The Caucasus and Central Asian countries will increasingly suffer from large income losses amid an uncertain global economic environment and low commodity prices, the World Bank said in its Europe and Central Asia regional economic outlook entitled “Low Commodity Prices and Weak Currencies”, launched in Astana on October 26.
The bank projects the economy in the entire region to grow by 1.4% in 2015 and 1.8% in 2016. “The Europe and Central Asia region has still not fully recovered from the after-effects of the global financial crisis and part of the region is facing strong headwinds.” Cyril Muller, World Bank vice-president for Europe and Central Asia, said at the presentation of the outlook.
“The eastern part of ECA is hit hard by declining commodity prices, particularly oil, while geopolitical risks and increased financial market volatility in emerging markets are dampening potential growth across all countries,” added Muller. “To build economic resilience and set the stage for robust growth in the eastern part of the region, it is critical, therefore, to adjust to the ‘new normal’ of lower oil prices with exchange rate flexibility and an agile business climate.”
The Caucasus and Central Asian regions have been hard hit by the downturn in Russia and the oil price shock, directly and indirectly through the fall in oil prices, remittances and trade, the WB said. Growth rates in 2015 are expected to be about half those seen in 2014 in the South Caucasus and Central Asia. Russia’s economy is projected to contract 3.8% in 2015 and 0.6% in 2016, because of ongoing weakness in oil markets.
The Bank predicted GDP growth for Armenia at 2.1% in 2015, 2.7% in 2016 and 3% in 2017, for Azerbaijan 2%, 2.6% and 2.7%, Georgia 2%, 3% and 4.5%, Kazakhstan 1.5%, 2.1% and 3.3%, Kyrgyzstan 2%, 4.2% and 3.4%, Tajikistan 4.2%, 4.8% and 5.5% and Uzbekistan 7%, 7.5% and 7.7%, respectively. The outlook doesn’t provide projected growth figures for Turkmenistan.
The bank warned that GDP growth, however, told a small part of the story in countries directly and indirectly adversely affected by lower oil prices, as spending power of the population fell sharply.
“The real domestic income of a country also includes terms-of-trade gains or losses, which result from changes in export and import prices. The fall in the oil prices and the subsequent devaluation of the ruble caused large changes in import and export prices, and consequently large terms-of-trade losses. This has had a much stronger adverse impact on buying power than what is reflected simply by GDP,” the outlook explains. “The real value of remittances received from abroad is also an important part of the purchasing power in a country that is not a consequence of real GDP. The real value of remittances has sharply declined in the region because of real depreciations in countries where the remittances originate.”
Armenia, Georgia, Kyrgyzstan, Tajikistan and Uzbekistan sent hundreds of thousands of labour migrants in search of jobs in Russia and Kazakhstan before the slowdown hit the Russian economy in mid-2014. Decreased employment opportunities in labour recipient countries and depreciated national currencies have also depressed remittances in dollar terms that labour migrants send home.
Given the weaker buying power of many households in the Caucasus and Central Asia, poverty rates are expected to rise in several countries, the outlook warns.
“This is a reversal of the downward trend toward lower poverty rates across the region. Poor households in oil-exporting countries and remittances-receiving countries are hit by higher import prices due to devaluations, the disappearance of jobs in construction and other nontradable sectors, and because of fiscal pressures,” the outlook says. “This highlights the need for a quick adjustment to the new economic reality. Only if countries seize new opportunities in tradable sectors can the deterioration of poverty rates be stopped.”
The weak ruble, slowdown in Russia and low commodity prices have led regional currencies to devalue by between 35% and 50% this year so far, and governments in regional countries are now facing high inflation because of currency depreciations.
“Exchange rate adjustments, along with prudent monetary policy to keep domestic inflation under control, will help countries regain competitiveness in global markets in the eastern part of ECA. However, while structural reforms continue, the pace of longer-term reforms has slowed and large gaps remain for the eastern part of ECA, such as in competition policy, small-scale privatization, trade and foreign exchange regimes, and price liberalization,” the outlook notes. “Reinvigorating reforms is key to building economic resistance and setting the region back on the path to robust growth.”
Exchange rate depreciations over the past year are part of a transition towards a new equilibrium, as many structural changes occurred during the oil boom – including real appreciations, shifts towards the production of non-tradable goods and services and sharp rises in real estate prices – will now have to be reversed since oil prices are at a structurally lower level, the outlook predicts. The changes don’t only concern oil-exporting countries but also their neighbours as they received large amounts of remittances from workers in the oil-exporting countries and experienced similar structural changes during the oil boom.
“For oil-dependent countries, adjusting to lower oil prices is much more difficult than adjusting to higher oil prices. The drop almost always happens much faster than the rise. Moreover, while during an oil boom the associated real appreciation can be accommodated by either nominal appreciations or higher inflation (or a combination of the two), the real depreciation after the oil price drop is typically only be achieved by nominal depreciation of local currencies, as large domestic deflation is difficult to achieve in practical terms,” the outlook explains. “However, depreciation of currencies tests the stability of financial markets that are partly dollarized.”