Macroeconomic Review: EDB countries demonstrate strong economic growth by the end of 2021
Moscow, 7 February 2022. The Macroeconomic Review published by the Eurasian Development Bank’s (EDB) researchers state that its member states – Armenia, Belarus, Kazakhstan, the Kyrgyz Republic, Russia, and Tajikistan – demonstrated strong economic growth as at the end of 2021.
“Back in late 2020, EDB analysts were expecting strong growth and recovery in 2021. Our projections were above the consensus forecast. However, reality has exceeded even our optimistic expectations. Economic activity in the region has surpassed pre-pandemic levels, with aggregate GDP growth in 2021 close to 4.5%,” said Evgeny Vinokurov, Chief Economist at the EDB and the Eurasian Fund for Stabilization and Development (EFSD).
The active phase of economic recovery in the region is over. As a result, the room for high growth this year has shrunk. Yet, there is potential for an increase in output in services and oil production. Unleashing it could allow the region’s GDP growth in 2022 to remain above the pre-pandemic rates. The growth rates will then approach their potential values.
“Special mention should be made of the economic situation in Kazakhstan. During the state of emergency in the first half of January, economic activity in the country weakened. The service sector has faced the greatest damages. We believe that the slight slowdown in economic activity in January will be reversed shortly. As the damages are compensated, including with government support, and the service sector regains its growth rates, the economy will begin to grow sustainably as early as Q1 2022. We expect Kazakhstan’s GDP to increase by 4% in 2022,” added Evgeny Vinokurov.
By the end of 2022, inflation in Kazakhstan is expected to slow down towards the upper threshold of the 4-6% target corridor. The base rate increase and regulatory measures will help to curb price rises. However, the risk of inflation remaining high has grown.
Inflation was the flipside of the rapid economic recovery globally and in EDB member states in 2021. Consumer price growth targets were exceeded in all the region’s countries. Overall, inflation in the Bank’s region of operations accelerated to 8.5% in 2021, compared to 5.6% the year before. Neutralising the effects of inflation factors will take time, and therefore inflation in the region is expected to remain high in 2022, too. A long period of higher inflation is likely to bind interest rates to remain above their neutral levels.
The start of this year was accompanied by greater volatility in financial markets and rising risks for the region’s economies. Due to heightened geopolitical tensions, Russia’s country risk premium exceeded 200 bps. Russian government bond yields rose and the rouble hit the 80 per dollar threshold.
The EDB’s baseline scenario assumes that the weakening ruble has led to its undervaluation and there is room for the exchange rate to move closer to 72 per dollar when the “heat of the moment” subsides. However, there is an increased likelihood of a scenario in which the country risk premium and the scale of capital outflows remain high. In this case, the ruble weakening observed in January would be more of an equilibrium shift and the exchange rate could consolidate above 75. The Bank of Russia could take this into account at its meeting on 11 February. At the moment, a key rate hike of 100 bps seems probable.
Because of the close economic and financial linkages among the Bank’s member states, monetary regulators in other countries of the region could factor in the key rate increase in Russia. With inflation rises at the start of this year, key monetary policy rates have already gone up in Armenia by 0.25 p.p. to 8.0%, in Kazakhstan by 0.5 p.p. to 10.25%, and in the Kyrgyz Republic by 0.5 p.p. to 8.5%.
“Another factor that could influence the decisions of the member states’ monetary regulators this year is the Fed’s actions. The U.S. regulator’s rhetoric is increasingly “hawkish.” No one doubts a Fed rate hike of at least 0.25 p.p. in March anymore and the market is expecting five hikes to 1.25–1.50% by the end of 2022. In addition, the Fed intends to start discussing a gradual reduction of its balance sheet. The reduction process is likely to start as early as summer, mainly through adjustments to reinvestment volumes,” commented Evgeny Vinokurov.
Significant monetary stimuli in the U.S. are now excessive. The U.S. economy and labour market have recovered. The country’s GDP in Q4 2021 was 3.1% higher than in the pre-pandemic Q4 2019 and the unemployment rate fell to 3.9% at the end of last year and is only slightly above the pre-pandemic low of 3.5%. Yet, inflation is on the rise and of increasing concern to the Fed.
However, EDB analysts concede that some persisting risks may prompt the U.S. regulator to adopt a more conservative strategy than the market currently suggests. This is primarily due to several factors that continue to threaten business activity, including the development of the pandemic, the likelihood of a severe slowdown of the Chinese economy, a general slowdown of the global economy after the end of the recovery phase, and high geopolitical tensions. The Fed’s year-end rate could be 1–1.25% lower than the current market consensus.
“We will continue to work hard to establish the Bank as a leading think-tank in macroeconomic analysis for the Eurasian region. Earlier this year, the EDB received the international Refinitiv StarMine Award for the most accurate projection of the Russian ruble exchange rate in 2021 among Reuters’ pool of forecasters. In 2022, the Bank’s researchers will continue to work on improving macro analysis,” Evgeny Vinokurov concluded.
The full version of the Macroeconomic Review is available here.
Additional Information:
The Eurasian Development Bank (EDB) is an international financial institution promoting integration and development in its member countries. For 15 years, the Bank has worked to strengthen and expand economic ties and foster comprehensive development in its member countries – Armenia, Belarus, Kazakhstan, the Kyrgyz Republic, Russia, and Tajikistan. The EDB's charter capital totals US $7 billion. The EDB’s portfolio mainly consists of projects with an integration effect in the areas of transport infrastructure, digitalisation, green energy, agriculture, industry, and mechanical engineering. The Bank adheres to the UN Sustainable Development Goals and ESG principles in its operations.
The EDB Media Centre:
Azima Sapargaliyeva +7 (777) 750 00 08 (Almaty)
Sergey Gorbachev +7 (916) 727 22 00 (Moscow)
www.eabr.org