Eurasian growth set for modest recovery in 2017, forecasts EBRD

By bne IntelliNews November 4, 2016

Though growth will likely ease further in 2016, economies in Central Asia and the Caucasus are set for a modest recovery next year, driven by improved outlook for Russia, an important trading partner, and a major source of remittances for the region, the European Bank for Reconstruction and Development (EBRD) said in the latest edition of its Regional Economic Prospects released on November 3.

Growth in Central Asia is projected to ease to 2.9% in 2016 from last year’s 3.6% as the build-up of structural challenges over 2014-16 arising from lower commodity prices, remittances and exports as well as declining local currencies are increasingly depressing growth, creating fiscal pressures and increasing risks in the region, the EBRD said. As the external environment is beginning to normalise, growth is set to gain strength, reaching 3.9% in 2017, driven by a positive trend in commodity exporting countries. Both estimates represent a slight deterioration from EBRD’s previous report in May, when growth was forecast at 3.3% for 2016 and at 4% for 2017.

The outlook, however, is subject to downside risks. There is growing risk that economic or financial sector challenges can spill over across the Central Asian countries, even if economic linkages between most of the countries remain limited, the EBRD warns. “The spillover risk, combined with the global and regional security incidents observed over 2016, are increasingly negatively affecting consumer, business and investor confidence in the region, including in the largest economy – Kazakhstan,” the report suggests.

In the Caucasus, Georgia will be the only of the three countries in the region to register stronger economic growth both in 2016 and next year.


Armenia is poised to lose its spot from last year as the fastest growing Caucasus economy as growth should weaken from 3% in 2015 to 2% this year and next, the EBRD said, keeping its forecast unchanged from May. The slowdown comes as rising exports and government consumption is offset by a contraction in gross fixed capital formation and household consumption.

Weak domestic demand and low import prices are pushing inflation into negative territory, which in turn is negatively affecting tax and customs revenues and the current account deficit. The conflict in the Nagorno-Karabakh region represents a risk to the growth outlook though, the bank warns. 


The oil-dependent Azerbaijan suffered the most in the region from the commodity slump. The economy is projected to contract by 3% in 2016 as capital investment, an important driver of growth in the previous years, dropped significantly. External and fiscal surpluses changed swiftly into twin deficits on the back of falling hydrocarbon revenues. After two step-devaluations in 2015, currency pressures lingered in the first nine months of 2016 despite efforts to bolster confidence in the manat, the EBRD says.

Rising inflation and exchange rate pressures forced the central bank to raise rates but the monetary impact of the hike is dampened by the high level of dollarization and an insufficiently developed money market. Forex deposits now account for some 80% of total. Yet, the combined assets of the country’s state oil fund and the central bank’s exchange reserves provide adequate safeguards against foreign exchange liquidity risks, accounting for 75% of the country’s economic output. Like Armenia, a flare-up of tension in the disputed Nagorno-Karabakh region represents a risk to the growth outlook.


Georgia’s economy is benefitting from increased investor confidence and a strong tourism season that offset the negative effects on remittances and exports. Growth will accelerate to 3.4% in 2016 from 2.8% last year and further gain strength to 3.9% in 2017. The Deep and Comprehensive Free Trade Area (DCFTA) and the prospect of EU visa free regime is contributing to improved investor confidence along with business-friendly policies of the government and central bank, the EBRD points out. Growth next year will be supported by an increasing impact of the DCFTA implementation and increased competitiveness, as well as strong domestic and foreign direct investment in infrastructure and other sectors.


Low oil prices, subdued growth in Russia and economic challenges in China continue to depress growth in Central Asia’s largest economy, which is exaggerated by the negative impact of regional risks and global and domestic security incidents on consumer, business and investor confidence, the EBRD said, cutting its 2016 GDP growth by 0.4 percentage points (pp) to 0.7%. In the short run, the country will continue to largely rely on the state support programmes and state-owned and quasi-state-owned enterprises to drive growth, which is projected to improve to 2.4% next year helped by improved external environment that should help boost oil exports, FDIs and domestic investments.


