You are on page 1of 13

IMPORTANT NOTICE:

The information in this PDF file is subject to Business Monitor International’s full copyright and entitlements as defined and protected by international law. The contents of the file are for the sole use of the addressee. All content in this file is owned and operated by Business Monitor International, and the copying or distribution of this file, internally or externally, is strictly prohibited without the prior written permission and consent of Business Monitor International Ltd. If you wish to distribute the file, please email the Subscriptions Department at subs@businessmonitor.com, providing details of your subscription and the number of recipients you wish to forward or distribute this information to.

DISCLAIMER

All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.

ISSN 1474-5615

Vol 14

Issue 2

February 2010

Russia & CIS

Business Monitor International’s monthly regional report on political risk and macroeconomic prospects

TURKMENISTAN

Chinese Trade Influence To Grow

BMI View We expect Russia to remain Turkmenistan’s largest purchaser of gas over the medium term following a decision by both states’ leaders to resume gas flows in 2010. However, with the concurrent inauguration of the Central Asian-China gas pipeline, and further Chinese investment within the energy sector expected, we anticipate China to rival Russia’s economic importance to Turkmenistan over the longer term. We highlight the poten- tial for increasing geopolitical risks going forward.

After an eight-month interruption, an agreement for the resumption of Turk- men gas exports to Russia was finally reached on December 22. Gas exports have not flowed since a pipeline explo-

sion on the Turkmen side of the border

cut off supplies last April. While Russia has not committed to a target volume

of imports for 2010, it has agreed to a

long-term deal worth 30 billion cubic metres (bcm) per year, down from 50bcm prior to the pipeline explosion. This was not the only major devel- opment in the Turkmen energy sector.

December 14 saw the inauguration of

the Central Asian-China gas pipeline,

a 2,000km stretch of pipeline that will link the Central Asian gas fields to the Chinese market. The first section of pipeline is set to carry 13bcm of gas

from Turkmenistan to China in 2010,

while a second pipeline (expected to be completed toward the end of 2010)

will push total capacity up to 40bcm by 2012-2014, which will also include ex- ports from Uzbekistan and Kazakhstan.

With energy exports having served

...

continued on page 9

GEORGIA

Worst Is Over, But Recovery To Be Mild

BMI View: The worst effects of the global financial crisis on the Geor- gian banking sector have now passed, with financial soundness indicators signalling broad-based stabilisation through Q309. Having received equity injections from major multilateral financial institutions, the country’s major banks now look better positioned to ride out the effects of real sector deterioration. That said, the process of deleveraging and unwinding bad loans will last into 2011. Thus, while asset contraction (in month-on-month [m-o-m] terms) is likely coming to an end, a quick recovery is still unlikely.

Latest data from the National Bank of Georgia (NBG) has confirmed a sharp decline in assets (in year-on-year

[y-o-y] terms) through Q209-Q309, with aggregate assets of commercial

...

continued on page 6

THIS MONTH’S TOP STORIES

Russia: Oil Stabilisation Bodes Well For Fiscal Outlook

BMI View: A combination of positive variables has bolstered Rus- sia’s fiscal outlook through the medium term, and as a result we have revised down our federal budget deficit forecast. We now expect the shortfall to fall to 6.8% of GDP in 2010 and 4.4% in 2011, and steadily further thereafter to 1.1% by 2014. We hold to our view that sustained wide deficits in 2009-2011 will not result in a fundamental destabilisation of the local economy.

page 2

Ukraine: Political Risk In 2010: As Bad As It Gets

BMI View: Ukraine’s political stability is set to be tested further in 2010 as the country heads into its first presidential election since 2004’s ‘Orange Revolution’. With January’s vote likely to result in a second round run-off between Prime Minister Yulia Tymoshenko and Viktor Yanukovych, there is a growing risk that Ukraine will be unable to fulfil the IMF’s conditions to restart its emergency lending programme before H210, thus further undermining economic stability.

page 4

REGIONAL INDICATORS

 

