EDB Macroeconomic Review: The decorrelation of national currencies is a new phenomenon in the EAEU+
EDB analysts presented the latest issue of the Macroeconomic Review for the Bank’s six member states with a detailed analysis of the current economic developments. The paper notes signs of stabilising inflation and a new phenomenon – the discordant dynamics of national currencies.
Moscow, 14 July 2022. The Eurasian Development Bank (EDB) has published a Macroeconomic Review, which summarises economic developments in the Bank’s member states for the first six months of 2022.
The review notes the diverging economic trends in the Bank’s member countries in Q2 2022. The economies of Russia and Belarus have come under heavy sanctions, leading to a decline in business activity, while Kazakhstan, Armenia, and the Kyrgyz Republic have demonstrated strong economic dynamics. In Tajikistan, GDP growth slowed but remained positive. Overall, Bank analysts estimate aggregate GDP growth in the EDB region of operations at 0.9% year on year over the first five months of 2022.
Economic activity in Russia contracted in May because of Western restrictions. The country’s GDP fell by 4.3% year on year, after a 2.8% year-on-year decrease in April. A key factor in the decline of the Russian economy is the contraction of domestic demand due to tightening credit conditions, difficulties in cooperation with foreign counterparties, and increased uncertainty. EDB analysts estimate that in June Russia’s GDP could decline by 4.5–5% year on year.
They also note that the economic downturn in Belarus has intensified. In May, Belarus’s GDP dropped by 8.8% year on year, after a 6.5% year-on-year decline in April. All of the larger economic sectors are contracting, except the IT sector, which has demonstrated continued, but slower growth. Economic activity in Belarus will contract further in the coming months due to weak consumer and investment demand, as well as declining export supplies. GDP could fall by as much as 4–4.5% year on year by the end of the first six months of 2022 (minus 8.5–9.5% year on year in June). The baseline forecast for the entire of 2022 (–6.5%) remains valid.
The economies of Russia and Belarus will adapt to the changed operating conditions, but this will take time.
Kazakhstan’s economic indicators are growing. From January to May, the country’s GDP increased by 4.6% year on year. Strong economic growth is supported by greater activity in the service sector, high construction rates, and growth in manufacturing. As a result of the country’s strong performance over the first six months, its GDP growth could reach 3–3.5% by the end of 2022. Economic activity in the second half of the year will be supported by fiscal policy and prices for Kazakhstan’s key export commodities that are higher than a year earlier. However, a likely recession in the eurozone and the US could limit growth due to lower demand for Kazakhstan’s exports.
Armenia is showing the greatest growth, with a 10.2% year-on-year increase in economic activity over the first five months of the year, driven by a successful tourist season and higher consumer demand from Russians. With a stronger-than-expected second quarter, Armenia’s GDP growth this year will exceed all projections.
From January to May 2022, the Kyrgyz Republic’s GDP grew by 5.7% year on year. A significant contributor to this growth is the expansion of gold production (+29.7% year on year). As the low base effect of the year is exhausted, GDP growth will slow down.
Inflation in the EDB region remains high, but there are signs of stabilisation. As at the end of June, EDB analysts estimated (aggregated) consumer price growth in the region at 15.2% year on year.
In Russia, deflation was 0.35% in June and annual consumer price growth slowed to 15.9% from 17.1% in May. This deflation was partly due to a price correction after they spiked in March and a fall in the highly volatile prices of fruit and vegetables. Disinflationary pressures are also being exerted by suppressed demand and the strengthening of the rouble. At the end of the year, inflation could be as high as 13 to 14%. However, there is a risk that inflation could accelerate in the autumn due to the likely depletion of stocks and higher transportation and logistics costs. In Kazakhstan, inflation accelerated to 14.5% year on year in June 2022, from 14.0% a month earlier. The persisting inflationary factors are the increased demand for socially important products and high world market prices. By the end of the year, inflation is forecast at 13%. Inflation in Belarus reached 17.6% year on year in June. Transport and logistics complications, rising global commodity prices and the weakening of the Belarusian rouble against the Russian rouble continue to exert pressure on prices. These factors will persist in the coming months, but weak domestic demand is projected to increase the disinflationary impact. The EDB analysts’ 2022 baseline forecast for Belarus (18% year on year) remains valid.
EDB analysts note an unprecedented appreciation of the Russian rouble against major currencies in recent months. In June, the rouble traded near 50 per dollar for some time, which has not been the case since 2015. The strengthening of the rouble has resulted from the contraction of domestic business activity, foreign exchange restrictions, and the forced abandonment of the budget rule. Imports into Russia have fallen by more than 40% since the beginning of the year and showed only small signs of recovery in May. Measures taken to ease currency restrictions and statements by the authorities about possible intervention in the foreign exchange market have weakened the rouble to 60–63 per dollar since the beginning of July. It would be premature to suggest that the rouble will continue to weaken further, as it is continuously pushed towards appreciation by a high trade surplus, which is a fundamental factor. Our baseline scenario expects an average RUB/USD exchange rate of 62 in Q3 and 70 in Q4.
“Another new phenomenon associated with the appreciation of the Russian rouble against the dollar is a strong decorrelation in the dynamics of the region’s national currencies against the Russian rouble,” said Evgeny Vinokurov, Chief Economist at the EDB. “The tenge has weakened against the rouble by more than 30% since the beginning of the year, with the most part of this happening in June. Similar trends can be seen in the Kyrgyz Republic, where the Kyrgyz som has stood at 79.5 to the dollar since the beginning of June and has depreciated by 14% against the Russian rouble. The Belarusian rouble weakened against the Russian rouble by 17% in June and by almost 40% since the beginning of the year. The Armenian dram has depreciated by 20% over the same period. All of this could have tangible and ambiguous consequences for the economies that have yet to emerge.” The weakening of the other currencies against the rouble could lead to lower imports from Russia and become an additional inflationary factor. On the other hand, supplies to Russia from these countries would become more competitively priced, supporting industrial and agricultural exporters. This is especially true for Belarus. As for the Kyrgyz Republic and Armenia, this could suggest an increase in migrant workers’ remittances in the local currencies, which could further support consumer demand.
Russia’s month-on-month deflation in June and the significant appreciation of the rouble set the stage for further key rate cuts. EDB analysts expect the key rate to fall to 8.5–9% after the July meeting and do not rule out that it could be cut further, to 7% by the end of the year. As inflation stabilises and inflationary factors subside, the National Bank of Kazakhstan may also embark on a round of base rate cuts, from 14% in June to around 12% by the end of the year. In the Kyrgyz Republic, should economic growth slow down, the policy rate could be lowered from 14% to 8–9% by the end of the year. In Belarus, the refinancing rate is likely to remain at 12% in the coming months.
The Macroeconomic Review is available on the Bank’s website.
Additional Information:
The Eurasian Development Bank (EDB) is an international financial institution investing in Eurasia. For more than 15 years, the Bank has worked to strengthen and expand economic ties and foster comprehensive development in its member countries. The EDB's charter capital totals US $7 billion. Its portfolio mainly consists of projects with an integration effect in transport infrastructure, digital systems, green energy, agriculture, manufacturing, and mechanical engineering. The Bank’s operations are guided by the UN Sustainable Development Goals and ESG principles.
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