Reduced Inflation In The EDB Countries Contributes To Economic Growth

Eurasian Development Bank debunks myths about EEU

Following relative economic stabilization in 2016, Eurasian Development Bank’s (EDB) member countries are entering the phase where inflation will go down significantly and key rates will be reduced gradually. This is expected to create more favorable conditions for the recovery of positive economic dynamics in the region. These are the findings of The Macroeconomic Review prepared by the Chief Economist Group at EDB.

The report suggests that economic recovery in Russia begins to generate impetuses for economic growth in a number of EDB countries, due to the recovered growth in money remittances and increased exports.

With the inflation slowdown and certain revival in the real sector, international rating agencies improved their outlooks for Russia’s sovereign credit ratings: Moody’s raised its outlook from ‘negative’ to ‘stable,’ and S&P from ‘stable’ to ‘positive.’ Russia’s overall rating remains at BB+.

The leading indicators, which include the Purchasing Managers Index (PMI) and the transport sector dynamics, suggest that recovery can continue in the second quarter of 2017. Fiscal parameters remain vulnerable to external shocks and the strengthening of the ruble.

In Kazakhstan, economic recovery becomes increasingly stable, while inflation continues to slow and remain close to the ceiling of the Central Bank’s target corridor. With this in mind, S&P Global Ratings affirmed Kazakhstan’s long- and short-term foreign and local currency sovereign credit ratings at BBB- and A-3, respectively. At the same time, S&P stated that the outlooks for twelve out of eighteen banks rated by S&P Global Ratings were ‘negative’ or on CreditWatch.

According to the report, Armenia’s economy saw a real breakthrough in individual money remittances in January 2017, up 35% year-on-year. This helped to improve economic activity significantly. The indicator grew by 6% in February 2017 as compared year-on-year. “This confirms that migrants’ money remittances play an important part in Armenia’s economic growth,” EDB analysts write.

Economic growth in Belarus may be influenced by the agreement on gas prices and oil supplies from Russia reached following a meeting of the presidents of the two countries in early April. In addition, economic recovery will be promoted by a considerable slowdown in inflation, accompanied by an active reduction in the key rate: from the beginning of the year, the key rate was reduced by 3 percentage points and it was resolved to decrease it further by 1 percentage point to 14% from 19 April 2017.

The tendencies in the Kyrgyz economy are consistent, to a significant extent, with regional trends. In addition to stabilized economic dynamics, inflation is approaching the bottom of the inflation benchmark.

Tajikistan stands aside in this picture, to an extent. Here, high growth rates are accompanied by accelerated inflation and increases in the key rate on the Central Bank’s compulsory provisions. The high level of bad debts and increased rate will require that the Central Bank toughens prudential regulation of the banking sector.

“Overall, economic recovery in the EDB countries is going forward, but still has room for more progress. It is unlikely that reduced inflation and key rates will alter the medium- and long-term economic dynamics without additional impetuses. From this point of view, the recovered mutual trade between the region’s largest economies (Russia, Kazakhstan and Belarus) and the furtherance of investments in the context of integration can both promote accelerated growth and ensure its sustainability in the medium and long term,” Yaroslav Lissovolik, Chief Economist at EDB, says.