Russia effect hits Central Asia to greater and lesser degrees

By bne IntelliNews December 19, 2014

Naubet Bisenov and Jacopo Dettoni in Almaty -


The Asian Development Bank, in its latest "Asian Development Outloook Supplement" published on December 17, cut the growth outlook for Central Asia to 5.1% from the previous 5.6% for the full-year 2014 and to 5.4% from the previous 5.9% for 2015. The countries in the region most exposed to Russia – Kazakhstan and Kyrgyzstan – are feeling the full effects of the crisis there, while the more closed economies appear more sheltered from the problems, though are still being hit by the fall in remittances.

"Central Asian economies are feeling the impact [of the slowdown in Russia] through reduced remittance inflows and muted external demand, which is undermining growth in Armenia, the Kyrgyz Republic, and Uzbekistan," the report reads. "Positive news in Tajikistan (where robust construction is more than compensating for the effect of the slowdown in the Russian Federation) and in Turkmenistan (where climbing gas exports are expected to boost 2015 growth) is insufficient to offset slowdowns in the rest of the subregion."

Falling oil prices and geopolitical tensions in the region, as well as the weaker demand for Kazakh exports from the country's main trading partners, are painting a bleaker picture for Kazakhstan’s economic growth in 2015. The stagnant oil and gas sector due to repeated delays in industrial production in the giant Kashagan oilfield and lower global prices of metals has meant industrial output fell in the first 10 months, picking up only in November to give a meagre increase of 0.1% for the January-November period.

The collapsing ruble is putting a huge strain on the Kazakh currency, the tenge, as Russia accounts for a third of the country's imports. The Kazakh authorities devalued the tenge in February by 19% to relieve the pressure from the falling ruble, which led to protests against the government's economic policies. With the oil price below $60 per barrel and the ruble hitting all-time lows of about RUB80 against the dollar mid-December, the Kazakh government will have to deal with maintaining the value of the tenge while keeping its promise not to slash spending on social programmes.

Government concerns over the state of the country's economy has forced Astana to cut its growth forecasts to 4.3% from 6.0% in 2014 and to 4.8% from 5.0% in 2015. Although the government retained the Brent price at $95 per barrel for the 2014 budget, it cut it to $80 per barrel in the 2015 budget. This means that should the price of oil remain below or around $60 per barrel for an extended period of time in 2015, the government will have to revise down again its forecasts for GDP growth, budget revenue, expenditure and other indicators in the first half of 2015.

The target for the Kazakh central budget revenue was cut by KZT178.9bn (nearly $1bn) to KZT7.86tn ($43.4bn) in 2015, by KZT147.3bn to KZT8.04tn in 2016 and by KZT176bn to KZT7.95tn in 2017. The budget deficit is expected to come in at KZT997.1tn or 2.3% of forecast GDP in 2015, KZT1,059.4bn or 2.1% in 2016 and KZT972.5bn or 1.7% of expected GDP in 2017.

Kazakhstan's central budget revenue is calculated with account of transfers from the National Oil Fund to the tune of KZT1.7tn, or $9.4bn, a year over the next three years. President Nursultan Nazarbayev announced in November that up to an extra $3bn a year would be withdrawn from the National Oil Fund over the next three years given the volatile oil prices and uncertainty around Western sanctions against Russia and their impact on its economy and, as a result, on the Kazakh economy. As part of this announcement, the government said it would withdraw additionally KZT707.5bn in 2015 and KZT372.5bn in 2016. The 2015 figure is nearly $4bn and is greater than $3bn, which is explained by the fact that the president allocated KZT1tn ($5.5bn) in February to stimulate economic growth and support the country's troubled banking sector in 2014 and 2015.

In line with Kazakh government growth forecasts, the International Monetary Fund (IMF) cut the country's economic growth forecast to 4.3% in 2014 in December from the October estimate of 4.6%. The IMF expects 4.5-5.5% growth in 2015 and 2016, since commercial oil production from the Kashagan oilfield is not expected any earlier than 2017. This means oil output will remain at around 82m tonnes until that time, translating into stagnant or negative growth in industrial output if the situation on the global metals markets doesn't improve significantly. The IMF also forecasts the inflation rate at 6.9% in 2014 and 6.1% in 2015 – within the government corridor of 6-8% – but with the expected devaluation of the tenge this could prove hard to maintain.

