EDB researchers note the GDP growth deceleration in the CIS countries in Q1

These developments have affected all the major groups of countries in the region

Almaty, 23 July 2014. In Q1 2014, the GDP growth in the CIS countries slowed down to 1.2% compared to the same period of 2013. Its deceleration is primarily explained by the decline in investment activity in Russia and its slower growth in Kazakhstan. This conclusion is suggested in the new issue of the CIS Macromonitor published by Eurasian Development Bank’s (EDB) Research Department.

EDB researchers note that, unlike in 2013, these developments have affected all the major groups of countries in the region: oil and gas exporters, human resource exporters, and countries with a diversified structure of exports.

“The situation around Ukraine continues to be the key source of risks for the economy of the region,” says the study. “In spite of the limited scope of direct impact of developments in this country on its neighbouring economies,—in 2013, the share of Ukraine’s economy in the economy of the region was 6.3%—the crisis in relations between Russia and Western countries resulting from those developments has led to less favourable terms of access for Russian companies to international capital markets and overall worsening of the economic uncertainty.” These factors largely explain the decline in investment activity in the Russian economy in 2014 and their effect can last for a long time.

The CIS Macromonitor also analyses the results and prospects of economic development of the countries in the region.

The economic growth in Azerbaijan slowed down in Q1 2014 against the background of a renewed recession in the oil and gas sector: the country’s GDP grew by 2.5% compared to Q1 2013. The recession in the oil and gas sector contributed to a drop in the total industrial output by 2.4%. EDB researchers note, however, that the capital inflow in the form of direct and portfolio investments increased in that period.

In Armenia, the GDP growth slowed down in Q1 2014 to 3.1% year-on-year owing to the weaker domestic demand and poor external market situation, in particular owing to the lower growth in Russia and less favourable prices for exported raw materials. The low level of economic activity particularly manifested itself in the negative growth of the mining industry (-1.3%) and construction (-3.3%). That is offset, however, with the good performance of agriculture (+6.0%) and processing industry (+4.5%). At the same time, EDB experts expect an acceleration of growth of Armenian GDP to 4.8% in total for 2014, inter alia owing to greater macroeconomic assistance from international donors and expanded cooperation with the Customs Union.

Belarus demonstrated some positive, although small GDP growth of 0.5% in Q1 2014 compared to the same period of 2013. The economic performance remained uneven: retail and wholesale trade grew correspondingly by 13.1% and 10.4%, while the industrial output dropped by 3.4%. The major contributors were such sectors as vehicle manufacturing (a decline of 24.6%), as well as manufacturing of machinery and equipment (a decline of 7.3%), while the chemical and oil refining industries recovered their growth (by 5.3% and 3.6%). The monthly inflation rate in the country remained at the level of 1.3–2%.

EDB researchers note that the situation in the area of public finance worsened in Q1 2014 compared to last year: the general government budget surplus dropped to 0.4% of GDP for January-March compared to 2.9% of GDP for the same period of 2013.

In Kazakhstan, the GDP growth in Q1 2014 decelerated to 3.8% year-on-year due to the impact of external (the slow-down in Russia and China), as well as internal factors, including weaker consumption and investments in the wake of the currency depreciation in February 2014, as well as lower crude oil production (-1.9%) against the background of difficulties with building up oil production at the existing oil fields and a delay in launching the development of Kashagan field.

It is stressed in the study that in May 2014, the activity indicators stabilised at a low level: the growth of the short-term economic indicator was 3.2% compared to May 2013. The industrial sector recovered positive growth owing to the favourable trends in the processing industry. In the second half of the year, the situation should improve, inter alia owing to the expanded fiscal stimulus, implementation of government programmes related to the development of the non-resource sector of the economy and industrialisation, measures of improving the soundness of the banking system, policies aimed at attracting foreign investment, as well as anticipated positive effects of currency depreciation for the real sector. The improvement will, however, be more limited than it was expected earlier. According to EDB projections, the GDP growth in Kazakhstan will make 5.1% for the year against the background of greater geopolitical uncertainty and downward revision of the oil production forecasts.

