ADB lowers Eurasian growth forecasts

ADB lowers Eurasian growth forecasts
By bne IntelliNews September 28, 2016

Lower commodity prices and recession in Russia continue to weigh on Eurasian economies with growth projected to further ease this year, the Asian Development Bank (ADB) said in a new forecast published on September 27.

The growth forecast for the region for 2016 was lowered to 1.5% from 2.1% reflecting more pessimistic projections for energy exporters Azerbaijan, Kazakhstan and Turkmenistan. Depressed oil and gas prices and low external demand have weakened these economies, while lower remittances mainly from Russia are hurting other economies in the region, ADB said.

Growth next year is seen accelerating to 2.6%. Yet, it still represents a downgrade from ADB’s previous forecast of 2.8% mainly because of a slower growth now projected for Turkmenistan.

Moreover, inflation forecasts for Eurasian countries were raised to 11.5% from 10.8% for 2016 and to 6.4% from 5.9% for 2017. The revision comes on the back of a sharp currency depreciation that fanned inflation in Kazakhstan that more than counterbalanced lowered inflation forecasts for Armenia, Georgia, Kyrgyzstan and Turkmenistan. 

Additionally, weak import demand is helping contain widening current account deficits across the region, but the projection for 2017 is nevertheless revised higher to 3.9% of GDP, mainly because of a worsening deficit in Kazakhstan.


Armenia’s economy will likely expand by 2% in 2016, ADB said keeping the forecast unchanged from an earlier estimate made in March as first-half GDP figures were broadly in line with ADB’s expectations. Industry remains the key driver, while construction and agriculture are weighing on growth. On the demand side, public consumption continues to drive expansion offsetting weak household consumption that is suffering from a plunge in remittances. Growth in the second half of the year is expected to be trimmed by reduced remittances, adverse weather negatively affecting agriculture and lower international prices for exports of copper, molybdenum, and other nonferrous metals.

Monetary policy eased amid deflation that persisted through the first seven months of 2016. Higher food prices caused by bad weather may revive inflation later in 2016, but soft domestic demand and lower gas and electricity tariffs should help keep inflation low at 1.5%, ADB said lowering the inflation outlook from 3.8% expected earlier. The current account deficit forecast for 2016 was cut by 0.4 percentage points (pp) but remains unchanged for 2017.


Azerbaijan’s GDP is expected to contract by 2.5% in 2016 before returning to modest growth in 2017, as low oil and gas prices continue to take their toll on the battered economy. A double devaluation of the national currency in 2015 will continue to put downward pressure on consumption and raise inflation. Moreover, restrictive fiscal policy is reducing government investments further curbing demand. Government spending is expected to rise in the second half of the year but economic activity will likely remain constrained by tighter monetary policy and cuts in bank lending. The growth forecast for 2017 is nevertheless unchanged at 1%, assuming higher oil prices and some recovery in domestic demand.

Inflation projections stand unchanged at 12% for 2016 and 5.2% for 2017. The current account forecasts for 2016 and 2017 are maintained, as developments in the external sector align with ADB’s earlier expectations, with a deficit in 2016 converting into a surplus in 2017.


The small Caucasus country is the only one in the region for which ADB is raising its growth estimate on the back of strong domestic demand resulting from fiscal support for consumption and investment. Supported by buoyant tourism, continuing fiscal stimulus and strengthening business confidence, growth is expected to accelerate to 3% in 2016 and further to 4% in 2017. Both projections revised up by 0.5pp from ADB’s previous forecast.

On the demand side, a stressed external sector remains the main constraint on growth but is expected to be offset by strong FDI and additional spending on infrastructure, ADB said. “In the run-up to parliamentary elections in October 2016, the government plans to roll out an ambitious, growth-enhancing plan to develop public infrastructure in the second half of 2016 that embraces road and transport projects and urban redevelopment that supports tourism.”

ADB cut its inflation forecast for Georgia to 3% for this year but kept next year's at 4%. “Inflation has ebbed since the end of the first quarter of 2016 because currency weakness in Georgia’s main trading partners has curtailed imported inflation,” the report reads. Worsening trade balance is leading to projections that the current account deficit will expand in both 2016 and 2017.