2008 2009e

2010f

2011f

Real GDP Growth, % y-o-y ave

Russia

5.6

-8.1

3.4

4.4

Ukraine

2.1 -15.3

1.9

3.3

Kazakhstan

3.0

-1.9

2.4

5.5

Azerbaijan

10.8

9.0

11.0

7.5

Turkmenistan

10.5

5.4

8.5

9.7

Uzbekistan

9.5

7.6

8.0

8.2

Georgia

2.1

-7.2

3.2

5.6

Belarus

10.0

-0.8

0.9

5.3

Inflation, % y-o-y ave

Russia

14.1

11.2

9.3

8.8

Ukraine

25.3

18.7

15.5

13.0

Kazakhstan

17.0

7.3

7.5

7.5

Azerbaijan

18.8

5.0

8.0

11.0

Turkmenistan

11.0

11.5

10.0

8.3

Uzbekistan

12.7

14.3

12.8

10.4

Georgia

10.0

3.0

2.5

3.2

Belarus

14.8

13.5

9.5

8.8

Current Account Balance, % GDP

Russia

6.4

3.6

4.7

4.8

Ukraine

-7.1

0.3

1.4

0.6

Kazakhstan

8.2

-4.2

-1.9

0.3

Azerbaijan

35.1

13.3

17.6

17.3

Turkmenistan

12.0

11.3

10.3

9.6

Uzbekistan

13.8

7.8

0.0

0.0

Georgia

-22.3

-8.9

-3.8

-3.2

Belarus

-8.6

-5.1

-3.5

-3.2

e/f = BMI estimate/forecast. Sources: national central banks/national statistical bureaux/IMF/BMI.

Visit www.emergingeuropemonitor.com for the following subscriber benefits:

Instant access to the latest issue on the day of publication via pdf download, as well as access to pdfs of back issues.

Access to the latest stories, analysis, charts, graphs and data online 24 hours a day, from any location.

Search across a 3-year archive of stories by keyword, sector or country. Find what you want when you want.

Don’t know your password?

Contact Iwona Hoffman at ihoffman@businessmonitor.com or call +44 (0)20 7248 0468 today.

Not a subscriber?

Go to www.emergingeuropemonitor.com today, register your details and get instant trial access.

ISSN: 1746-0735

Editorial/Subscriptions Office:

Mermaid House, 2 Puddle Dock, London EC4V 3DS, UK Tel: +44 (0)20 7248 0468 Fax: +44 (0)20 7248 0467 email: subs@businessmonitor.com www.businessmonitor.com www.emergingeuropemonitor.com

 RUSSIA
RUSSIA
 

RISK SUMMARY

 

POLITICAL RISK

Security Risks Remain High

In the worst terrorist attack in Russia out- side the North Caucasus region since 2004, a bombing on a Russian train left dozens dead and over 100 injured on November 28. The attack took place on the Nevsky Express main line, which operates between Moscow and St. Petersburg. The Federal Security Service has announced that a 7kg bomb detonated on the line roughly 350km north of Moscow. Chechen separatist militants claimed responsibility and, in turn, Russian Prime Minister pledged to destroy any terrorist groups. Although the bomb- ing highlights the persistent security risk in Russia, we do not believe that an escalation of an armed campaign is likely in the North Caucasus as a result of the attack.

We have upgraded our short-term political risk rating to 73.3 on account of an improved eco- nomic outlook.

ECONOMIC RISK

Recovery Underway

We maintain that H109 was the trough of the recession in Russia and that an economic recovery is likely to accelerate in H110. The stabilisation of oil prices above US$70.00/bbl and the concomitant improvement in do - mestic and international capital markets will be the primary drivers pushing headline real GDP growth back into positive territory. We hold to our forecast for the Russian economy to expand by 3.4% in 2010, up from an esti- mated contraction of 8.1% in 2009.

The short-term economic risk rating remains at 56.5.

BUSINESS ENVIRONMENT

Forthcoming Changes To Minerals’ Law

The government has announced that it will seek input from foreign investors as part of a process to reform the country’s minerals law. The law, officially named ‘Law 57’, governs foreign investment in Russia, and specifically outlines regulations for company ownership stakes in strategic mineral sectors. The de- cision to consult external firms is a positive sign, and suggests that Russia may be willing to ease some rules, which currently restrict majority foreign ownership in several key commodities sectors including oil and gas.

BMI’s business environment rating stands at 46.8.

ECONOMIC OUTLOOK

Oil Stabilisation Bodes Well For Fiscal Outlook

BMI View: A combination of positive variables has bolstered Russia’s fiscal outlook through the medium term, and as a result we have revised down our federal budget deficit forecast. We now expect the shortfall to fall to 6.8% of GDP in 2010 and 4.4% in 2011, and steadily further thereafter to 1.1% by 2014. We hold to our view that sustained wide deficits in 2009-2011 will not result in a fundamental destabilisa- tion of the local economy. Healthy oil revenues, privatisation earnings, a comfortable cushion of sovereign wealth fund assets and historically low domestic rates all sug- gest that the deficit is sustainable through the medium term.

