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Growth in the Caucasus and Central Asia (CCA) is expected to come to a near halt this year - contracting to 0.9% in 2009 from 6.3% in 2008 - and recover only gradually in 2010, according to the latest International Monetary Fund forecast for the region.

The global downturn is now affecting most CCA countries, which include four oil and gas exporters (Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan) and four oil and gas importers (Armenia, Georgia, the Kyrgyz Republic, and Tajikistan).

CCA countries differ substantially in terms of per capita/GDP, which ranges from $800 in Tajikistan to $8,500 in Kazakhstan. Although linkages to international financial markets are relatively weak in most countries, the global economic crisis has caught up with the region via falling commodity prices, and lower export demand and remittance inflows, especially from Russia. And CCA growth, which had reached double-digit levels in recent years, is taking a hit. "As the global crisis spreads through the region, the hard-earned macroeconomic gains of recent years have been put at risk, with growth coming to a virtual halt and financial vulnerabilities on the rise," says Masood Ahmed, director of the IMF's Middle East and Central Asia Department, in a press release.

Russia links

The IMF says that the current contraction in Russia's economy is now slowing sharply both trade and remittances. Russia remains a key economic partner for CCA countries even though as trade flows have declined over the past decade, because financial linkages, such as remittances, have increased. In Tajikistan, remittances accounted for about 50% of GDP in 2008, with most Tajik migrants reportedly working in Russia.

Another factor affecting the region is the weakness of the Russian ruble, which has depreciated by about 30% against the dollar since July. Some CCA countries were initially reluctant to let their currencies depreciate, putting them at a competitive disadvantage and reducing the value of remittances given the corresponding appreciation of their currencies vis-à-vis the ruble. In recent months, however, most countries (such as Armenia, Georgia, and Kazakhstan) have moved to adjust their exchange rates.

Oil exporters are also being affected by lower world oil prices, although they could use their accumulated reserves to moderate the downturn, the IMF says. Even though current account and fiscal surpluses are disappearing as revenues fall, these countries have accumulated financial assets during the boom years that they can draw upon to provide a fiscal stimulus to domestic demand and counteract the decline in economic activity.

Lower inflows

Most CCA countries are also likely to see capital and other foreign exchange inflows drop off in 2009. The region has been affected by the drying up of trade credit and other credit lines.

In Kazakhstan, for instance, pressures in the non-oil private sector have increased, with banks challenged to secure funding and keep satisfactory levels of liquidity, which affected credit availability and growth prospects. Furthermore, this could also put pressure on the Kyrgyz Republic's banking system, which is one-third owned by Kazakhstan banks. And since Kazakhstan is also a destination for migrant workers from the region, the growth slowdown in Kazakhstan will contribute to lower remittances to other CCA countries.

The region's countries have varying outlooks depending on their conditions, but most are experiencing a drastic decline in economic activity, although a recovery is expected in 2010. Armenia, Tajikistan, and the Kyrqyz Republic, which depend heavily on remittances, will be more severely impacted, as well as Kazakhstan; while growth will be just barely positive in Georgia and the Kyrgyz Republic. Only Turkmenistan, Uzbekistan, and Azerbaijan are expected to delink somewhat from the downturn because of continued increases in oil and gas production and fiscal stimulus.

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