ADB cuts Eurasian growth forecasts

By bne IntelliNews September 23, 2015

Naubet Bisenov in Almaty -


The Asian Development Bank has cut its growth forecast for Central Asia and the Caucasus to 3.3% from 3.5% in 2015 and to 4.2% from 4.5% in 2016, as the regional economies try to adjust to lower global commodity prices and recession in the Russian Federation, the bank said in its latest Asian Development Outlook 2015 Update, published on September 22.

The bank said the lower oil and gas prices cut export revenues, constraining growth in the region’s oil-exporting countries – Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan –while weak remittances, mostly from Russia, limited consumption in Uzbekistan and the region’s energy-importing countries – Armenia, Georgia, Kyrgyzstan and Tajikistan.

The regional economies, the ADB said, benefited from public investment in services, agriculture, mining and construction, while trade and export-oriented manufacturing remained burdened by weak external demand, especially a slowdown in China. “The lower growth forecast for 2016 reflects a more sluggish recovery in Kazakhstan and the lagged impact of the recession in the Russian Federation and weaker performance in the PRC [People’s Republic of China],” the update says.

The bank raised the inflation forecast for Central Asia for 2015 to 8.1% from the 6.7% projected in the Asian Development Outlook (ADO) 2015, as “the sharp depreciation of the Kazakh tenge on 20 August warrants a rise in the inflation forecast for Kazakhstan, to 8.9% from 6.0%”.

Kazakhstan’s abandonment of a trading corridor for the national currency’s exchange rate, allowing it to float freely, resulted in a 33% devaluation between August 20 and September 22, and in a depreciation of other regional currencies. At the same time, price controls put in place across the region after currency devaluations in 2014 and early 2015 have helped keep inflation from accelerating faster, despite increases in food prices in the first half of 2015 and the float of the tenge, the ADB said. “With the lagged impact of the depreciation raising the 2016 inflation forecast for Kazakhstan to 7.9% from 6.2%, the aggregate inflation projection for Central Asia in 2016 is increased to 7.5% from 6.6% in ADO 2015.”

The bank projects the current account deficit for Central Asia in 2015 to equal 3.2% of GDP, wider than the 0.2% deficit projected in ADO 2015, reflecting an expected widening of Kazakhstan’s current account deficit to 5.2% of GDP and a halving of the projected surplus for Azerbaijan from 12.0% of GDP to 6.0%, in view of weaker prospects for petroleum exports. “These changes offset a narrower current account deficit projected for Armenia, revised from 9.2% of GDP to 8.7%. For 2016, the current account balance for Central Asia is now projected to be a deficit of 1.6% of GDP, compared to the 0.2% surplus forecast in ADO 2015, as a poorer outlook for petroleum and metal prices widens the projected deficit for Kazakhstan to 3.2% of GDP and narrows Azerbaijan’s forecast surplus to 8.0%.”


GDP growth accelerated to 4.0% in the first half of 2015 from 2.6% in the same period in 2014 and to 3.5% for all of 2014, and all major sectors contributed to growth, but a 4.2% slump in trade slowed growth in services to 1.8% from 3.7% a year earlier, the bank said in the outlook. While agriculture had double-digit growth of 15.5%,  industry including construction expanded by only 3.7%, with private consumption and investment declining and public consumption showing only modest gains. Foreign trade deficit decreased significantly, as exports fell much less than imports.

“Despite strong growth in the first half, the growth forecasts are trimmed for 2015 and 2016, as problems in Armenia’s major trading partners continue to reduce trade, remittances, and investments and so depress economic growth,” the outlook says. “Agriculture is still foreseen as the primary driver of growth, along with a modest contribution from industry and services.”


The economy rebounded with robust growth of 5.7% in the first half of 2015, up from 2.1% in the same period in 2014, boosted mainly by government capital expenditure, with the economy outside of the large petroleum sector being the major driver of growth, the bank said. The ADB didn’t change its earlier economic growth forecasts of 3% in 2015 and 2.8% in 2016 in the update. The public investment programme remains a key source of economic expansion and employment, but budget revenues are under pressure from lower oil prices. Despite a reduction in spending from the budget plan, fiscal policy is expected to remain somewhat expansionary in 2015 to support the economy, the ADB suggested.

