EDB Macroreview, May 2017. Recovery in Trade between the EDB Countries

Abstract

The stabilisation of commodity prices and the resultant stabilisation of national currencies in most EDB countries in 1Q 2017 create a favourable basis for a recovery in trade in the EDB region. Suffice it to note that all EDB countries showed growth in mutual trade turnover in 1Q of the year; notably, the highest turnover growth rates were observed in Kazakhstan (nearly 41% y-o-y) and the Russian Federation (33.7% y-o-y). The considerable growth rates in trade turnover between the Republic of Belarus and EDB countries (30.2% y-o-y) may receive additional impetus now that the Russian-Belarusian agreement on the prices and supplies of energy commodities has been concluded. The situation with the countries’ mutual ties also improved as regards migrants’ remittances: growth in remittances to Kyrgyzstan exceeded 54% in 1Q 2017, while in Armenia this indicator was 14% y-o-y in 1Q 2017. The situation was the opposite in Tajikistan, where migrants’ remittances in 4Q 2016 decreased by 39% compared with the same period the previous year. In this review, our special report focuses on macroeconomic ties among the EDB countries and the economic growth transmission channels, mainly as regards foreign trade and remittance flows. Our study testifies to a considerable role of these factors in the regional countries’ economic recovery, but we also note that the region’s economies remain highly vulnerable to external shocks, and to energy price fluctuations above all. Apart from trade turnover and remittance growth, this year’s recovery in economic cooperation between the countries has been boosted by the signing of the Customs Code by the EAEU countries, the agreement reached on the elimination of obstacles to the free movement of goods, services, capital, and labour in the EAEU (the White Book), the instruments of the EEC Council and Collegium aiming to create a single Eurasian pharmaceuticals market that enter into force in May 2017, the energy price agreement reached between Russia and the Republic of Belarus, and the signing of instruments between the Republic of Kazakhstan and the Kyrgyz Republic on the provision of technical and financial assistance to Kyrgyzstan in adapting its economy to membership of the Eurasian Economic Union. Also notable are the issue of a new USD 300 million tranche of the EFSD loan to the Republic of Belarus and the decision of the Russian Federation to write off Kyrgyzstan’s USD 240 million debt at once. Further easing of monetary policy based on a considerable slowdown in inflation, which has reached record-low levels in the Russian Federation, is additional potential stimulus for accelerated economic growth in most EDB countries this year. In addition to the interest rate reduction effect, investment growth in the EDB countries may be supported by an inflow of foreign direct investment, given both its relatively low base in the past few years and an improving external background. That said, the opportunity to deploy a public budget boost is still limited, as the EDB countries’ budgets remain insufficiently adapted to lower and more volatile commodity prices. Russia’s economic growth outlook for 2017 has improved from 0.8% to 1.3%. The projection change was influenced by the first quarter’s economic data and a revised oil price projection that took into account the first quarter’s trends in world energy prices. The improvement in the Belarusian GDP projection from minus 0.5% to positive 1.3% over 2017 is caused by higher than expected economic activity recovery rates in the 1st quarter and by the agreement reached on gas prices and oil supply from the Russian Federation. Kazakhstan’s improved GDP outlook is caused by stronger external demand and by the expansion of the State budget deficit with a view to revitalising the banking system. More optimistic assumptions concerning the foreign economic situation and a revised fiscal boost were the main factors behind the improved GDP outlook for Kyrgyzstan. Tajikistan’s economic growth projection was revised downwards as its banking sector situation deteriorated. A key risk for the remainder of 2017 is renewed volatility in the commodity markets after a period of strengthening exchange rates of some EDB countries’ currencies. Early May developments in both the Russian and Kazakh financial markets showed that, after a considerable strengthening in the preceding months, the national currencies have become more sensitive to increased volatility in oil prices. With some developing markets’ currencies overvalued, the oil price volatility factor may be compounded by increased Fed rates, which may additionally pressurise developing countries’ currencies. We expect that, given the increased external risks, the Central Bank of the Russian Federation may harden its rhetoric and slow the reduction in the key rate in the coming months.