Economic prospects in the CIS in 2011 Main patterns of growth in 2010
A drop in real GDP of almost 6% in the east European transition economies in 2009 was the most severe of the regional recessions of that year. Beginning in the first quarter, however, most of east European economies saw a return to economic growth in 2010, which averaged about 3% for the year. In the main, the recoveries were export-led, with the lagged effects of large international stimulus packages, and in some cases substantial multilateral aid programmes, also playing a role. The pace of growth in domestic demand was generally much weaker, or in some cases remained negative. In particular, investment remained weak, depressed by low levels of business confidence linked to the uncertainty of the macroeconomic outlook, as well as to spare production capacity. In addition, household spending was weighed down by low levels of consumer confidence linked to poor employment prospects, high unemployment, falling or slowing wage growth, high levels of indebtedness, the paucity of credit as banks continued to repair their balance sheets, and a drop in workers' remittances.
Notably, the recoveries in the economies of the Commonwealth of Independent States (CIS) were generally stronger than for regional economies further west. The contrast was starkest between those economies that had been tipped into recession in 2008-09 by a fall in external demand and international commodity prices, and those that, before the crisis, had relied for rapid growth on domestic credit booms fuelled from external borrowing. Some of the bigger countries in the CIS, such as Russia and Ukraine, exemplify the first situation, whereas a number of countries in the Baltics and the south-eastern Balkans exemplify the second. [Some latest growth figures, highs, lows, averages, contrasted with rates before the crisis.] A second contrast with the countries of central-eastern Europe is that, whereas their prospects are bound up with those of the EU, where unfolding sovereign debt crises in peripheral countries have threatened the integrity of the common currency, the crucial relation for many CIS countries is with developments in Russia and Kazakhstan, the leading hydrocarbons-exporting economies within the organisation.
Finally, the political uprisings in the Arabian Peninsula and Arab North Africa may hold mixed economic and political prospects for the authoritarian hydrocarbons producers in the CIS, boosting state resources by pushing up hydrocarbons prices on world markets, while at the same time providing potentially replicable models for political confrontation with authoritarian state apparatuses.
The main, interlinked policy dilemmas
With the recovery having gained purchase, governments are now turning to a number of tough common policy dilemmas. The first weighs fiscal austerity against growth, because of the potential damage of withdrawing budgetary support before economic recovery has become self-sustaining. This concern is accentuated by the expectation of a downturn in global economic growth in 2011, as the boost from the big international stimulus packages fades. Thus, with fiscal and growth imperatives pulling in opposite directions, the benefits of running a loose monetary policy are likely to be cast in a favourable light, at least for a time longer. This is because maintaining liquidity could help to sustain economic activity, both directly, through its impact on domestic demand, and indirectly, by way of aiding the repair of bank balance sheets. This second effect could encourage a return to higher rates of credit growth, which plummeted during in the crisis and which are still well below the rates seen in the boom period. Without this, lower rates of economic growth will remain the norm for longer. However, for some governments, the return of inflationary pressures, both from rising international prices for commodities and food, and, further off, from individual economies as consumption demand begins to revive and spare capacity to dwindle, will create pressures in the opposite direction, pitching the desire to boost economic growth against the need to contain the pace of rise in the general price level. Another policy priority facing some governments across the region, and especially a few of the weaker economies in the CIS, will be the need to pursue policies to maintain external stability in the face of large external deficits and the build up of external debt.
With the recovery having gained purchase, governments are now turning to a number of tough common policy dilemmas. The first weighs fiscal austerity against growth, because of the potential damage of withdrawing budgetary support before economic recovery has become self-sustaining. This concern is accentuated by the expectation of a downturn in global economic growth in 2011, as the boost from the big international stimulus packages fades. Thus, with fiscal and growth imperatives pulling in opposite directions, the benefits of running a loose monetary policy are likely to be cast in a favourable light, at least for a time longer. This is because maintaining liquidity could help to sustain economic activity, both directly, through its impact on domestic demand, and indirectly, by way of aiding the repair of bank balance sheets. This second effect could encourage a return to higher rates of credit growth, which plummeted during in the crisis and which are still well below the rates seen in the boom period. Without this, lower rates of economic growth will remain the norm for longer. However, for some governments, the return of inflationary pressures, both from rising international prices for commodities and food, and, further off, from individual economies as consumption demand begins to revive and spare capacity to dwindle, will create pressures in the opposite direction, pitching the desire to boost economic growth against the need to contain the pace of rise in the general price level. Another policy priority facing some governments across the region, and especially a few of the weaker economies in the CIS, will be the need to pursue policies to maintain external stability in the face of large external deficits and the build up of external debt.