“The 2016 budget is being tightened, as low petroleum prices have led to the postponement of some investment projects. Notwithstanding these developments, this update maintains ADO 2015 growth projections for 2015 and 2016,” it said. Official foreign currency reserves fell by more than 30% in January–August 2015 because the central bank intervened to maintain the new exchange rate after the February 2015 devaluation of the Azerbaijani manat, the bank noted. “Declining foreign currency reserves and oil prices are putting further pressure on the manat and could trigger another devaluation if recent trends continue over the coming months.”

Dollarisation is the main concern in the banking sector, as dollar deposits almost doubled after the devaluation, and to limit inflation, the central bank has reduced local currency liquidity. “With tepid domestic demand largely offsetting price pressures from the devaluation, year-on-year inflation rose to only 3.5% in the first half of 2015, which was nevertheless up from 1.6% for the same period in 2014. The devaluation will continue to put inflationary pressure on imports other than food.”


Preliminary data show a further slowdown to 2.6% in the first half of 2015, reflecting declines of 5.2% in manufacturing and 2.5% in trade despite strong growth of 22.9% in mining and 17.2% in construction, the bank said. Bank credit expanded by 12.2% in the first quarter, but fell by 1.5% in the second quarter line with slower growth. Despite planned fiscal consolidation, capital spending is expected to contribute to growth in the second half of 2015 and in 2016, the update says.

“However, net exports will remain a drag on growth, as recession in the Russian Federation and Ukraine weakens the external outlook. Growth forecasts are maintained for 2015 and 2016, but growth could be lower if recession in the Russian Federation proves worse than currently forecast, along with its impact on Georgia’s other trading partners in the subregion.”

Continuing moderate inflation, despite depreciation of the Georgia lari by nearly 33% since November 2014, reflects weakening domestic demand (as much domestic credit is denominated in dollars) and reduced profit margins for firms, along with lower prices for imported food and energy, the ADB expects. However, inflationary expectations have recently increased, with the depletion of inventories accumulated at cheaper prices, rising production costs, and extensive dollarisation in the economy. To counter these expectations, the National Bank of Georgia raised its policy rate in steps by 200 basis points to reach 6.0% in August, but inflation is expected to accelerate to about 6% by year-end.

The current account deficit reached 14.1% of GDP in the first quarter of 2015 as the trade deficit widened and the regional economic slowdown trimmed remittances, the bank said. “The deficit was funded largely through foreign direct investment inflows and official development assistance.”


Kazakhstan’s abolition of a trading corridor for the tenge on August 20 was a result of the depreciation of other currencies in the region and its environs, notably the ruble, which, along with the drop in prices for oil and other commodities, had made Kazakhstan less competitive, the ADB said. “While still recovering from the 2014 devaluation, low oil prices, and ruble depreciation, the economy suffered a further shock from the early move to a freely floating exchange rate and the resulting depreciation of the tenge.”

Over the medium term, gains from a more competitive exchange rate are likely to materialise, the ADB said, but analysts at Moody’s believe the devaluation of the tenge doesn’t offer significant benefits to Kazakh exporters.

Despite the repeated revisions of the 2015 budget reflecting lower oil prices, the government is committed to continuing some stimulus expenditure despite sharply declining revenues, the ADB said. “Real growth may suffer from lower private consumption in response to higher import prices, and from diminished private investment as commodity producers see profits fall”. The bank expects a projected rise in exports and preparations for Expo 2017 will promote a recovery in growth despite continued weak private consumption and investment and possible downside risks from a rise in interest rates to contain inflation. The growth forecast is lowered for 2015 and 2016 from 1.9% to 1.5% and from 3.8% to 3.3% respectively.

Inflation was modest at 5.3% in the first half of 2015, down slightly from 6.1% a year earlier, mainly because of weaker aggregate demand and cheaper imports from the Russian Federation after ruble depreciation. However, in the second half of 2015, tenge depreciation will directly spur import prices, especially for non-food imports with limited scope for substitution, and thus quicken inflation.

While the government is trying to contain price increases by, for example, applying price controls and delaying to 2016 the expected salary increase for public servants, inflation is now projected to be higher by half in 2015 than the ADO 2015 projection – 8.9% against 6%. For 2016, the lagged impact of the August 2015 depreciation prompts a smaller upward revision – to 7.2% against earlier forecasts of 6.9%.

