OUTLOOK 2012: Eurasia - a question of stability

By bne IntelliNews December 19, 2011

Clare Nuttall in Almaty -

Armenia is on track to achieve growth of 4.3% in 2011, according to the International Monetary Fund (IMF). Growth has been driven by mining and manufacturing, but agriculture and other sectors also showed a strong post-crisis recovery. However, the country is vulnerable to both the Eurozone crisis and a possible slowdown in Russia, which is both Armenia's main export market and the primary source of both foreign direct investment (FDI) and remittances. In November, Moody's Investors Service changed the outlook for Armenia's sovereign rating from stable to negative. According to the ratings agency, Armenia is in worse financial shape than it was at the start of the previous crisis, and therefore less able to resist turmoil in the global economy. Armenia is also preparing to hold parliamentary elections in May 2012. These will be the first national elections since the 2008 presidential elections, which were followed by mass riots and the deaths of at least 10 people.

In Azerbaijan there is a growing realisation that the country's oil and gas reserves won't last forever. Unless major new discoveries are made, production is set to peak in 2020, bringing Azerbaijan's oil boom to an end. 2011 saw a fall in hydrocarbon production for technical reasons, resulting in low forecast growth of just 0.2%, the IMF says. While production is set to revive in 2012, Baku has focused recently on building up the non-resource sectors of the economy with some success. Economic growth outside the hydrocarbons sector is expected to come in at nearly 9% in 2011, up from 7.5% in 2010. Measures are being taken to encourage the development of Azerbaijan's stock exchange to expand the funding options for local companies. The government also hopes that continued economic prosperity will stave off political discontent. Early 2011 saw several, admittedly small-scale, protests organised via social networking sites and apparently inspired by the Arab Spring.

2011 was a good year for the Georgian economy, which is expected to grow by 5.5% according to the IMF, slowing slightly to 5.2% in 2012. With the exceptions of agriculture and construction, production in most sectors of the economy is now above pre-crisis levels. The government is targeting further growth in the energy, tourism and agricultural sectors, and has opened negotiations with the EU with the aim of increasing agricultural exports to Europe. Inflation, a concern earlier in 2011, has been brought under control. Inflation fell to just 2.3% year on year in October, allowing the National Bank of Georgia to cut the main refinancing rate from 7.25% to 7.00%. FDI, which was severely hit by the August 2008 war against Russia, revived in 2011. The latest figures from Geostat show that FDI was up 66% year on year in the third quarter of 2011. Georgia attracted a total of $643m in January-September.

With two revolutions in just six years, Kyrgyzstan has had a turbulent time recently. After Almazbek Atambaev was sworn in as president in December, there are hopes that stability will be restored and the economy given a chance to grow. The April 2010 revolution and ethnic violence in June 2010 caused a 1.4% contraction in the economy that year, but in 2011 there has been a strong recovery, with GDP up 5.5% in the first half of 2011, according to the European Bank for Reconstruction and Development (EBRD). Bishkek hopes to attract much-needed investment, especially to the mining, tourism and agriculture sectors. This may be helped by the country's accession to the Russia-Belarus-Kazakhstan Customs Union, which is expected soon. However, there are some concerns for 2012. Kyrgyzstan's ruling coalition collapsed immediately after Atambaev's inauguration and as of mid-December a new government had not been formed. The financial sector has largely recovered from the events of 2010, but some problem banks remain, the EBRD says. Kyrgyzstan's transport and energy infrastructure is also in urgent need of repair and modernisation.

On the back of its mining boom, Mongolia is set to be one of the world's fastest growing economies in 2011, with growth of 11.5% rising to 11.8% in 2012, according to the IMF. FDI, most of it going into the mining sector, reached 26% of GDP in 2010, and similar levels continued in 2011. In addition to the massive Oyu Tolgoi copper-gold deposit and the Tavan Tolgoi coal deposit, Mongolia has numerous smaller deposits. Ulaanbataar is seeking to avoid over-reliance on a single sector, and through the creation of the Mongolian Development Bank will invest into other areas of the economy. However, there are growing concerns the economy could be overheating. The IMF has warned that the government's expansionary policies have created inflationary pressures and made the economy more vulnerable to economic shocks. "Additional spending [in 2011] would further overheat the economy, hurt the poor by driving up inflation, increase the vulnerability to a global commodity shock, and undermine credibility in fiscal policy and the fiscal responsibility law," the IMF warned in November.

The poorest of the post-Soviet republics, Tajikistan's economy rebounded in 2010 and the country is expected to achieve a respectable 6% growth rate in both 2011 and 2012, IMF forecasts say. Tajikistan is the world's most remittance-reliant country, with remittances from migrant workers mainly in Russia accounting for at least 31% of GDP, according to the World Bank. It is therefore vulnerable to problems in the Russian economy. China is also playing an increasingly large role in Tajikistan, where investments into new roads and other infrastructure are mainly being funded by Beijing. Tajikistan has continued investing into the hydropower sector. The CASA-1000 project will see surplus electricity from Kyrgyzstan and Tajikistan exported to Afghanistan and Pakistan. However, construction of the massive Roghun dam, which is hotly opposed by Uzbekistan, has not yet started.

Turkmenistan continues to grow strongly based on expansion of the oil and gas sector. According to the EBRD, growth was more than 14% on year in the first half of 2011, making it the region's fastest growing economy. Gas production was up 40% in January-June, and exports have increased following the construction of new pipelines to China and Iran. Ashgabat is still weighing the options for future exports. President Gurbanguly Berdymukhamedov said in November that exports to Europe were a priority, but later that month Turkmenistan signed an agreement with Pakistan on the TAPI (Turkmenistan-Afghanistan-Pakistan-India) pipeline project. The EBRD thinks that GDP growth prospects are good, but that Turkmenistan faces downside risks "related to the global slowdown, over-reliance on gas production and exports, excessive state intervention, and slow progress with market-oriented reforms."

Uzbekistan was relatively unaffected by the recent crisis, maintaining growth due to its isolation from the international economy and state stimulus package. The economy has continued to expand since then, with GDP set to grow by over 8% in 2011, according to the IMF. "Strong growth was registered in services, transport and communication, trade, and agriculture and was driven by buoyant domestic consumption supported by large wage and pension increases," says an IMF report issued in November. Several major investment projects are moving forward including Lukoil's investments into the Aral region, and plans for a $3.2bn gas-to-liquids (GTL) plant that Uzbekneftegas hopes to build in partnership with Malaysia's Petronas and South Africa's Sasol. However, there are a number of concerns about the Uzbek economy, including the perennial problem of currency convertibility. Directed lending has increased in the banking sector, where there are signs that asset quality is deteriorating.

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