Kazakhstan’s growth estimate for this year was cut to 0.1% from 0.7% expected in March in the light of the unexpectedly sharp slowdown in the first half of the year, continuing declines in industry, and weakening private domestic demand, ADB said. The growth forecast for 2017 was kept at 1.0%. “The pickup is likely because of the expected size and impact of countercyclical programs, the anticipated start of oil production at the Kashagan field, and an expected slowdown in consumer price increases,” the report notes.

Fiscal policy will likely be expansionary in the full year of 2016 with additional expenditures expected to be covered by large transfers to the budget from the country’s National Fund – projected at almost KZT3.7tn (equal to 50.1% of budgeted revenue).

The forecast for annual average inflation in 2016 was raised to 14.7% from 12.6%, reflecting the impact of continuing currency depreciation on import prices. The current account deficit forecast was worsened to 5.5% of GDP in 2016 from 3.5% expected earlier as declining oil production will reduce exports, while imports will also contract as the tenge depreciation weakens consumer purchasing power. Trade is projected to recover in 2017, with exports rising faster than imports as oil prices recover slightly, ADB suggests.


ADB is keeping its growth outlook for Kyrgyzstan's economy unchanged at 1% for 2016 and at 2% for 2017, assuming some recovery over the next year and a half  after GDP contracted 2.2% in the first seven months of 2016. Recession in Russia has been the main cause of falling output, ADB said adding, however, that recent developments suggest some stabilisation with remittances and exports resuming growth.

Inflation will likely accelerate in the second half of 2016 on seasonal factors but will still average to only half the 10% projected in March, ADB said. The inflation forecast is unchanged for 2017, assuming gradual tariff adjustments due to Kyrgyzstan’s accession into the Eurasian Economic Union.


Growth projections for Tajikistan were also maintained at 3.8% for 2016 and at 4% for 2017, ADB said, while noting macroeconomic risks from a rise in non-performing loans and deteriorating indicators of financial sector health. The bank also kept unchanged Tajik inflation forecasts, but suggested that inflation could accelerate further if currency controls curb domestic production and imports, thereby driving up prices for both. “Inflation averaged 5.7% in the first 7 months of 2016, reflecting efforts to reduce liquidity through foreign exchange controls and auctions of Treasury bills and of securities issued by the National Bank of Tajikistan, the central bank”, the report notes. During this period, the Tajik somoni depreciated by 10.7% against the US dollar despite currency interventions by the central bank.

Moreover, the depreciation in the first half of 2016 helped drive external debt to 35.9% of GDP, compared to 27.8% at the end of 2015, and continuing depreciation might breach the 40% legal limit on external debt, ADB cautions. The current account deficit forecast for 2016 and 2017 were kept unchanged at 4.8% and 5.5% of GDP, respectively.


Turkmen growth forecasts for this and next year have both been lowered to 5.5% amid a continued fiscal consolidation which aims to prioritise public spending and put a freeze on new large-scale projects. “The economy remains vulnerable to a protracted period of low energy prices and/or lower demand from its major customers for energy imports.”

Inflation is now projected to average 5% in 2016, or 1.6pp lower than the estimate made in March. For next year, inflation is seen easing to 4.4%, which also represents a downgrade on the 6% forecast made in March. To resist pressure for a new devaluation, the government has imposed stringent foreign exchange controls, which have allowed the Turkmen manat to remain stable against the US dollar since January 2015, containing inflation.

Even though the government has started phasing out subsidies and slowing investment spending, the fiscal balance is projected to move from nearly 0% in 2015 to a 2% deficit in 2016, reflecting higher social spending, ADB expects. The deficit is expected to narrow to 1.0% of GDP in 2017. The current account deficit is projected to widen more than projected earlier, with a “15.4% decline in exports mostly offset by a 16.7% fall in imports”.


Weaker external environment and slower growth in industry weighed on Uzbek economy in the first half of 2016, while government investments remained the main driver of growth. That is in line with ADB’s projections so the bank kept unchanged this year’s GDP growth forecast at 6.9% and next year’s at 7.3%. The bank is also maintaining inflation forecasts with higher government spending, continued hikes in administered prices and a depreciating local currency depreciation expected to be partly offset by lower import costs. The projections for a slightly widening current account surplus are also unchanged – at 0.2% of GDP  in 2016 and at 0.8% in 2017.