The GDP growth in Kyrgyzstan slowed down to 5.6% in Q1 2014 (8.8% in Q1 2013). The reasons for that include weaker domestic demand due to the decelerated rate of growth of remittances, as well as limited external demand due to weaker economic activity in the trade partner countries — Kazakhstan, Russia, and China; and the effects of administrative trade barriers in the Customs Union member states. The country’s GDP is projected to grow at 5.1% in 2014.

As to the situation in Moldova, EDB researchers note the continued growth of its economy, although the rate of that growth has decelerated since the pick-up at the end of 2013. The GDP grew by 3.6% compared to Q1 2013. The growth was quite steady: the agricultural output increased by 7.2%, the industrial output — by 7.1%, while that in construction — by 8.5%.

In Russia, the GDP growth in Q1 2014 dropped compared to the same period of 2013 to 0.9% from 2% in Q4 of last year. The key contributor was the lower investment activity at the start of the year: the fixed capital investments declined over Q1 2014 by 4.8% in real terms compared to Q1 2013. That resulted in a drop in construction output by 3.6%. At the same time, the processing sectors continued growing at the same rate as at the end of 2013 (2.4%). The extractive industries have maintained some moderate growth (0.8%). The positive factors include the improved status of the public finance compared to 2013 and consolidation of the country’s balance of payments.

“The economic development of the country will be determined this year by a range of factors, the key one being the pattern of fixed capital investment,” noted EDB experts. “The factors constraining the recovery still include the tension in the region and the current policy tightening by the Bank of Russia.”

The GDP growth in Tajikistan decelerated owing to the lower growth in Russia and the unfavourable terms of trade in the international markets for Tajik exports (aluminium and cotton), but it continues to be high at 7% in annual terms. There is a notable improvement in the performance of industry (+3.6%) that is explained by the high rate of growth of the extracting industry and the faster growth in many sectors of the processing industry offsetting the recession in the metals (-27.6%) and textile industries (-33.6%).

According to the CIS Macromonitor, the trade deficit deteriorated significantly in Q1 2014 (-US $699.8 million compared to -US $476.3 million). Due to lower aluminium and cotton exports both in volume and nominal terms, the country’s exports dropped by 37.1% while imports continued growing at a high rate (+10.7%).

In Turkmenistan, the GDP growth continued to be high in Q1 2014 at 10.3% year-on-year. The contributing factors include the high investment activity (+8.1%) in the framework of implementing government projects practically in all the sectors of the economy, high rates of wage growth, high foreign investments, as well as improved exports. The growth rate in construction was over 18.8% year-on-year, in the chemical industry — 11%, and in the textile industry — 18.3%. The retail trade grew by 18.7% owing to the sound domestic demand.

The GDP growth in Uzbekistan continued to be high in Q1 2014 (7.5%) in annual terms due to the high investment activity (+10.1%) and growth of real incomes of the population (+12.8%), attraction of foreign investments (US $525 million over Q1 2014 that was 1.7 times higher compared to Q1 2013), and active bank lending to the economy (+31.2%). The labour productivity in industry grew by 7.2%, the cost of production was reduced on average by 8.8%, while the energy intensity of GDP — by 15%. Exports grew by 8.4% in volume terms.

In Ukraine, the GDP declined by 1.1% in Q1 2014 compared to the same period of 2013. Fixed capital investments dropped by 19.1%. The sharp devaluation of the domestic currency contributed to faster inflation. “In general, the economic situation in the country continues to be fragile: there are on-going risks in relation to both the prospects of the GDP growth recovery and sustainability of the balance of payments,” note EDB researchers. “The negative effects for the balance of payments can be generated by the potential increase in spending on energy imports and greater than currently expected decline in exports.”

The e-version of the publication is available here.

Additional Information

Eurasian Development Bank is 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 exceeds US $1.5 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.

Read more at https://www.eabr.org.