“Inflation should stay in the single digits, however, constrained by contracting private demand and lending suppressed by local banks’ foreign exposure and a currency mismatch between highly dollarized deposits and loans denominated mostly in tenge,” the update says. “The newly introduced inflation targeting regime will need to strike a balance between high interest rates, which could mute economic growth, and high inflation rates, which could force further tenge depreciation and thus higher import prices.”

Low oil and metal prices caused export revenues to fall by almost 47% in the first quarter of 2015 and the current account to turn negative, the bank said. “As commodity prices are expected to remain low in 2015 and 2016, lower export earnings outweigh lower merchandise imports, the decline in net service exports, and reduced net investment income.” The bank now forecasts a much larger current account deficit for 2015. However, exports are expected to recover modestly in 2016, which will ease the current account deficit despite slightly larger demand for imported goods and services in preparation for Expo 2017. The projected current account deficit is nevertheless raised from the earlier forecast – 5.2% of GDP against 1% in 2015 and 3.2% against 1.3% in 2016.

“Production at the Kashagan oilfield is now expected to begin in 2017, which should boost growth and strengthen the current account balance over the medium term,” the update concludes.


Kyrgyzstan’s economy performed better this year so far, compared to the previous year, but despite this the ADB maintains the growth forecast for 2015, as full-year developments will depend heavily on remittances from and trade with Russia, which is experiencing a marked recession. The growth forecast for 2016 is similarly sustained on the assumption of some recovery in the Russian Federation and other regional trading partners, the bank assumes. “The Kyrgyz Republic’s accession to the Eurasian Economic Union (EEU) on 8 May 2015 and the physical opening of the EEU borders effective from 12 August 2015 add uncertainty to the country’s growth prospects in the second half of 2015 and over the medium term.”


Growth slowed to 6.4% in the first half of 2015 as industrial expansion moderated to 14.9% from 16.8% a year earlier, reflecting relatively meagre 3.5% growth in aluminium, and as spillover from recession in Russia cut services growth to 0.8%, and agriculture maintained 6.9% growth. The ADB trimmed the 2015 growth forecast from that of ADO 2015 to 3.5% against 4%. Slower expansion is expected to carry over into 2016 despite expected recovery in the Russian Federation, prompting a similar trimming of that forecast – 6.5% against 7%, the bank said.

The update retains the inflation forecast in 2015, while inflation is raised to 7.0% for 2016 in view of expected price increases for food and utilities reflecting in part upcoming salary hikes in the public sector. “Inflation could accelerate further as a result of gradual depreciation of the Tajik somoni and currency controls that curb production and imports, thereby increasing prices for both domestic and imported goods.”

A 32% fall in remittances in the first half of 2015 from the same period in 2014 contributed to a 25% decline in imports, as exports fell by about 8%, the bank said. “The uncertain external environment resulting from continued ruble depreciation and the weakening of the PRC yuan and Kazakh tenge is expected to affect Tajikistan mainly through remittances, as the Russian Federation and Kazakhstan are the main destinations for Tajik migrant workers, and through external trade, as trade with the Russian Federation, the PRC, and Kazakhstan represented about 60% of all imports and 26% of exports in 2014.”


Economic growth in the first half of 2015 was reported at 9.1%, lower than in the first half of 2014. Growth was driven by expansion in industry by 6.2%, construction by 12.1%, agriculture by 11%, and services by 11.6%. On the demand side, a 7.9% rise in investment was the main driver of growth, according to the ADB.

“For the year as a whole, the decline in global energy prices is projected to reduce export earnings and somewhat slow the pace of investment. However, strong fiscal and external buffers will help support growth in a difficult external environment.” Accordingly, the bank slightly reduced the forecast for growth in 2015 to 9.5% from 9.7% but maintains the forecast for slower growth at 9.2% in 2016.

Declining energy prices are expected to reduce export receipts despite a higher volume of gas exports to satisfy gas contracts with China, the bank assumes. Under the current scenario of low prices for hydrocarbons, the maintains the forecast for the current account deficit widening to 8.5% of GDP in 2015 and subsequently narrowing to 6.2% in 2016 with some recovery in oil and gas prices.


