Eurasian growth will bottom out in 2015, says World Bank

By bne IntelliNews June 11, 2015

bne IntelliNews -


Growth will be the lowest in years in Central Asia and Caucasus in 2015 but will pick up over the next two years, the World Bank predicts in its Global Economic Prospects report.

"In South Caucasus and Central Asia (including Kazakhstan), growth is expected to bottom out in 2015 and gradually strengthen to 2.9% and 4.9% in 2016-17, respectively, as conditions in the regions normalise," the report said.

In oil-exporting countries - Kazakhstan, Azerbaijan, Turkmenistan and Uzbekistan - growth prospects remain "closely" tied to oil prices, but higher oil prices expected over the next two years should eventually support economic growth. "In Kazakhstan, growth is projected to decline to 1.7% in 2015 as production delays in the Kashagan oil field persist, but strengthen to an average of 3.5% in 2016–17," the World Bank said of the region's largest economy, which accounts for about a half of regional GDP. Kashagan, Kazakhstan's massive but troubled oil field, is expected to relaunch production in the second half of 2016, and achieve a phase one output of 370,000 barrels per day (b/d) by the end of 2017, according to the NCOC consortium's managing director, Stephane de Mahieu. Lower oil prices are expected to result in a current account deficit in Kazakhstan in 2015, for the first time since 2009, the WB forecasts.

The bank said almost all economies in the region had been negatively affected to various degrees by the spillovers from the recession in Russia and Ukraine, as well as weakening confidence related to the ongoing geopolitical tensions, and the growth slowdown in oil-exporting Azerbaijan and Kazakhstan. "Only Uzbekistan and Turkmenistan, two relatively closed, resource-rich economies with strong buffers and linkages with the East and South East Asia regions, were reportedly less affected by the commodity price declines and regional headwinds."

Azerbaijan is expected to post a 1.5% growth this year and Kazakhstan 1.7%, according to WB forecasts. Growth is expected to stand at 8% in Turkmenistan and 7.6% in Uzbekistan in 2015, but the WB estimates, like other IFIs, are largely based on official growth figures provided by authorities in Turkmenistan and Uzbekistan which could not be independently verified.

These regional headwinds had "significant negative repercussions" on the region’s oil-importing economies - Georgia, Armenia, Kyrgyzstan and Tajikistan - through trade, investment and remittances, which more than offset the benefits of low oil prices. Activity weakened and exchange rate pressures increased in these countries, with exports slowing in Armenia and Georgia and remittance flows from Russia to Georgia, Kyrgyzstan and Tajikistan falling. The two Central Asian countries are the world's most remittance-dependent countries: remittances from Russia alone totalled $3.01bn in Tajikistan and $1.19bn in Kyrgyzstan in 2014, reaching an equivalent of 32.9% of GDP and 17.7% of GDP respectively.


The risks for the region remain tilted to the downside, with the key ones being further declines in oil prices, escalation of geopolitical tensions, and abrupt tightening of global financial conditions, the World Bank said. The Russian economy, on which the regional economies heavily depend, could face a deeper recession in 2015, and possibly in 2016, if oil prices decline or geopolitical tensions in the region escalate. Low oil prices, combined with a delayed recovery in Ukraine, will also slow down in other major oil exporters - Kazakhstan and Azerbaijan -  which in turn lead to a "sharp" slowdown in regional growth, the bank said.

Russia's restrictions on migrant workers from outside the Eurasian Economic Union may lead to a significant number of labour migrants returning to Tajikistan and Uzbekistan. "Net energy exporters in the region would struggle to adjust to further falls in oil prices," the bank suggested. "For the region’s oil importers, the windfall to households via higher disposable incomes and to firms via lower production costs would accelerate the tailwinds of a recovery, but this will not fully offset the opposing forces."

Monetary policy

Low oil prices and geopolitical tensions have complicated monetary policy in the Caucasus and Central Asian countries, the bank said. "In two relatively large oil-exporting economies of the region, Azerbaijan and Kazakhstan, policy flexibility has been constrained by elevated inflation and balance sheet concerns," the report says. "Efforts to stem currency depreciations in these countries resulted in some losses of reserves and slow external adjustments (current account balances are expected to deteriorate in both countries in 2015)."

With significant buffers in the form of foreign assets, oil-exporting countries have been able to avoid steep spending cuts, despite significant loss in oil revenues, or have implemented countercyclical expenditure increases. Fiscal break-even oil prices are estimated to remain at or over $90 per barrel in Kazakhstan and Azerbaijan, and considerably above the $58-64 projected for 2015-16 to cover government spending, which has increased in recent years in response to "rising social pressures and infrastructure development goals", the bank noted. "As a result of the oil price decline, all countries in the region are expected to run fiscal deficits in 2015 except Turkmenistan and Uzbekistan. With buffers eroding rapidly, and lower oil prices expected to persist for a prolonged period, most countries will need to re-assess medium-term spending plans and will need to adjust gradually to the new realities in the global oil market."

At the same time, oil-importers, namely Armenia, Georgia and Kyrgyzstan, with close economic ties to oil exporters, may have to tighten fiscal policy in the medium-term to ensure the sustainability of high government or quasi-government debt, despite slowing growth.

Structural reforms

The World Bank believes sustained lower oil prices will reduce real incomes and purchasing power in many oil-exporting economies and the economies closely linked to them, and unemployment in oil-importers will remain high. "To accelerate growth and job creation, and to avoid a significant widening of the income gap, requires stepping up the implementation of structural reforms in the entire region."

Many countries in the region remain well below the frontier of best practices with regard to creating a business environment conducive to productivity growth, while barriers to open markets and access to finance are well above-average in Azerbaijan and Kyrgyzstan. "Reducing these barriers would spur productivity and increase resilience to external shocks," the bank said.

While reform needs are country specific, they fall into a few categories, the bank explained. These include shifting the composition of growth away from consumption in Georgia, or natural resources in Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan; easing infrastructure bottlenecks; improving education; reforming labour markets; enhancing competition and easing administrative burdens; improving access to private and multilateral financing; reducing barriers to trade and facilitating regional integration; and reforming energy subsidies.

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