Central Asian growth to slow in 2015, says Asian Development Bank

By bne IntelliNews March 26, 2015

bne IntelliNews -


The economies of Central Asian countries are expected to slow down because of the ongoing geopolitical tensions and the recession in Russia, the region's major trading partner, according to the Asian Development Bank's Asian Development Outlook 2015 report.


Despite the launch of the Eurasian Economic Union with Armenia, Belarus and the Russian Federation, growth is forecast to slow to 1.9% in Kazakhstan in 2015, it says. "This reflects slumping oil prices, economic weakness in the Russian Federation, and tenge appreciation against the ruble, which has hurt the competitiveness of Kazakh exports and boosted imports from the Russian Federation." However, growth is projected to recover to 3.8% in 2016 as the economy adjusts to low oil prices and as stimulus measures take hold.

The ADB forecasts mining to contract by 10.0% in 2015 and remain unchanged in 2016, dragging down industry by 5.3% in the first year and allowing marginal growth of 0.4% in the second. The slowdown will limit growth in services to 5.0% in both years.

Investments in housing and infrastructure under a state programme for regional development are projected to boost construction by 4.0% annually, and past investment under the Agriculture 2020 development programme is projected to expand agriculture by 2.7% in 2015 and 4.0% in 2016, the report says.

Government interventions should boost consumption growth by 4.2% in 2015 and 5.0% in 2016. Countercyclical policy will likely mean investment supported by the National Oil Fund's resources will rise by 4.0% in 2015 and 4.8% in 2016, as Expo 2017 nears. Net exports are forecast to fall by 15.5% in 2015 on low oil prices and a weak grain crop, which will shrink agricultural exports and export revenue, and by 8.0% in 2016, as imports rise by 5% and exports remain unchanged.

Inflation is projected to slow to 6.0% in 2015 in line with lower food prices, slower income growth, cheaper imports from Russia and Kyrgyzstan, which will join the Eurasian Economic Union in May 2015, before accelerating marginally to 6.2% in 2016.


The country's growth is likely to slow further to 1.7% in 2015, reflecting recession in Russia, sluggish performance in Kazakhstan, and a further drop in gold production as the quality of extracted ore declines, the ADB said. Growth is expected to remain positive, however, with recovery in agro-processing and textiles and more trade as Kyrgyzstan joins the Eurasian Economic Union (EEU) on 1 May 2015. The government's action plan is to support export-oriented industries such as textiles and agro-processing through fiscal incentives and tax waivers. Growth is projected at 2.0% in 2016 on the assumption of some recovery in Russia and Kazakhstan and higher remittances.

Processing, light industry and construction should raise activity outside the gold sector, the report suggests. "In addition, EEU accession may boost trade and transportation, though the need to raise tariffs to EEU levels may discourage trade outside the EEU." At the same time, entry into the EEU may boost external demand, but lower remittances will reduce household incomes and, probably, domestic private consumption.

The Kyrgyz economy remains vulnerable to shocks from its largest enterprise, the Kumtor gold mine, which supplied 7.4% of GDP in 2014 and some 40% of exports. A long-standing dispute over mine ownership poses risks to the current forecast and damages the investment climate. Currency depreciation and tariff increases on imports to comply with the EEU are projected to keep average annual inflation at 10.5% in 2015 and 10.0% in 2016. Continued ruble depreciation could trigger further weakening of the som, which would likely worsen inflation and dollarisation.


Despite robust growth expected in agriculture and expanded extraction at Oyu Tolgoi, albeit less than in 2014, GDP growth is forecast to slow to 3.0% in 2015 as falling prices of exports are felt and as monetary and fiscal policy are tightened to contain inflationary and balance of payment pressures, the ADB said.

The country's industrial production will grow more slowly than in 2014 as a credit squeeze affects construction and real estate, and as lower export prices pressure mine operators. Services are projected to grow only marginally as other economic activity slows. "Assuming a stable external environment and the resumption of major investment in mining in 2015, economic growth should recover to 5.0% in 2016 even with the continuation of restrictive fiscal and monetary policies."

Consumer price inflation, the report says, will moderate to an average of 8.9% in 2015 and 7.7% in 2016, reflecting slower growth and fiscal and monetary tightening. The forecast assumes that the central bank will prioritise its target of 7.0% year on year for consumer price inflation and achieve it by the end of December 2016.

Gross international reserves are likely to remain under pressure in 2015 as FDI inflows stay weak and the current account deficit large. The deficit is forecast to be stable at 8.0% of GDP in 2015 as higher export volume is balanced by falling prices. "When large new mining investments start to push up imports in 2016, the current account deficit may almost double to 15.0% of GDP," the ADB suggested.


With hydrocarbons representing more than 90% of exports, the continued decline in energy prices and fluctuating demand for Turkmen gas will likely reduce export revenues, weakening the current account, the report says. "However, Turkmenistan has strong external buffers, as the International Monetary Fund estimated its foreign exchange reserves equal to 22 months of imports in 2014." Moreover, Turkmenistan has the lowest break-even petroleum prices in the region and this should  provide some insulation against fluctuating energy prices, it added.

GDP growth is projected to slow to 9.7% in 2015 and 9.2% in 2016, reflecting lower public investment. However, "growth will slow further if external difficulties persist and require fiscal adjustment".


GDP growth is forecast at 7.0% in 2015 and 7.2% in 2016, reflecting economic difficulties in Russia and historically low international commodity prices, the ADB said. "To limit the growth slowdown, the government is expected to boost spending further, particularly for public investment."

With gradual recovery in external demand expected in 2016, industry will remain the key supply-side driver of growth, with output supported by higher lending. "Large industrial enterprises in strategic sectors—mining, oil and gas, and manufacturing—are expected to receive the bulk of additional lending from both the government and commercial banks."

Planned wage and pension increases above the inflation rate are expected to support private consumption and demand for services, and stable production of key agricultural crops, cotton and wheat, will help agriculture grow by 6.0% in 2015, the ADB predicts.

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