According to government sources, the economy grew by 8.1% in the first half of 2015, the same rate as in the first six months of 2014. Investment was the main source of growth in the first half, with gross fixed capital formation estimated to have risen by 9.8% over the same period of 2014, as the government continued its development programmes, the bank said. Based on first quarter data, the contribution of net exports to growth is estimated to have declined as external demand remains weak and economic difficulties affect major trading partners. As developments broadly correspond to forecasts made in ADO 2015, the update maintains its projected growth rates for 2015 and 2016 at 7% and 7.2% respectively.

The trends influencing the consumer price index remain the same as described in ADO 2015: higher government spending and continued depreciation of the local currency partly offset by lower import costs, the bank said. As a result, it maintains the inflation forecasts for 2015 and 2016 at 9.5% and 10% respectively.

The government announced an external trade surplus of only $83.4mn in the first half of 2015, or 82% below the $482.1mn trade surplus reported a year earlier. Exports remained weak due to historically low global prices for the country’s natural gas, gold, copper, and cotton exports, and to slowdowns in key trading partners – Kazakhstan, the Republic of Korea, and the Russian Federation, the ADB explained.

Cumulative trade with these three partners declined by 18% from the same period in 2014. At the same time, trade with China grew by around 36% year on year, presumably on energy exports, it noted. Imports of goods and services declined by 6% from the same period in 2014, mainly because of lower global prices and tighter import controls. As external developments mirror those anticipated in ADO 2015, the update maintains the earlier projections for small current account surpluses in 2015 and 2016 at 0.9% and 1.1% respectively.


Growth decelerated from 7.8% in 2014 to 3.0% in the first half of 2015. Consumption increased by 2.3% over the same period last year, but gross fixed capital formation dropped by 42.7% because foreign direct investment plunged below 1% of GDP and stimulus was partly withdrawn, the ADB said. Exports declined by 4.5% as a 16.3% increase in copper concentrate exports (13.9% by volume) could not compensate for lower volumes and prices for both coal and iron. Net exports expanded, however, as lower foreign direct investment dragged down imports by 30.3%. On the supply side, agricultural growth softened to 9.4% and services grew by 0.3%, but industrial growth remained robust at 12.1% as production at the Oyu Tolgoi copper and gold mine picked up, the bank said.

The growth forecast is lowered for 2015 and 2016 – to 2.3% from 3% and to 3% from 5%, reflecting a deteriorating external environment, drought-affected harvests, necessarily tight monetary and fiscal policies, and, on the positive side, the start of underground works at Oyu Tolgoi in mid-2016, the bank said.

Average inflation will be lower this year than forecast in ADO 2015 (7.6% against 8.9%), and supply-side factors will hold inflation steady in 2016 (7.6% against 7.7%). The current account deficit will narrow more than forecast earlier but widen again in 2016 on imports for Oyu Tolgoi development – from 8% to 5% and 15% to 7%.

“Although the poverty rate improved to 21.6% in 2014 from 27.4% in 2012, many people remain vulnerable, as does the economy as a whole, to risks stemming from downward pressure on commodity prices, fluctuating production expected from Oyu Tolgoi and other mines, severe weather that affects crops and livestock, and uncertainty regarding the authorities’ success in maintaining tight macroeconomic policies,” the ADB concludes.


Related Articles

COMMMENT: Great challenges for Eurasia call for decisive solutions

Juha Kähkönen of the IMF - The Caucasus and Central Asia (CCA) region continues to navigate a wave of external shocks – the slump in global prices of oil and other key commodities, the slowdown ... more

IMF calls for Central Asia to tighten monetary policy

Naubet Bisenov in Almaty -   Caucasus and Central Asian (CCA) countries need to tighten their monetary policy to anchor inflation expectations, but excess tightening may weaken financial ... more

COMMENT: Once I lived the life of a millionaire…

Peter Szopo of Erste Asset Management -   No, the title of this column is not the first line of the autobiography of an erstwhile emerging markets investor – although it could be. Somebody who ... more

Notice: Undefined index: subject_id in /var/www/html/application/controllers/IndexController.php on line 335