The CIS’ Stretched Strongman Stridency
As US and European election outcomes suggest a softer stance toward Russian sanctions extension and ex-Soviet Union authoritarian leaders sovereign credits have stabilized and bounced, with President elect-Trump’s team reporting a warm phone call with Kazakhstan president Nazarbaev. GDP growth will be half a percent this year, and is due to rise to 2 percent in 2017 with Kashagan field output and higher oil prices and infrastructure building under domestic and China’s One Belt One Road programs. The tenge-dollar exchange rate has settled below 350 as inflation heads towards single digits allowing the central bank to cut the policy rate to 12 percent in November. International reserves are again approaching $100 billion with reduced intervention and the current account expected to return to rough balance. Banking sector consolidation continues with a merger among big state-owned players that may be partially sold through the stock exchange under proposed divestiture plans. The President’s succession remains uncertain amid rumors of poor health, although he has moved security service and family allies into key positions. With currency bottoming, foreign exchange-linked mortgage loan protests have ebbed and authorities otherwise often handle popular discontent as a possible terror threat, drawing condemnation from human rights groups. Washington and Brussels regularly call for peaceful dialogue and greater democracy, but Trump in his initial talks seemed to praise his counterpart’s 25-year tenure and tough governance approach.
Lower-rated Azerbaijan with its own history of media and political crackdowns got into similar trouble on hydrocarbon price correction and massive devaluation, with 3 percent GDP shrinkage this year on accompanying construction collapse. President Aliev put technocrats in charge of an end-decade diversification strategy, and preliminary reforms elevated World Bank competitiveness rankings. Sovereign wealth fund assets are back to $35 billion after diversion for currency and import support, but the current account has remained in surplus with remittance help. After two re-pegs stoked 15 percent inflation, the central bank responded with over 1000 basis points in rate hoists, but the 80 percent financial system dollarization muted their impact. With free float, the manat has since lost 5 percent against the dollar, and although public debt is under 40 percent of GDP, two-thirds is dollar or euro-denominated, and the Sofaz fund may opt for riskier overseas allocation to compensate. Bank cleanup is a major cost and several institutions will be shuttered or restructured, with the fiscal gap set at 5 percent of GDP next year even with recession breakout. The Trump organization branded luxury real estate there at the height of the boom in joint ventures with business executives close to the regime, according to reports.
Latvia and Lithuania maintain top investment-grade ratings and trade has been hurt by the Russian sanctions but they are also wary of the next US administration’s NATO backing as Moscow stages military maneuvers near their borders. Latvia after an IMF-EU rescue has followed a relentless deleveraging and austerity course, and growth recently slipped to 2 percent with bad loans still at 5 percent of the total. High-skilled labor demand could bring wage pressure, and tax reform is in an early stage to fight evasion. Lithuania has demonstrated comparable discipline resulting in Euro adoption, and the new government coalition between the Green and Social Democrat parties vow further moves as internal devaluation no longer rules with such power.
