Low commodity prices and the continued recession in Russia will weigh on the economies of Central Asia and the Caucasus, causing growth to slow down again this year, the World Bank said in the latest edition of its Global Economic Prospects report released on June 8.

Eurasian economies suffered a sharp slowdown last year, reflecting the region’s strong dependence on Russia and commodity markets. Russia is a major source of remittances and the leading trade partner of many countries in the region. Growth is expected to stay subdued over the next few years, especially among commodity exporters, as low oil prices widen current account deficits and put downward pressure on exchange rates, the World Bank says.

Growth in Central Asia is projected to reach 2.1% this year. The estimate represents a 1.1 percentage point deterioration on the World Bank’s previous forecast published in January. In Kazakhstan, the region’s largest economy, growth is expected to come to a virtual stand-still as falling oil revenues constrain public spending and exchange rate pressures compel the central bank to maintain elevated policy interest rates. The effect of low oil prices is significant for Kazakhstan’s economy as oil accounts for 19% of the GDP and 76% of exports. The deep recession in Russia and the slowdown in China are also playing a major role.

“The sharp devaluation, followed by the move to a floating exchange rate in August 2015, boosted inflation and put pressure on domestic borrowers, as about 30% of loans in the banking system in mid-2015 were denominated in foreign currency, mostly US. dollars,” the World Bank notes. Though the central bank lowered its benchmark interest rate by 200 basis points to 15% in May, it remains elevated as the authorities seek to support the tenge.

Elsewhere in Central Asia, Uzbekistan and Turkmenistan should register the strongest growth of 7.3% and 5% respectively in 2016, though both estimates were also cut by 0.2pps and 3.9pps from January. The two countries are also experiencing slowdowns in growth, despite their strong buffers and limited economic ties to the rest of the world.

Economic growth in South Caucasus countries weakened to 1.6% in 2015 from 3.2% in the previous year. Average GDP is projected to swing to a 0.5% decline this year reflecting mainly the worsened outlook for the Azerbaijani economy. The biggest of the three South Caucasus countries is expected to register a 1.9% drop in economic output this year, the World Bank said, lowering its estimate by 2.7pps from January. Like other oil exporting countries, Azerbaijan's fiscal buffers have been eroded by the low oil prices. 

Growth in Armenia will also weaken, with the latest forecast pointing to a 1.9% expansion in 2016, down by 0.3pps from the January estimate. Georgia is the only country in the region for which the World Bank kept its forecast unchanged – at 3% for 2016, 4.5% for 2017 and 5% for 2018.

With oil prices expected to stay low for longer, key priorities for oil exporters such as Azerbaijan and Kazakhstan include adjusting to lower government revenues and mitigating financial sector risks in a context of reduced fiscal space for potential financial sector stabilisation measures, the World Bank suggests.

Other risks include a deeper than expected recession in Russia that could generate intensified spillovers for neighbouring countries such as Armenia, Georgia, Kyrgyzstan, Tajikistan and Uzbekistan through reduced remittance flows and lower demand for imports. A flare-up of geopolitical tension, in particular between Armenia and Azerbaijan over the breakaway region of Nagorno-Karabakh, could also weigh on growth.