EBRD Predicts Central Asian Economic Growth, Negative Impacts from Ukraine-Related Sanctions

ASTANA – The European Bank for Reconstruction and Development (EBRD) released its Regional Economic Prospects report on Sept. 18, showing relatively strong growth in Central Asia, improving growth in Central Europe and Turkey, but weakened growth prospects for all across the EBRD’s transition region.

ebrr-pic4-452x302-30136The weakened growth prospects are primarily the result of the conflict in Ukraine and sanctions enacted by both Western countries and Russia, according to the report. Russia’s economy is predicted to stagnate this year and contract in 2015.

Forecasts vary significantly country by country, and Kazakhstan’s expected growth for 2014 remains 5 percent (5.5 percent was predicted in January 2014 and downgraded in May). Kazakhstan is not expected to be dramatically affected by the conflict unless sanctions toughen and begin to affect the country’s oil trade with and through Russia. (The slowdown in growth is attributed to oil project delays as well reverberations from the conflict in Ukraine.)

Sanctions and counter-sanctions, drops in remittances and higher military spending across the region in the medium term are expected to strongly affect regional economic performance.

Russian slowdown felt widely

Central Asia, the Caucasus and Eastern Europe are being affected to varying degrees by the Russian economic slowdown.

Western sanctions against Russia, particularly sanctions announced in September targeting its oil sector, as well as Russia’s counter-sanctions, have caused the EBRD to downgrade its economic forecast for the country for 2015 from slight growth to a contraction of .2 percent. Growth for 2014 stays forecast for 0 percent overall, with the slightly better than predicted growth in the earlier part of the year expected to be negated by the effects of new sanctions on the country’s economy.

In the first half of the year, capital outflows from Russia were about $75 billion. Confidence in business is suffering and access to international capital markets and financing has been significantly reduced in the first quarter, year on year. At a press conference on Sept. 17, EBRD Chief Economist Erik Berglof said that the reduced access to capital is increasing the role of the state in the economy, adding that “the state is not very effective in providing finance to SMEs [small- and medium-sized enterprises] and private sector financing in general has been suffering.”

Trade and finance is being directed east, but this, he says, is likely also part of a larger trend.

Growth in Central Asia remains strong

Growth has remained strong in Central Asia, relative to other regions addressed in the report, buoyed by large extractive projects. Overall growth in Central Asia dropped half a percent from the first quarter of 2013 to the first quarter of 2014 (from 7.4 percent to 6.9 percent), mainly, the report said, due to Russia’s economic performance.

The reduction in remittances from Russia in Kyrgyzstan and Tajikistan, where they are 29 and 49 percent of gross domestic product, respectively, is expected to have negative consequences. (These consequence are not expected to be felt in Kazakhstan, which has few economic ties with the countries, Agris Preimanis, EBRD Lead Regional Economist, told The Astana Times.)

This is the first time remittances have fallen since 2009, and remittances to Uzbekistan and Moldova have fallen the most. The impact has been slightly offset by the dollar’s stronger purchasing power in countries that have seen their currencies weaken.

Kazakhstan’s performance and predictions

Kazakhstan’s GDP in 2013 was $220.3 billion. Its economy is expected to grow by 5 percent this year, down from 6 percent growth in 2013. Industrial production has remained almost equal in the first half of the year, year on year, dropping by .01 percent in 2014 (it rose by 2.3 percent in 2013). Relatively low exposure to Russia in the form of remittances, as well as the possibility of increasing food and agricultural exports to Russia to make up for embargoed products, may offset the economic impact of sanctions.

“The direct impact of the current Western sanctions against Russian oil on Kazakhstan’s oil sector and broader economy are likely to be minimal. However, any future hardening of the Western sanctions on the Russian oil sector – to the extent that Kazakhstan’s oil trade with or through Russia would be affected – could have a negative impact on Kazakhstan, recognising that a significant part of Kazakhstan’s oil is exported through Russian pipeline or port infrastructure,” Preimanis said.

Yet again, nonperforming loans were called out as a hindrance for growth in Kazakhstan, where the EBRD says the nonperforming ratio is between 30-50 percent. Tajikistan, Cyprus and Ukraine, where the ration is 20 percent and may rise significantly, were also cautioned about their nonperforming loans.

Weakening rouble, Western perceptions, Russian counter-sanctions Kazakhstan’s main threats

“The slowdown in Russia and weakening of the rouble, as well as shifts in the perception of the former CIS [Commonwealth of Independent States] region (mainly related to but not limited to Russia) by Western investors, are the most important economic factors affecting Kazakhstan in terms of the fallout of the Russia/Ukraine crisis,” Preimanis said.

Some impact from the plummeting growth of Ukraine will be felt, he noted – about 2.5 percent of Kazakhstan’s exports go to Ukraine – and from slowdowns in other CIS trading partners, but he does not expect a pronounced effect from this on Kazakhstan’s economic performance.

But if Russia continues to struggle, the rouble may falter. “Further rouble depreciation is one of the biggest economic risks for Kazakhstan stemming from the Russia/Ukraine crisis,” Preimanis said. The rouble has weakened in recent months, but the current exchange rate of 38 roubles to the dollar does not put pressure on the tenge, he said, and the tenge has additional headroom left. “In the current market and economic circumstances in Kazakhstan, the tenge can accommodate a further drop in the rouble of at least 10 percent before rouble depreciation starts translating into material downward pressure on the tenge exchange rate,” he said.

Russian counter-sanctions are also a worry, he said. “Russian counter-sanctions in food products can be expected to, on balance, have an overwhelmingly negative overall impact on Kazakhstan through potential food price inflation and domestic supply risks, even if these sanctions might spur growth in food exports from Kazakhstan.” Current counter-sanctions might redirect Kazakhstan’s and other country’s food products toward Russia, which could reduce the supply of food products coming to Kazakhstan, create food price inflation and increase the demand for Kazakhstan-produced food products, he said. The counter-sanctions might also affect the transit of food products from the EU to Kazakhstan through Russia.

Growth in defence spending may have long-term implications

At a press conference on Sept. 17, EBRD Chief Economist Erik Berglof noted a shift in attitudes in the transition region and in Europe more broadly toward defence spending, which will have long-term implications, he said. “[C]entral and eastern Europe has benefited from low [defence] expenditure as a percentage of GDP and it has been decreasing over time. Now, as you have seen, there have been clear statements from several central European countries that they will increase defence spending. NATO has encouraged members to reach the 2 percent level. Poland has said they will do so by next year. Ukraine will announce that it will double its defence spending over the period until 2020. There is clearly a diminishing fiscal space due to this and, of course, this peace dividend has been very important for the fiscal consolidation we have seen in our countries.”

Most significant risks

“The single most important source of risk remains the further escalation of the crisis in Ukraine/Russia with a direct negative impact on the two countries and significant spill-over effects for the region as a whole, as discussed in the May 2014 issue of Regional Economic Prospects,” the report reads. “Such a scenario would have far-reaching implications for investor confidence in the region, trade, flows of remittances from Russia to lower-income countries in EEC and Central Asia, and possibly energy and food security in the region,” the report reads.

An additional risk is an oil price shock from further escalation of the security crisis in Iraq, the EBRD said.

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