Central Asian oil importers hit the buffers

Economic growth will slow more sharply in central Asia’s oil and gas importers than in its energy exporters this year, according to International Monetary Fund projections.

Tumbling energy prices will cut economic growth across oil exporters Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan from 5.4 per cent in 2014 to 3.8 per cent this year, the IMF forecasts.

However, perhaps surprisingly, growth is expected to fall more steeply, from 4.7 per cent to 2.3 per cent, in the region’s quartet of hydrocarbon importers: Armenia, Georgia, the Kyrgyz Republic and Tajikistan, as the table shows.

The IMF squares the circle by arguing that the oil and gas importers have been worst hit by the recession in Russia and the slump in the rouble, “which have had a severe impact on these countries, particularly through remittances and trade”.

In particular, it notes that in Tajikistan and the Kyrgyz Republic, remittances (mostly from Russia) accounted for 43 per cent and 30 per cent of gross domestic product last year, despite the duo being geographically more distant from Russia than the rest of the countries in the Caucasus and central Asia (CCA) region. Remittances also constituted 20 per cent of GDP in Armenia.

However, remittance flows to CCA countries fell by between 25 per cent and 50 per cent in the first half of 2015, according to the IMF.

“Remittances have grown substantially over the past decade and appear closely correlated with activity in Russia’s non-tradable sector, most notably construction,” the IMF said.

“The large presence of migrant workers in Russia makes these countries vulnerable to risks of surges in unemployment and social tensions in the event that migrants are forced to return.”

Armenia and Tajikistan are also particularly reliant on foreign direct investment flows from Russia, the IMF says. However Turkmenistan, an oil and gas exporter, is most exposed to a slowing of trade, given that its exports to Russia account for more than 9 per cent of GDP.

 

Overall, the IMF analysis suggests that although the four oil importers have received a small boost to GDP from lower oil prices, this has been swamped by the spillover effect from the Russian slowdown, as the second chart shows.

In contrast, while oil exporters have, unsurprisingly, been hit by the impact of lower energy prices, they have been relatively unscathed by the Russian recession.

The energy importers have also been whiplashed by falling prices for the commodities they do export. Tajikistan has suffered from falling prices for its aluminium and cotton, Armenia from lower cotton prices and the Kyrgyz Republic from lower gold production.

So far at least, the oil importing quartet’s currencies have also fallen almost as much as those of the oil exporters, as the last chart shows.

That, at least, may be about to change. Azerbaijan and Turkmenistan have pegged their currencies to the dollar to stop further depreciation, a policy fellow oil exporter Kazakhstan was forced to abandon in August.

However Chris Weafer, senior partner at Macro Advisory, a Moscow-based consultancy focused on Russia and Eurasia, believes Azerbaijan is only holding back from a further depreciation or float of the manat until parliamentary elections due in November have passed, and that Turkmenistan will also be forced to follow suit.

The IMF does forecast that economic growth will inch up in the region next year, from 3.8 per cent to 4.1 per cent among oil exporters and 2.3 per cent to 3.0 per cent for the importers, as the Russian economy stabilises

However it calls on CCA countries to accelerate structural reforms and implement greater exchange rate flexibility.

“The long-lasting nature of the shocks means that deeper and more durable policy changes will be needed,” said JuhaKähkönen, deputy director of the IMF’s Middle East and Central Asia department.

“Structural reforms would help move these countries to a higher growth path. More can be done to raise the quality of education, promote financial development, improve the business environment and diversify exports.”

Mr Weafer, agrees, saying: “The countries from the former Soviet Union have really not embraced any major reform initiatives.

“They have been more focused on maintaining their political regimes and structures. We have seen almost the same leaders or their offspring in place over the past 20 years. They have lived with the Soviet legacy of corruption and bureaucracy.”

Yet Mr Weafer says the example of Georgia, the one CCA country to embrace reform, has not been encouraging.

Following the country’s 2003 Rose Revolution, the country embraced the western growth model and had some success in tackling corruption.

However Georgia “has not benefited from a single dollar of western investment,” Mr Weafer says. “They looked to the west and got nothing back in return. The message from Georgia is that there is no cavalry coming over the hill from the west.”

As a result, Georgians are increasingly supportive of the idea of the country joining the Russian-led Eurasian Economic Union, he says, despite the fact that Moscow and Tbilisi fought a war in 2008 and Russia still occupies two chunks of Georgian territory.

Overall, Mr Weafer goes further than the IMF in calling the ongoing slowdown in the region a “crisis”. Even though the economies of all of the eight CCA countries are still growing, he says, given their relatively early stage of development, they should be growing faster.

He warns that waves of jobless migrant workers returning from Russia could create social tensions.

“These countries are seeing the return of a large number of disaffected workers with nothing to do. You sit there and wait for the Russian economy to recover or, increasingly, you are looking at your own government [to help you].

“There is great concern that the return of so many workers from Russia can start to lead to more social instability and political issues for these countries,” Mr Weafer says.

Kazakhstan held its presidential election in April, a year before NursultanNazarbayev’s five-year term was due to end, a move Mr Weafer says was driven by a desire to ensure it was not impacted by social or economic problems.

“The incumbent regimes are very worried this can lead to problems. There are consequences to come that we haven’t yet seen,” he says.

Nevertheless, Mr Weafer does not see scope for any major reforms without widespread regime change.

If there is a glimmer of hope it perhaps comes from the re-emergence of nearby Iran, India’s growing interest in central Asia or, most obviously, China’s “One Belt, One Road” initiative, Mr Weafer says.

The latter is likely to see Beijing pouring billions of dollars into the CCA region to improve infrastructure and trade links in an attempt to create an economic belt stretching from China to Europe.

https://www.ft.com/cms/s/3/ad1be9b6-78af-11e5-a95a-27d368e1ddf7.html#axzz3pMyHrsrn