Latest Russian federal budget data through to November has affirmed an increasingly posi- tive fiscal outlook. From January-November, budget expenditures totalled RUB8.58trn, just 87% of total planned expenditures for the year. We have been particularly encour-

aged by the slowdown in expenditure growth over the first two months of Q409. Whereas spending had expanded by an average of 48.2% y-o-y over the first three quarters of

the year, growth fell substantially to 10.7% and 19.3% in November and October respec- tively. Moreover, revenue growth has shown signs of a tentative recovery, flipping into positive territory in November for the first time in 10 months. Indeed, budget inflows expanded by a healthy 15.5% y-o-y in No-

vember, up from a contraction of 28.0% in

the previous month.

Revenues Begin To Crawl Back ...

Russia – Federal Budget Revenue & Expenditure Growth

 RUSSIA RISK SUMMARY POLITICAL RISK Security Risks Remain High In the worst terrorist attack in

Source: Ministry of Finance

The improvement in fiscal conditions has mirrored a broader stabilisation of the Russian economy through the second and third quarters. The bounce in Urals oil prices, from a low of US$32.14/bbl in December 2008, to above US$70.00/bbl in Q409 has been crucial, not only for increasing federal

government royalty earnings, but also as it has bolstered foreign capital inflows into the domestic economy. As a result, the financial

crisis Russia was facing in Q408-Q109, characterised by an almost total freeze on do- mestic lending and an unprecedented outflow of foreign capital, has been sharply mitigated.

Shortfalls To Continue In 2010

Russia – Federal Budget Balance, RUBbn

 RUSSIA RISK SUMMARY POLITICAL RISK Security Risks Remain High In the worst terrorist attack in

Source: Ministry of Finance

As domestic credit conditions have

improved, interest rates have in turn fallen dramatically, opening the way for easier borrowing conditions for the central govern- ment. Indeed, the yield on the benchmark 5-year OFZ bond maturing in 2011 has fallen from a high of 14.0% in February to a record low of 5.3% as of December 23. To be sure, the move in treasury yields has been helped by aggressive rate cutting by the Central Bank of Russia, which has brought its refi- nancing rate down by 400bps, from 13.0% to

9.0% over the same period. With refinancing

costs having fallen in such fashion, this has meant that the sustainability of the widened deficit in 2009 has improved substantially.

Revising Down Our Deficit Forecasts

– On the back of the latest data, we have

revised down our fiscal deficit forecasts for the long term. We now expect Russia to post a deficit of 7.9% of GDP in 2009 (down from an original forecast of 9.1%) and for the shortfall to then decline to 6.8% in 2010. Despite our revisions, we hold to

2

  • 2 RUSSIA & CIS – FEBRUARY 2009

www.emergingeuropemonitor.com

our view that Russia will continue to post wide deficits through the medium term, with a reduction below 4.0% of GDP only

expected in 2012.

Domestic Debt Surges As Expected

Russia – Domestic Debt Figures

our view that Russia will continue to post wide deficits through the medium term, with a
our view that Russia will continue to post wide deficits through the medium term, with a

Source: Ministry of Finance

We stress though, that this should not pose a major challenge to domestic macroeconom- ic stability. With combined public external and domestic debt totalling less than 10% of

DATA & FORECASTS

GDP, there is significant scope for the gov- ernment to tap both local and foreign credit

markets to sustain a deficit over an extended period. This is especially the case when fac- toring in the aforementioned historically low interest rate conditions. Moreover, we note that Russian sovereign wealth fund assets, despite having been drawn down by over US$50.0bn through 2009, remain in robust

shape. Combined assets of the reserve and

national wealth funds totalled US$168.0bn at end-November. These funds alone equate to 75% of the total forecast nominal fiscal shortfall over the three-year period to 2012. We are also sanguine on the political willingness of the government to cut the deficit through the long term. Not only have we been encouraged by the ability of Prime Minister Vladimir Putin’s executive to largely stick to within the defined budget plan for 2009, but there are also signals that Moscow is moving to wind down recession stimuli programmes. The government has already frozen public sector payrolls and cut capital expenditure plans through the long term. On December 10, Putin an - nounced that he would cut social spending

to fight unemployment in 2010, promising only RUB36.3bn to subsidise regional job programmes. This figure was down from the RUB43.7bn the Federal government spent on the programmes in 2010, and well below the RUB62.3bn, the sub-national

governments were asking for.

