In 2016 Central Asia’s economic growth will be the lowest for the last 20 years, IMF projects

Almaty. 26 April. Silkroadnews – This year the economic growth in the region of the Caucasus and Central Asia (CCA) is expected to drop to 1.2%, which is a two-decade low, followed by 2.5% in 2017, the report by the International Monetary Fund (IMF) “Caucasus and Central Asia: battered by external shocks” states, KazTAG writes.

“As a result of the external shocks in 2016 growth in the CCA region is predicted to decline to 1.2%, which is a two-decade low, to be followed by a small increase in 2017,” the document states.
For 2017 the IMF projection for the CCA region’s economic growth makes 2.5%.
“It is predicted that the average growth in 2017-2021 will make 3.7%, which is much weaker than the 8.3% average in 2000-2014,” the report emphasizes.

In particular, in 2016 the oil-exporting countries are expected to have a decline to 1.1% growth compared to 3.2% in 2015 due to decrease in oil production and public investment, private demand reduction (partly as a result of the weakening of confidence) and growing uncertainty in respect of exchange rates and monetary policy. For the oil-importing countries the projection makes 2.6%, which is also weaker versus 3% in 2015.

“The positive impact of lower oil prices on economic activity turned to be limited as the domestic fuel prices have decreased only slightly (by nearly 20% in 2014) due to low competition and national currencies weakening. The positive impact of this factor on consumption got partially offset by a decrease in remittances from Russia (which used to be an important source of income in Armenia, Kyrgyz Republic and Tajikistan, where in 2015 remittances accounted from 9% to 32% of GDP),” the report says.

Decreasing exports to Russia along with weakening of direct investments from Russia, deferred demand (mainly from China) and prices on the most important items of export commodities in addition to oil (copper, aluminum, cotton) also “overshadow” the economic outlook, the IMF experts say.

“Risks to the economic outlook are mainly related to further deterioration of the external economic situation and internal banking system. Further oil prices weakening will affect the oil-exporting countries directly and the oil-importing countries – through its influence on the Russian economy, Russian ruble and spillovers through the trade and money remittances,” the analysts write.

Lower oil prices may also lead to a decline in investments in the oil and gas sector which plays a decisive role for the medium-term growth prospects in the oil-exporting countries. At the same time a stronger slowdown in China will also lead to a reduction in external demand – both directly, due to increase in the share of the region’s exports to China by about 10 percentage points of total exports since 2005, and indirectly, through other commodities prices and the investors’ trust.

“The internal risks are mainly related to the banks’ vulnerability in case of further weakening of the national currency. Till now the buffer capital reserves helped to mitigate the impact of the recent macroeconomic shocks. In case of further deterioration of the economic situation in the countries with high levels of vulnerability and weak supervision the financial stability risks may come into fruition,” the document says.

According to the IMF analysts, a foreign balances correction is being conducted as a response to the external shocks and national currency depreciation. Thus, in 2016 the oil-exporting countries are expected to increase the total current account deficit of external operations up to 4% of GDP, compared with 2.7% in 2015, mainly due to a sharp drop in the oil exports revenues partially reimbursed by the 15% decrease in imports within GDP. For the oil-importing countries this year it is expected to proceed with the current account deficit of external operations at quite a high level of 9.6% of GDP. In general, the largest decline in imports was observed in those countries where the national currency fell the most.

“This year in the oil-exporting countries the budget deficit is expected to get increased by 1.7 percentage points of GDP to 4.9%, while for the oil-importing countries it is projected to reach 4.9% of GDP, which is 1.4 percentage points higher than in 2015,” the document states.

“The state of bank balance sheets with a high degree of dollarization is likely to deteriorate further and in some cases the deterioration rate will be accelerated due to non-performing loans as the previous crises’ legacy. The level of liquidity is getting reduced caused by slowing of revenue inflow in foreign currency and capital outflow aggravated by deposits growing dollarization,” the report says.

At the same time along with unhedged borrowers’ creditworthiness reducing due to the growth slowdown and currency’s weakening, credit risks start to grow. Against the economic activity weakening the credits to the private sector will continue to drop further. Further decline is projected for the banks’ profitability.

“The living standards, as measured by GDP value per capita, doubled for the past 12 years, mainly due to increase in revenues from commodity exports and remittances. Now, with the decrease in commodity prices and remittances it will take almost 25 years for the living standards to double again. If the structural reforms are not carried out and accelerated within the region, it will lag behind other emerging market countries,” IMF experts noted.