Regional Economic Prospects in EBRD Countries of Operations: July 2011 (PDF)

The EBRD raised its 2011 economic growth forecast for the 29 countries in which it invests to 4.8% from the 4.6% predicted in May, while still expecting a slowdown to 4.4 percent next year, according to a report released July 22.

While Russia and other countries of the former Soviet Union are the least exposed to risks from the euro region, energy producers would be hit by stagnation in the euro area, which would reduce demand for commodities, the EBRD said.

Russia and most Central Asian economies continue to be on a firm recovery path. In Russia and Kazakhstan, the recovery has mostly been driven by higher oil prices, large-scale fiscal stimulus packages and banking-system support. Their recovery in turn has helped to stimulate the economies of the Kyrgyz Republic, Tajikistan, and Uzbekistan, which benefited from the pick-up in remittances and trade, as well as from other rising commodity prices. However, some important risks remain. First, the outlook remains highly dependent on external commodity price developments and domestic government support. Second, rising international food and fuel prices have resulted in large and rapid increases in inflation, resulting in some instances in social tensions. Third, state ownership and interference in the region’s banking sectors remains high. Together with incomplete restructuring efforts, this is contributing to an inefficient allocation of credit and continued high levels of nonperforming loans (NPLs), particularly in Kazakhstan and Tajikistan.

• In Russia, the growth momentum was sustained in the first quarter of 2011 (at 4.1% year-on-year) and output is expected to grow at 4.6% in 2011 and 4.7% in 2012, up from 4% in 2010. Overall asset quality in the banking sector has stopped deteriorating and the bailout of the Bank of Moscow, the sixth largest bank, in July 2011 is likely to be an isolated event. At the same time, investment activity has remained subdued, and capital outflows have persisted, estimated at over US$ 30 billion in the first half of 2011. While depletion of the fiscal reserve fund has been postponed and the budget deficit is expected to be contained below 1.5% of GDP in 2011, the implicit budget-balancing oil price has increased significantly. This could make the economy and the currency more volatile in response to swings in commodity prices.
• In Kazakhstan, GDP growth was 7.1% year-on-year during 2011 H1 and is forecasted to remain around 7% in 2011, supported by high commodity prices and continued strong public sector support. However, credit to the economy remains stagnant, in part because non-performing loans remain stuck at around 25% of total loans. Despite formally abolishing the exchange rate corridor in late February 2011, the National Bank of Kazakhstan (NBK) has intervened heavily to keep the exchange rate stable. Inflation increased to 8.5% in June 2011, and is expected to average 8.8% during 2011.
• The Kyrgyz Republic’s recovery from the global 2009 and domestic 2010 crises is continuing, driven by improved political stability, higher gold prices and fiscal stimulus. Inflation has accelerated since the middle of 2010, driven by increasing food and fuel prices, and has exceeded 20% since March 2011. However, it is expected to drop sharply in the coming months. GDP growth picked up to 5.5% year-on-year during 2011 H1 and is forecast to reach 6.3% in 2011, driven mostly by external factors, including stronger international demand, higher commodity prices, increased gold production, and growing remittances.
• In Tajikistan, economic growth remained strong at 6.5% year-on-year in 2011 Q1, and is expected to average 6% in 2011, driven by strong regional growth, high aluminium and cotton prices and growing remittances. Inflation accelerated from around 5% in mid-2010 to nearly 15% in May 2011, mostly driven by rising international fuel and food prices, leading to concerns about food security.
• Turkmenistan continues to experience a buoyant economic expansion with economic growth in 2011 still expected to be around 10%. This is mainly driven by ongoing large public construction projects and increased gas exports to China and Iran. Given that many prices remain administered, annual average inflation is expected to remain relatively low at around 5.5%. Medium-term growth prospects are good, but the economy remains highly dependent on oil and gas.
• Uzbekistan’s economy appears to have been unaffected by the crisis, with an official growth rate above 8% in 2009 and 2010, driven mostly by favourable external conditions and expansionary fiscal policies. However, GDP growth slowed down somewhat to 7.6% during 2011 Q1 and is expected to average 7% during 2011.