Continued low oil prices are exerting pressure on fiscal spending in Eurasia’s two largest economies – Azerbaijan and Kazakhstan; this, in turn, is slowing regional growth in Central Asia, the Asian Development Bank said in its latest outlook published on March 30. “While the expected pickup in oil prices will bring some relief in 2017, growth is expected to remain below the five-year average pace to the forecast horizon,” it said.
“Plunging petroleum prices, recession in the Russian Federation, and weakness in other trading partners took their toll on Central Asia, where average growth plummeted to 2.9% in 2015 from 5.3% a year earlier,” the bank said. “Forecasts of even lower petroleum prices and continued recession in the Russian Federation prompt a projection that average growth in the subregion will slow further in 2016 to 2.1%, with contraction forecast for Azerbaijan and growth at only 0.7% for Kazakhstan.”
Growth is projected to recover somewhat to 2.8% in 2017 on the strength of an improved external outlook and somewhat higher petroleum prices, the ADB continued. Steep currency depreciation in several economies helped push average inflation to 6.2% in 2015 from 5.7% last year.
“The lagged inflation effects of depreciation in 2015 and possible further currency weakness in some economies are projected to propel average inflation to 10.8% in 2016 as acceleration occurs in all economies, with inflation reaching double-digits in Azerbaijan, Kazakhstan, the Kyrgyz Republic, and Uzbekistan,” the bank said. At the same time, the report said expected exchange rate stabilisation should help rein in average inflation in the region to 5.9% in 2017.
Despite a better-than-expected performance in 2015, the outlook for the Armenian economy remains very uncertain. External factors like the recession in Russia, Armenia’s main commercial partner, will place a downward pressure on GDP growth, which is projected at 2% in 2016 and 2.3% in 2017, down from 3% in 2015. After growing by 11.4% in 2015, agriculture is expected to remain the key driver for growth in 2016, aided by government subsidies and good weather.
Meanwhile, growth in services, which account for half of the economy, and industry is expected to remain sluggish. Retail trade, investment and private consumption are expected to contract, while the country's current account deficit will be contained by decreasing imports. Fiscal policy will be gradually tightened after fiscal slippage and rising external debt in 2015, the multilateral lender writes, with the fiscal deficit expected to reach 3.5% in 2016.
Azerbaijan’s GDP is expected to contract by 1% 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, which is expected to contract by 12% in 2016, in line with the rise in inflation. Private consumption and investment will be the main sources of growth in 2016- 2017, while oil prices will severely challenge fiscal policy, resulting in a fiscal deficit of 3.1% of GDP.
Total government and government-guaranteed debt is expected to climb to 40.9% of GDP in 2016 because of investments in the gas project Southern Gas Corridor, up from 12.5% of GDP at end-2015. Strengthening the financial sector and boosting financing for small and medium enterprises are key to accomplishing the government's economic diversification agenda, the ADB said. The decision to close inadequately capitalised banks in January and February could strengthen the banking sector, as would the introduction of a single regulator for capital markets.
The Georgian economy is expected to grow by some 2.5% in 2016 and 3.5% in 2017 on the back of strong domestic demand resulting from fiscal support for consumption and investment. Anticipated hikes in social expenditure and capital outlays and a projected 16.5% yearly rise in credit are also expected to boost growth in 2016 and beyond. Industry, services and agriculture are all expected to expand by over 2% in 2016 and over 3% in 2017, in part thanks to government support such as a proposed zero tax on reinvested profit.
Inflation is expected to remain high at 5% in 2016 as the Georgian lari continues to depreciate against a strong dollar, but will decline to 4% in 2017. The central bank is expected to stick to its strategy of gradually raising the refinancing rate, while the current account deficit is expected to narrow to 9.5% of GDP in 2016 and 9.2% in 2017 as exports pick up to pre-2014 levels.
Growth is forecast to remain subdued at 0.7% in 2016 and 1.0% in 2017, the report says. “Higher countercyclical expenditure, the Expo 2017 in Astana, and the anticipated entry into production of the long-delayed Kashagan oilfield mitigate the prospective drop in private consumption,” the bank explained. “With commodity prices expected to show little improvement, however, growth could be lower than forecast if oil prices fall further or expansion in regional trading partners disappoints.” Over the next two years, fiscal policy is expected to support growth, while monetary policy is expected to focus on containing inflation, though high dollarisation and a shallow financial system will limit its effectiveness, the report suggested.