To be sure, the overwhelming popular- ity of both Putin and President Dmitry Medvedev, even through the depths of the recession, will enable the government to take a less populist position going forward. Indeed, latest opinion poll data show ap- proval ratings for both the Prime Minister and President rising in November, and remaining well near their historic levels of above 70% and 80% respectively.

Oil Below US$50.00/bbl – We caution that despite all the positive signals, ultimately, the stability of Russia’s fiscal position will be contingent upon oil remaining above US$50.00/bbl. While our core sce- nario calls for oil to average in excess of US$70.00/bbl through 2010, we caution that significant commodity price volatil- ity remains a major risk going forward. The lack of a strong fundamental demand recovery in the United States and eurozone

over the medium term as well the risks of a global ‘double-dip’ are particular worries and suggest that continued financial market stability will not be assured. Should oil sell off, we would highlight US$50.00/bbl as a key level to watch for macroeconomic stability in Russia. Should oil remain below

this point for an extended period, than a

reversal in the positive fiscal trends seen in Q409 would be expected.

BMI View: Unemployment in Russia ticked back up to 8.1% according to latest data for November, up from 7.7% in the previous month. The latest figure reinforces our view that seasonal effects were likely to push the

jobless rate higher through to the early part of 2010, and we hold to our estimate of unemployment coming in at 8.5% at end- 2009. We also hold to our view for inflation in Russia to continue falling through the short

term, with our end-2009 forecast remain- ing at 9.0% y-o-y. Reinforcing our view, consumer price growth in November fell to 9.1% y-o-y, down from 9.7% in the previous month and a 2009 high of 14.0% in March.

2008 2009e Latest Period 2010f 2011f
2008
2009e
Latest Period
2010f
2011f

Population, mn [4]

141.9

141.2

-

-

140.5

139.8

Nominal GDP, US$bn [5]

1,607.4

1,328.1

538.5

Jan-Jun

1,670.9

1,961.9

Nominal GDP, RUBbn [6]

39,954.4

41,170.6

17.0

Jan-Jun

46,368.3

52,479.5

GDP per capita, US$ [5]

11,327

9,406

-

-

11,894

14,035

Real GDP growth, % change y-o-y [6]

5.6

-8.1

-8.9

Jul-Sep

3.4

4.4

Industrial production index, % y-o-y, ave [6]

2.7

-10.9

-12.0

Jan-Nov

2.0

5.0

Budget balance, RUBbn [1,7]

1,697.0

-3,247.0

-1,350.0

Jan-Nov

-2,954.0

-2,328.0

Budget balance, % of GDP [1,8]

4.2

-7.9

-

-

-6.8

-4.4

Consumer prices, % y-o-y, eop [6]

13.3

9.0

9.1

Nov

9.5

8.0

Central Bank policy rate, % [2,9]

10.0

8.5

-

-

9.0

8.5

Exchange rate RUB/US$, eop [10]

29.40

30.30

30.55

22-Dec

27.00

26.50

Goods imports, US$bn [9]

291.9

175.1

131.5

Jan-Sep

201.4

237.6

Goods Exports, US$bn [9]

471.6

273.5

206.3

Jan-Sep

341.9

403.5

Trade balance, US$bn [9]

179.7

98.4

74.8

Jan-Sep

140.5

165.8

Current account, US$bn [9]

102.4

47.2

32.1

Jan-Sep

78.3

94.5

Current account, % of GDP [9]

6.4

3.6

-

-

4.7

4.8

Foreign reserves ex gold, US$bn [3,9]

438.2

447.0

451.2

4-Dec

469.3

469.3

Import cover, months g&s [9]

14.3

22.9

-

-

21.1

18.0

Total external debt stock, US$mn [9]

484,600.0

479,816.0

487,400.0

Sep

502,573.0

572,220.0

Total external debt stock, % of GDP [11]

30.1

36.1

-

-

30.1

29.2

Notes: f BMI forecasts. 1 Federal Budget; 2 Refinancing Rate; 3 Reserves Including Gold; Sources: 4 IMF. 5 Federal State Statistics Service/BMI Calculation; 6 Federal State Statistics Service; 7 Ministry of Finance; 8 Ministry of Finance/BMI Calculation; 9 Central Bank of Russia; 10 BMI; 11 Central Bank of Russia/BMI Calculation.

