Central Asia’s Stunted Succession Syndrome
The IMF joined the Asian Development Bank in downgrading GDP growth forecasts for Central Asia and the Caucuses this year and next, as they warned of worsening commodity and remittance flows from neighbors Russia and China and domestic public investment capacity. The ADB predicts less than 3.5 percent expansion in 2015 and just 4 percent in 2016, with inflation at roughly double these levels following Kazakhstan’s 33 percent devaluation from August-September. The current account deficit will widen to 3.5 percent of GDP as Azerbaijan’s surplus is halved, and regional oil and metal exports will remain muted. Kazakhstan was at the bottom of the MSCI Frontier Index with a 50 percent loss through September, and Belarus external bonds were unmoved by President Lukashenko’s romp to another term without Western election observers as the economy contracted 4 percent through July. The EU may relax sanctions after the President quashed reported Russian plan to build a military base, and he has also conducted talks with the IMF over a possible program and taken a $50 million power plant loan from China’s Export-Import Bank. Tiny Kyrgyzstan tried to break the authoritarian mold after entering Moscow’s Eurasia Economic Union in May, but many candidates for parliament were disqualified as President Atambaev’s Social Democratic party led the vote for another fragile coalition. Seats were openly for sale and rival groups resorted to violent attacks, with the new government facing a 50 percent debt-GDP load and faltering donor support.
Kazakhstan’s record $2.5 billion global bond placement momentum in July was halted by the peg abandonment the next month, and the central bank has intervened $150 million daily to prevent drift toward 300 tenge/dollar. Recession could hit in the last quarter after industrial and mining output fell 5 percent before the adjustment. Agriculture is flat and rural unrest was a previous threat to President Nazarbaev’s grip as security forces broke up demonstrations. Foreign investors had been prepared for further depreciation but not outright floating and were also dismayed by murky ownership shifts at another state-owned London listing. The region’s other oil power Azerbaijan heads into November parliamentary elections with GDP growth slowing to 4 percent as the June European game construction push fades, and the manat is still under pressure after February’s reset. Official reserves fell $1 billion in August to $7.5 billion, but the sovereign wealth fund at half of GDP provides additional cushion. Banking system dollarization has stabilized at two-thirds of business and personal deposits, but political jitters could accelerate flight after the polls as President Aliev receives continued international condemnation for opposition and media arrests.
Georgia has been demoted to underweight in JP Morgan NEXGEM recommendations, with remittances from Russia off 35 percent on an annual basis leaving a 7 percent of GDP current account gap. Moscow criticized establishment of a NATO training facility and signed a pact with unrecognized South Ossetia. Economic growth has flagged to 2.5 percent and inflation is above the 5 percent target with devaluation’s pass-through and higher electricity prices. The central bank lifted rates again 100 basis points to 7 percent as minor improvement in global competitiveness rankings was unable to boost expatriate and local worker sentiment.
