expectations.

Growth is seen decelerating slightly next year, although it should remain healthy thanks to solid household consumption growth propped up by sustained tightness in the labor market. Meanwhile, solid fiscal metrics and a well-managed external position should power the economy in the medium-term, while financial support from Russia should help with debt refinancing. FocusEconomics panelists see the economy expanding 2.9% in 2019, which is unchanged from last month’s forecast, and 2.5% in 2020.

MONETARY SECTOR | Inflation edges down in October

A regional estimate revealed that inflation moderated slightly in October, coming in at 3.9% and thus below September’s upwardly revised 4.0%. Price pressures eased across the region in the month, except in Russia where inflation inched up.

The recent upward revision of CIS regional monthly inflation is due to new inflation statistics for Uzbekistan. Inflation was broadly stable in Uzbekistan at 16.3% in October (September: 16.2%). Price pressures remain elevated in the country due to the Central Bank’s currency reform which precipitated seen a marked devaluation of the soum this year.

Inflation in the CIS economy is expected to rise going forward due to pass-through effects from currency depreciation as well as from a hike in Russia’s VAT. Inflation is projected to end 2019 at 4.7%, which is unchanged from last month’s forecast. In 2020, inflation is seen ending the year at 4.2%.

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Angela Bouzanis

Senior Economist 

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