Policy and performance in Russia and Kazakhstan
In both Russia and Kazakhstan, high and rising prices for hydrocarbons internationally, relative to 2009, will continue to sustain economic recovery in 2011. In Russia, the pick-up of consumer demand has been relatively unhindered by an overhang of private debt. In contrast, despite some progress in 2010, in Kazakhstan the inability of households and firms to pay pack loans—aggravated by the depreciation of the tenge that was induced by a sharp fall in inflows of foreign-exchange from the end of 2008 as a result of the global financial crisis—continues to place limits on the lending of the Kazakh banks, as they are forced to raise provisions against non-performing loans (NPLs). Thus, NPLs across the banking sector had risen to 26% in the first half of 2010, according to the IMF. Domestic credit growth in Kazakhstan dropped from a peak of almost 80% year on year in 2006, to just below 7% in both 2009 and 2010, according to the Fund. (In contrast, the peak rate of annual domestic credit growth in Russia was lower, at around 44% in 2007, and it dropped much less steeply, to around 22% in 2010.) This will restrict the speed of growth not only of the domestic economy, but also of its smaller Central Asian neighbours in particular. It should push policymakers in Kazakhstan to keep short-term policy interest rates low for the near future.
Of the two, Russia would thus appear to be in a better position economically to attempt to reduce the fiscal deficit in 2011. The possibly short-term boost to hydrocarbons export earnings as a result of a fresh round of political turmoil in the Middle East, which has stoked market fears over supply, should ease official plans to bring down the fiscal deficit, which reached the equivalent of almost 6% of GDP in 2009. Nonetheless, addressing the underlying problem of a structural non-oil fiscal deficit could remain, or even be discouraged by the same development.
Another important factor to keep an eye on for assessing regional economic prospects is the construction sectors in both countries, which continue to perform poorly, reflecting both excess capacity and a reluctance of the financial sector to lend. Construction is traditionally a large employer of migrant workers from other countries in the CIS and will thus feed into the prospects for a revival of private consumption and some kinds of investment in those states, through the link of remittance returns.
In both Russia and Kazakhstan, high and rising prices for hydrocarbons internationally, relative to 2009, will continue to sustain economic recovery in 2011. In Russia, the pick-up of consumer demand has been relatively unhindered by an overhang of private debt. In contrast, despite some progress in 2010, in Kazakhstan the inability of households and firms to pay pack loans—aggravated by the depreciation of the tenge that was induced by a sharp fall in inflows of foreign-exchange from the end of 2008 as a result of the global financial crisis—continues to place limits on the lending of the Kazakh banks, as they are forced to raise provisions against non-performing loans (NPLs). Thus, NPLs across the banking sector had risen to 26% in the first half of 2010, according to the IMF. Domestic credit growth in Kazakhstan dropped from a peak of almost 80% year on year in 2006, to just below 7% in both 2009 and 2010, according to the Fund. (In contrast, the peak rate of annual domestic credit growth in Russia was lower, at around 44% in 2007, and it dropped much less steeply, to around 22% in 2010.) This will restrict the speed of growth not only of the domestic economy, but also of its smaller Central Asian neighbours in particular. It should push policymakers in Kazakhstan to keep short-term policy interest rates low for the near future.
Of the two, Russia would thus appear to be in a better position economically to attempt to reduce the fiscal deficit in 2011. The possibly short-term boost to hydrocarbons export earnings as a result of a fresh round of political turmoil in the Middle East, which has stoked market fears over supply, should ease official plans to bring down the fiscal deficit, which reached the equivalent of almost 6% of GDP in 2009. Nonetheless, addressing the underlying problem of a structural non-oil fiscal deficit could remain, or even be discouraged by the same development.
Another important factor to keep an eye on for assessing regional economic prospects is the construction sectors in both countries, which continue to perform poorly, reflecting both excess capacity and a reluctance of the financial sector to lend. Construction is traditionally a large employer of migrant workers from other countries in the CIS and will thus feed into the prospects for a revival of private consumption and some kinds of investment in those states, through the link of remittance returns.
Fiscal consolidation in Central Asia
Fiscal consolidation is required not only as the payoff for any fiscal expansion undertaken during the economic crisis: following events in Greece in the first half of 2010, there is the additional incentive for governments to do so to try to convince international lenders of their fiscal rectitude. The kind of response possible will depend on the resources available. Broadly, just as hydrocarbons exports had allowed some countries to build up funds to draw on to cushion the full impact of the fall in external demand during the recession, so the recovery of oil prices and revenue will afford them greater room for manoeuvre for fiscal consolidation during the recovery. Kazakhstan and Azerbaijan both appear to be aiming for fiscal consolidation in 2011. In practice, in Kazakhstan this is planned to happen not only by means of a reduction of transfers from the NFRK, the sovereign oil wealth fund, but also through the imposition of an export duty and a progressive income tax. In Azerbaijan, overall deficit reduction is planned to go hand in hand with a rise in transfers from SOFAZ, its own oil windfall account, for social and infrastructural programmes, as well as part of the medium-term goal of industrial diversification. On the revenue side, non-oil fiscal consolidation will be hampered by an expected sharp slowdown in economic growth in 2011 linked to a fall in oil production volumes, which will put a dent in the growth of fiscal inflows. Hydrocarbons revenue may discourage necessary structural reforms in Turkmenistan and Uzbekistan.
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