CIS Countries: Economic Snapshot for the CIS Countries
November 2, 2018
Growth slides in Q3
The recovery in the Commonwealth of Independent States (CIS) is expected to have taken a breather in the third quarter, after growth shot up in the second quarter. FocusEconomics projects that regional GDP growth slid from 2.4% annually to 2.1% in Q3. While higher commodity prices are expected to continue giving a boost to activity in the region, sluggish momentum in Russia is expected to have weighed on the region and spilled over, denting growth in other economies.
While official data from Rosstat, Russia’s statistical institute, is still not available, the economy ministry stated that growth slowed notably in Russia in Q3, expanding 1.3% annually (Q2: +1.9% year-on-year). A weak grain harvest caused agricultural output to plunge in the third quarter and consumer confidence sank following the announcement of unpopular government reforms. However, the mining sector prevented a starker slowdown, growing at a faster pace thanks to firm commodity prices and rising oil production. Moreover, a dramatic weakening of the Russian ruble this year is likely to have caused spillover effects into other economies in the region due to soft remittances growth and softer demand for exports.
Cumulative GDP data for Belarus revealed that growth slid in the third quarter amid a slowdown in the manufacturing and retail trade sectors. Azerbaijan’s economy also grew meagrely in the first three quarters of 2018 as oil production remained subdued despite higher prices. Meanwhile, although official data is still outstanding for Ukraine—which is not included in the regional aggregate—the economy is expected to have slowed in Q3 after growing robustly in Q2. Retail sales growth moderated in the quarter pointing to lacklustre consumer spending and a tight monetary policy stance likely continued to dent growth.
On the political front, uncertainty has risen in Armenia, after Prime Minister Nikol Pashinyan resigned on 16 October, less than six months after assuming office. Pashinyan’s resignation was intended to prompt a new election as there has been no general vote since he rose to power suddenly last spring and the legislature is still controlled by the previous administration. However, a date for the vote has still not been set and a package of electoral reforms designed by Pashinyan were rejected by the legislature on 22 October. Meanwhile, Salome Zurabishvili came out on top in the first round of presidential elections in Georgia on 28 October, the last direct presidential election as the country moves to a fully-fledged parliamentary system.
Moderate recovery set to continue in 2019
The CIS economy’s modest recovery after a commodity-price induced growth slump in 2015-2016 is set to continue next year. Tailwinds from firmer commodity prices, rising energy and mineral output, contained inflation and solid labor markets should fuel activity. However, growth will remain moderate overall as a tax hike in Russia is expected to dent consumption in the region’s largest economy, while a weak Russian ruble is likely to translate into reduced remittances and exports for other CIS economies. The evolution of global commodity prices and the prospect and consequence of fresh sanctions against Russia are key risks to next year’s outlook.
The CIS economy is seen expanding 2.1% in 2018. Next year, growth should edge down to 2.0%, which is unchanged from last month’s forecast. This month, three economies saw no changes to their 2019 growth projections, including regional giant Russia. However, Azerbaijan, Belarus, Kyrgyzstan, Tajikistan and Uzbekistan had their prospects downgraded, while Armenia’s forecast was lifted. As for the three countries that are not included in the regional GDP aggregate, Georgia’s outlook was raised, while Turkmenistan and Ukraine’s prospects were revised down. In 2020, the CIS economy is seen growing 2.1%.
In 2019, Tajikistan and Uzbekistan are projected to be the region’s top performers, both growing above 5.0%. Turkmenistan, which is not included in the regional aggregate, is seen expanding a buoyant 5.7%. In contrast, Azerbaijan and Russia are expected to be the region’s worst performers, with expansions below 2.5%. Among the region’s larger economies, Kazakhstan will outpace the rest, growing 3.4%, followed by Belarus (2.9%).
RUSSIA | Putin’s dominance of Russian politics loosens
The recovery is expected to have lost steam in the third quarter, after growth accelerated notably in the second quarter. While a solid performance by the industrial and energy sectors likely buttressed momentum—the Ural oil price rose to the highest level seen since October 2014 in September and the manufacturing PMI hit a five-month high in the same month—a weak grain harvest, downbeat consumer sentiment and sanctions-related spillovers likely prevented a stronger pick-up. Consumer sentiment plunged in the third quarter in the aftermath of the government’s unpopular hike in the retirement age, and imports contracted for the first time in over two years in August—likely signaling weak domestic demand. Despite a public outcry, President Vladimir Putin finalized the rise in the retirement age on 3 October, signing the bill into law. His popularity has plummeted because of the reform and in September his party lost three regional governorships in recent elections.
Growth is seen slowing next year, after clocking in at 1.8% in 2018. A hike in the VAT and tense geopolitical backdrop will act as headwinds to activity, but the economy’s momentum should be shielded somewhat thanks to higher oil output. FocusEconomics panelists see GDP expanding 1.6% in 2019, which is unchanged from last month’s forecast. In 2020, GDP is seen increasing 1.7%.