Kyrgyzstan is heading for a sharp slowdown this year, with economic growth projected to weaken to 1.6% from last year’s 3.5%, the EBRD estimates. Still, the estimate represents a 0.6pp improvement on EBRD’s previous forecast. The economy is suffering from a sharp decline in remittances and lower production at the flagship Kumtor gold mine. “The disruptions of gold production were a result of delay with agreeing the 2016 mining plan between the government of the Kyrgyz Republic and Centerra Gold, a situation that was resolved in June 2016,” the report reads. While financial support and FDI from China and Russia have helped to support growth, a build-up of challenges over 2014-16 will continue to weigh on growth prospects in the short term, the bank cautions.


Lower commodity prices and slower exports to China weighed on Mongolia’s economy over the past two years, bringing GDP growth from double-digit figures in 2011-13 to 8.1% in 2014 and 2.4% in 2015. A slowdown in the real estate sector and the tugrik’s 28% depreciation against the US dollar since 2014 also played a role.

Still, the planned expansion of the country’s copper and gold mine Oyu Tolgoi will provide a significant boost to the country’s economic growth going forward. The nearly $6bn project will increase FDI and should lead to an improvement in the investment climate and in consumer confidence, the EBRD expects. Growth in 2017 is projected to accelerate to 3.5% from 2% expected for 2016. On the other hand, the government’s ability to stimulate growth will be limited by the high level of state debt (200% of GDP as of June) and upcoming bond repayments in 2017 and 2018 (equivalent to 9.4% of GDP).


Like most of Central Asian economies, Tajikistan will experience a slowdown in GDP growth this year amid the challenging external environment. The economy is projected to expand by 4.5% in 2016, to follow a 6% hike in 2015. Such as the case with its neighbour Kyrgyzstan, Tajikistan’s economy is facing the same problems – declining remittances from Russia and a sharp depreciation of the local currency.

The somoni depreciated 35% against the US dollar over the past year and a half, putting pressure on non-performing loans (NPLs) and the performance of the banking sector, the EBRD notes. The external and internal challenges, combined with difficult business environment, can be expected to continue to suppress economic activity, with growth in 2017 expected to further weaken to 4.1%. “Moreover, there is downside risk to achieving this level of growth that can arise from possible further deterioration in the banking sector and challenging fiscal position of the country. External financial support and investment from the bilateral partners and IFIs will be key to ensuring economic stability,” the EBRD says.


Turkmenistan’s will be the sole Central Asian economy to keep pace from last year with growth projected to stay at 6.5% in 2016. Next year, officially reported growth can be expected to recover slightly to 7.1%, supported by FDI both in the extractive and non-extractive sectors and a gradual improvement in the external environment. However, these positive factors will be offset by negative effects of the currency restrictions on the real economy.

The authorities introduced stringent FX regulation seeking to mitigate pressure on the local currency, which is pegged to the US dollar. The new regulations, however, negatively affect the ability of businesses in the country to carry out import-export operations, according to the EBRD.


Uzbekistan’s economic growth is projected to ease to 6.5% this year from 8% in 2015 reflecting a build-up of weaknesses in the economy resulting from a sharp drop in remittances from Russia and a slowdown in some of the main trading partners over 2014-15, the EBRD predicts. “In 2017, growth can be expected to decline further to 6.2%, as external factors continue to weigh on remittances and trade, and to crystalize internal macroeconomic vulnerabilities, increasing risks to growth.”

Real GDP growth Actual Current forecast Change from previous forecast in May
  2014 2015 2016 2017 2016 2017
Armenia 3,6 3,0 2,0 2,0 0,0 0,0
Azerbaijan 2,8 1,1 -3,0 1,0 0,0 0,0
Georgia 4,6 2,8 3,4 3,9 0,0 0,0
Eastern Europe and the Caucasus -1,7 -4,8 -0,4 1,7 -0,2 0,0
Kazakhstan 4,3 1,2 0,7 2,4 -0,4 0,0
Kyrgyzstan 3,6 3,5 1,6 2,6 0,6 0,0
Mongolia 8,1 2,4 2,0 3,5 -1,9 -1,6
Tajikistan 6,7 6,0 4,5 4,1 0,0 0,0
Turkmenistan 10,3 6,5 6,5 7,1 0,0 0,0
Uzbekistan 8,1 8,0 6,5 6,2 0,0 0,0
Central Asia 6,0 3,6 2,9 3,9 -0,4 -0,1
Soure: EBRD's November 2016 Regional Economic Prospects  

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