EDB: Challenges to further economic growth in the region intensify (Monthly Macroeconomic Review)

Moscow, 17 August 2017. The positive dynamics of economic recovery in the member countries of Eurasian Development Bank (EDB), which was observed in the first half of the year, remained in June, although most of the countries in the region face emerging risks to these positive trends.

This finding is presented in the Monthly Macroeconomic Review prepared by the EDB Chief Economist’s Group.

In particular, several EDB countries registered inflation growth in June 2017: by 0.3% (compared to May 2017) or up to 4.4% y/y in Russia; by 0.4% or up to 6.5% in Belarus; by 0.3% or up to 4.1% in Kyrgyzstan; and by 0.3% or up to 9% in Tajikistan. According to EDB analysts, this is a result of short-term effects of unfavourable weather conditions and growing exchange rate volatility.

The risks of building up inflation pressures will also remain in the second half of this year that, in the opinion of EDB experts, will most likely lead regulators to taking a more prudent approach to bringing down policy rates in the remaining part of the year.

The report highlights that, in the context of exchange rate depreciation and mounting inflation pressures, central banks (except for the National Bank of the Republic of Belarus) had ceased further reductions of their policy rates by July, with the rhetoric of regulators getting tighter. In addition to the diminishing potential scale of stimulating economic activity by reducing interest rates, most of the EDB member countries registered a significant decrease of their budget deficits in the first half of 2017 that was partially caused by the need to reduce the vulnerability of state budgets to volatile commodity prices or avoid a high growth of public debt.

In the context of weakening monetary and fiscal stimulus, the prospects of further recovery in EDB member countries will largely depend on structural measures aimed at boosting investment and exports growth. “These segments of the economy, however, face their own challenges — after the recovery of mutual trade and exports growth, further exports recovery may become more difficult to achieve in the absence of support on the part of commodity prices, especially following a period of recovery of exchange rates and real wages,” notes Yaroslav Lissovolik, Chief Economist at EDB. He also stresses that some preliminary data on the rate of year-on-year growth of exports in EDB member countries point at its certain deceleration in June (Armenia, Russia).

However, the potential investment growth will partly depend on the recovery of the rate of lending growth that, in its turn, is currently contained by the relatively high level of overdue loans in the banking sector (Kazakhstan, Belarus, Tajikistan). As to the EDB member countries, which significantly depend on remittances from Russia, their ability to maintain the upward trend will largely depend on the economic growth recovery in the region and stability of local currencies. Based on data for June 2017 on remittances to Armenia (growth of 9.1% against the same period of last year or up to US $148 million) and Kyrgyzstan (growth of 10.5% against the same period of last year or up to US $236.4 million), the annual rates of growth were positive, but still lower than in the previous month of this year. For instance, in Armenia, the growth was 41.5% in May 2017 against the same period of last year with remittances reaching US $155 million; and in Kyrgyzstan the growth was 39.7% against the same period of last year with remittances reaching US $238.8 million).

The authors of the review believe that the second half of 2017 will be more difficult for ensuring both the recovery growth in EDB member countries and overall improvement of their macroeconomic performance. However, the general global background is still relatively favourable, and these challenges are to be treated rather like signals of the need to search for additional sources of growth, which would not undermine achievements in the field of macroeconomic stability in the meantime.

The full version of the Monthly Macroeconomic Review is available here.

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Key Macroeconomic Indicators of EDB Countries

^{Source: National authorities, authors’ calculations}

Annual Inflation (growth in %, month to the relevant month of last year)

Additional Information:

Eurasian Development Bank (EDB) is an international financial institution founded by Russia and Kazakhstan in January 2006 with the mission to facilitate the development of market economies, sustainable economic growth, and the expansion of mutual trade and other economic ties in its member states. EDB’s charter capital totals US $7 billion. The member states of the Bank are the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, the Kyrgyz Republic, the Russian Federation, and the Republic of Tajikistan.

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