KAZAKHSTAN | Economic momentum picks up
Economic activity bounced back at the end of the third quarter, supported by higher oil prices. The short-term indicator for economic activity shot up to 6.5% year-on-year in September, compensating for some of the downturn in July and August. Growth had decelerated sharply to 2.1% in August. Rising oil prices have fueled an improvement in the current account balance—recent data showed that the four-quarter rolling deficit shrunk sharply in Q2 compared to the same period a year ago. In addition, an upturn in retail sales growth in the third quarter points to an acceleration in private consumption as low levels of unemployment were sustained and inflation contained. However, rising upside risks to inflation stemming from a weaker tenge threatens to curb households’ purchasing power in the next quarter.
Higher oil production, supported by increased investment, coupled with a continued rise in oil prices should support growth next year. Moreover, private consumption is expected to remain solid, thanks to favorable labor market dynamics and easing inflation. Headwinds to the outlook arise from the intensifying tit-for-tat trade war and tighter global financial conditions. Uncertainty around the transition of power after President Nazarbayev leaves office also poses 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 | New IMF deal secured
The economy seemingly shifted into a lower gear in the third quarter on the heels of a robust outturn in Q2. Industrial output decelerated sharply on average in Q3, amid a deteriorating manufacturing sector. Retail sales growth also lost steam, in part due to the hryvnia’s weakening against the U.S. dollar which weighed on purchasing power. On the external front, the available data is also downbeat: Average merchandise export growth in July–August came in below that of Q2 amid decelerating exports of chemicals and metals. Meanwhile, the government signed a new USD 3.9 billion agreement with the IMF on 19 October, breaking a prolonged deadlock over the resumption of the Fund´s financial support. The politically unpopular decision of raising household gas tariffs by 23.5% was a critical precondition for the deal. The agreement will shore up the government’s finances and should boost investor confidence, allowing Ukraine to once again issue dollar-denominated bonds to finance country’s debt.
Growth is expected to moderate slightly next year; nevertheless, it should remain solid and is seen picking up pace again in 2020. Domestic demand will remain in the driver’s seat of the expansion, led by robust public and private investment activity. Furthermore, household consumption should remain strong amid tightening labor market conditions and lower inflation. FocusEconomics panelists see GDP rising 2.9% in 2019, down 0.1 percentage points from last month’s forecast, and 3.1% in 2019.
BELARUS | Growth wanes in third quarter
Preliminary national accounts data points to a marked slowdown of economic activity in the third quarter, following a strong outturn in the first half of the year. Industrial production grew at the slowest pace since Q1 2017 in the third quarter, largely due to cooling activity in the manufacturing sector. In addition, private consumption growth seems to have decelerated, reflected by slowing retail sales growth in Q3 as inflationary pressures intensified. The external sector’s backdrop continued to generate uncertainty throughout Q3 amid plunging export earnings due to the weakening of the Russian ruble; Russia is Belarus’ largest trading partner and takes a lion´s share of the country´s exports. Lastly, according to the latest survey data, the composite economic sentiment indicator deteriorated in September largely due to sliding confidence in the trade sector, while downbeat domestic demand conditions weighed on the overall business climate in the same month.
Growth should remain healthy but decelerate somewhat next year, helped by buoyant household consumption amid sustained labor market tightness. The country’s external imbalances are seen under control and its fiscal position should remain solid next year, while financial support from Russia should help with debt refinancing. FocusEconomics panelists see the economy expanding 2.9% in 2019, which is down 0.1 percentage points from last month’s forecast, and 2.6% in 2020.
MONETARY SECTOR | Inflation rises in September
An estimate of regional inflation revealed that price pressures increased in September, coming in at 3.6% (August: 3.3%). Higher price pressures were recorded in the bulk of the region’s economies. A weaker ruble fed into inflation in major-player Russia, while higher food prices and imported inflation put pressure on prices in several other economies. That said, inflation still remains moderate compared to historical data.
A less favourable external environment and rising inflation prompted Kazakhstan’s Central Bank to tighten monetary policy in October. Meanwhile, Russia’s Central Bank held interest rates unchanged in the same month, taking a wait-and-see approach after raising rates at the previous meeting. Russia’s Central Bank kept a cautious tone overall regarding future policy decisions, and some of our analysts are expecting another rate hike in the coming months.
Price pressures are expected to rise going forward due to pass-through effects from currency depreciation as well as from a hike in Russia’s VAT. The impact of future new sanctions on Russia is unclear. While fresh measures could spark a sharp depreciation in the ruble and amplify inflation, some analysts suspect that the market has already priced fresh sanctions into the ruble’s value. Inflation is projected to end 2019 at 4.7%, which is up 0.1 percentage points from last month’s forecast. In 2020, inflation is seen ending at 4.2%.