Kazakhstan's economy heavily depends on the extractive sector – both oil and gas and metals – which accounts for about 17% of GDP, with the share of energy exports accounting for more than four-fifths of total exports in monetary terms. This means that the price of oil and oil output will play a significant role in achieving its economic growth targets.

Moscow-based investment bank Renaissance Capital assumes that at an oil price of $80 per barrel, the National Bank of Kazakhstan, the central bank, would likely devalue the tenge by at least 15.5% (KZT220 to the dollar), which should ease negative external shocks, support exports and cut imports, boosting domestic industries. At $80 a barrel, the investment bank estimates GDP growth at 2.9% in 2015. Should the price of oil fall further, the Kazakh economy would stagnate at $60 per barrel and contract 1.4% at $50 a barrel.

Rest of Central Asia

Turkmenistan seems relatively untouched by falling hydrocarbon prices and the regional slowdown, as the development of its still-nascent domestic gas industry keeps shoring up economic growth. The country posted 10.3% y/y economic growth in the first 11 months of the year, according to government figures, and the IMF sees economic growth at 11.5% y/y in 2015.

In just five years since the first trunk of the $7.3bn Central Asia-China gas pipeline (CACGP) came online in December 2009, Turkmenistan has turned into China's largest gas supplier, shipping 24.4bn cubic metres (cm) to China in 2013, which made up 47% of Beijing’s total gas imports. Export volumes will go up to 65bn cm per year by 2020, when a fourth trunk of the CACGP is expected to be ready.

Uzbekistan too is weathering the storm, with economic growth of 8.1% recorded in the first nine months of 2014, and an expected 8% seen in 2015, at least according to government figures.

Even though Uzbekistan’s economy is relatively closed, it was showing steady growth due to its energy (particularly gas) and metals (especially gold) resources. Revenues from these key industries allow the government to control the economy through investments in services (accounting for 48% of GDP) and industry (accounting for 40% of GDP). Uzbekistan is currently the world’s fifth largest producer of cotton, but is attempting to diversify its agriculture towards fruits and vegetables.

Tajikistan is also showing some resilience to the troubles affecting Russia. Annual GDP growth is expected to slow slightly to 6.5% in 2014 from 7.5% in 2013, and remain at 6.0% in 2015, the IMF estimates. “Growth this year is being supported primarily by an extraordinarily rapid expansion of construction (over 27% y/y through September)," the IMF said in a statement following an official mission to Dushanbe in November.

However, the country has to deal with falling remittances from Tajik migrants working abroad, which made up 42% of GDP in 2013, World Bank figures show. The inward flow of remittances fell by almost 5% in the first half of 2015, according to figures from the Central Bank of Russia, and have likely decreased further in the second half of the year as Western sanctions and falling oil prices take an additional toll on the Russian economy and the ruble.

On the other hand, Kyrgyzstan is feeling the chill coming from the Russian freeze; its economic growth has quickly decelerated and the Kyrgyz som is steadily losing ground against the US dollar.

Kyrgyzstan's economic growth is expected to fall to 3% in 2014, down from 10.5% in 2013, and will not exceed 5% over the next three years, according to World Bank estimates. “The medium-term outlook has become more challenging reflecting structural deficiencies in main trading partners, as well as more tense foreign trade relations, including from stricter enforcement of custom union regulations,” the World Bank said in its latest country report, referring to Kyrgyzstan’s preparations to join the Russia-led Eurasian Economic Union (EEU) in 2015.

Tighter customs controls at the Kazakh-Kyrgyz border designed to ensure duty-free access only to Kyrgyz-made products are affecting the re-export of Chinese products, a key part of the economy.  Almost 80% of local businesses deal in the re-sale of cheap Chinese products, including mass-market goods, fruit and vegetables, and other mass-market goods. Every year Kyrgyzstan re-exports $10bn worth of Chinese products, according to figures in the local press. Should Kyrgyzstan join the EEU, import duties for goods coming from China will double, local observers warn, further affecting the country's re-export potential.

The Kyrgyz currency lost 14.5% against the dollar in 2014, forcing the country's National Bank to carry out 390 operations in the currency market to support the som. At the same time, the weakening currency caused inflationary pressures to rise as the import bill went up, with the annual growth of the consumer price index reaching 9.7% in November compared with 4% in 2013. Inflation is put at 8% in 2015, according to World Bank estimates.

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