The sudden move to a floating exchange rate in August 2015 has revealed financial vulnerabilities that stem not only from persistently high NPLs (around 8%) but also from high and growing dollarisation and much lower oil prices, the bank said. “All banks must now measure credit risk by external ratings, while market risk and operational risks are assigned by set formulas,” it suggested. “Beyond these measures, the financial system requires considerable support. To provide it, the central bank needs credibility, autonomy, and the resources to fill this role, especially as high dollarisation hinders its ability to serve as a lender of last resort in foreign currency.”
Growth is expected to slow to 1% in 2016, with continued weakness in the external environment, and recover slightly to 2.0% in 2017, assuming some improvement in the Russian Federation and other trading partners, the report said. “However, the economy remains vulnerable to shocks from its largest enterprise, the Kumtor gold mine, where a drop in output cut 1% from growth in 2015 and disputed mine ownership could disrupt production in 2016.” Accession to the Eurasian Economic Union (EEU) in August 2015 may boost trade and transport, but demand in the EEU is weakening and the need to raise tariffs to EEU levels may shrink trade with economies outside the union, it suggested. “Lower remittances may further reduce household.”
Reducing the public foreign debt ratio (at 63.8% of GDP at end-2015) will require prioritising and rescheduling public investment, cutting the wage bill and other spending, and better managing debt. “Greater care when contracting and guaranteeing new debt would require a moratorium on commercial borrowing and improved debt monitoring to minimise risks from public enterprises,” it said. “Fiscal consolidation is essential to restore debt sustainability while funding programs that address poverty and boost growth.” It is critical to improve debt management and mobilise domestic sources of financing, the ADB suggested. “Measures to stimulate growth include using the Russian Kyrgyz Development Fund to support export-oriented industries and improving the business environment to attract investments.”
Growth will stagnate at 0.1% in 2016 and 0.5% in 2017 as mining production declines and shrinking Development Bank of Mongolia disbursements, rising debt repayments, and mounting balance-of-payments pressures will necessitate tighter macroeconomic policy, the ADB said. “Policy responses should include reducing consolidated deficits further, strengthening debt management, and – most urgently – resolving looming external debt repayments. Gradual currency depreciation in line with market fundamentals would restore competitiveness and contain balance-of-payments pressures while safeguarding foreign exchange reserves, but its adverse impact on the financial sector and the public debt ratio cannot be ignored. Loose monetary policy should be avoided, as it could aggravate balance-of-payments pressures. Special care needs to be taken with civil servant replacements, especially in key macroeconomic areas, to ensure that sufficient institutional memory and capacity are retained to address immediate challenges.”
Growth is forecast to slow to 3.8% in 2016, reflecting the continuing recession in the Russian Federation, before recovering to 4.0% in 2017 with some recovery in the external outlook, the bank suggested. “Fiscal policy is expected to be expansionary over the next two years given the challenges facing the economy,” it said. Monetary policy will likely aim to curb inflation while preventing recession but broad money growth will rise mainly as foreign exchange deposits gain value in local currency terms. “Exchange rate policy is expected to move gradually to a floating rate regime because of limited reserves,” the report continued, but “banks face serious risks from ongoing depreciation, tightened foreign exchange regulations, and stagnant retail trade and services.”
Tajikistan needs a new growth model based more on domestic production and exports, the bank said. “While stimulating demand may help in the short run, sustained growth will require supply-side reform to revive the country’s industrial base and boost employment,” it noted. Tajikistan should address important obstacles facing businesses to attract private investment: “Adopting more stable and transparent investment incentives; reducing the number of surprise business inspections, in part by halving the number of government units conducting them; limiting advance tax payments to three months’ worth of annual liabilities; streamlining the granting of construction permits; and simplifying regulations on certifying product quality, toward boosting exports.”
Growth is projected steady at 6.5% in 2016, rising to 7.0% in 2017, but like in other regional countries, it could be lower if external weakness persists, requiring the government to implement more stringent fiscal adjustment, the report suggested.
While fiscal measures can offset external shocks over the near term using savings accumulated in sovereign wealth funds, a prolonged period of low energy prices could diminish these buffers: “Greater diversification would help smooth output volatility, create jobs to absorb the country’s young and growing working-age population, and develop the economy outside of the hydrocarbon sector.”
Growth is forecast to slow to 6.9% in 2016 because of the weak external outlook and recover to 7.3% in 2017, led by public investment and government spending, the report said. Uzbekistan’s exports depend heavily on prices of a few major commodities and developments in a handful of countries such as China, Russia and Kazakhstan. This requires a more diverse and sophisticated export base to minimise external shocks and ensure export competitiveness, highlighting the importance of securing the continued transfer of technology, the report suggested. “Liberalising foreign trade and promoting foreign investment facilitate access to global technology and innovation. Though exposing the country to more volatility, a more open economy promotes the adoption of external knowledge through trade and foreign investment,” it said.