Slowdown in Emerging Markets Weighs on Caucasus, Central Asia

  • Region’s growth still strong at 6 percent, but slightly lower than last year
  • Weaker growth in trading partners—especially Russia—poses downside risk
  • Structural reforms, closer regional cooperation would help in medium term
  • The IMF’s Regional Economic Outlook Update for the Caucasus and Central Asia, released on May 6 in Dubai, projects that slower growth prospects in the region’s main trading partners—Russia, China, and Turkey—will weigh on exports, foreign direct investment, and remittances. The report said that a temporary decline in oil output growth in Kazakhstan will also affect the region’s economy in the near term.

    Risks from trading partners

    Economic activity in the CCA continued to expand at a strong rate in 2013, thanks to robust domestic demand in the oil- and gas-exporting countries (Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan) and strong export growth in the oil- and gas-importing countries (Armenia, Georgia, the Kyrgyz Republic, and Tajikistan).

    But this year growth is projected to soften, and risks to the forecast have risen, the report noted (see table).

    The main regional risk stems from a further deterioration of Russia’s growth prospects, which is likely to reduce growth through lower remittances, lower exports, and lower project financing. Geopolitical risks related to the Russia/Ukraine crisis may also affect the CCA through a gamut of trade, remittance, and financial channels, as well as possible disruptions in production or transportation of commodities. And a potential slowdown in China could also adversely affect the region’s economies (see chart).

    The report noted that many of the gas- and oil-importing countries in the region have low fiscal and external cushions to draw on, despite the strong growth of recent years. This dearth of buffers would make it difficult for these countries to avoid an adjustment in the event of a large shock.

    Inflation rising

    Inflation in the CCA is expected to rise by 1½ percentage points to 7½ percent in 2014-15, mainly because of the recent currency depreciation in Kazakhstan and strengthening domestic demand in Georgia.

    In countries where inflation is expected to stay within central bank target ranges, monetary policy can remain at a neutral setting, the IMF said. But the region’s central banks should stand ready to tighten policy if inflation...

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