 UKRAINE
UKRAINE
 

RISK SUMMARY

 

POLITICAL RISK

Selling Arms To Iraq

According to Anatoly Grytsenko, head of the Ukrainian parliament’s security and defence committee, Ukraine and Iraq have signed an agreement which will see Kiev provide Bagh- dad with US$2.5bn worth of weapons and military equipment. Under the terms of the contract – the country’s largest weapons deal in history – Ukraine will produce and deliver 420 BTR-4 armoured personnel carriers, six AN-32B military transport planes, and other military hardware. This development, in our view, underscores Ukraine’s growing role as one of the world’s largest arms dealers.

Ukraine’s short-term political risk rating is 44.6.

ECONOMIC RISK

Inflation Still Elevated

While Ukrainian consumer price inflation remains among the highest in emerging Eu- rope, inflation took another sharp leg down in November, coming in at a 29-month low of 13.6% y-o-y, down from 14.1% and 15.0% in October and September respectively. The key driver behind the ongoing disinflationary trend was a significant easing of utility price inflation, with prices increasing by ‘only’ 16.1% y-o-y, compared with 22.3% in Oc- tober. We hold to our core view for inflation to edge higher in 2010, and forecast CPI coming in at 16.0% by end-year.

Our short-term economic risk rating remains at 28.3.

BUSINESS ENVIRONMENT

Banks Going Bust

Although total asset growth in Ukraine’s banking sector came in at 33.8% y-o-y in September, we maintain our view that un- derlying stability will remain tenuous through 2010. We caution that a host of risks could derail the sector’s eventual recovery, most notably the growing threat that the IMF does not resume its emergency lending program to the country before H210, significantly mitigating the scope of the government’s refinancing program. Moreover, we main- tain our projections for asset growth and profitability to continue collapsing through 2010 alongside the economy’s broad-based recession, and expect the amount of non- performing loans in the economy to reach record levels by end-year.

Our business environment rating is 45.8.

POLITICAL OUTLOOK

Political Risk In 2010: As Bad As It Gets

BMI View: Ukraine’s political stability is set to be tested further in 2010, as the country heads into its first presidential election since 2004’s ‘Orange Revolution’. With January’s vote likely to result in a second round run-off between Prime Min- ister Yulia Tymoshenko and Viktor Yanukovych, there is a growing risk that Ukraine will be unable to fulfil the IMF’s conditions to restart its emergency lending pro - gramme before H210, thus further undermining economic stability.

Ukraine’s presidential election campaign is in full swing, and will dominate the domestic political environment through Q110. The country’s political risk profile is among the

weakest in emerging Europe, with Ukraine

scoring only 42.1 out of 100 under our short-

term political risk ratings, and we believe

the situation will deteriorate in the coming months. We highlight the key risks to watch

out for in 2010, in addition to our views on

the most likely post-election scenarios.

Stability Far From Assured

Ukraine – Breakdown Of Short-Term Political Risk Ratings

 UKRAINE RISK SUMMARY POLITICAL RISK Selling Arms To Iraq According to Anatoly Grytsenko, head of

Source: BMI

Why The Election Matters – As Ukraine’s president is the primary figure in charge of the nation’s foreign policy agenda, the election will be a key determinant of the country’s external orientation over the next five years. Given the role which bilateral relations between Kiev and Moscow play in underpinning the former’s underlying risk profile, the ability of Ukraine’s next president to maintain cordial relations with Russia will be crucial for medium-term stability. To this end, with the current and avowedly ‘pro-Western’ Ukrainian Presi- dent Viktor Yushchenko continuing to poll in the single-digits, and hence unlikely to

make it to the second round run-off vote,

our core view remains for bilateral relations

between the two states to improve after the

vote, which should reduce (but not elimi- nate) the likelihood of frequent flare-ups in

tension through to 2014.

The Four Horsemen

Opinion Poll: For whom do you intend to vote in the next presidential election?

 UKRAINE RISK SUMMARY POLITICAL RISK Selling Arms To Iraq According to Anatoly Grytsenko, head of

Source: Razumkov Centre

More importantly perhaps, we expect the election to play an increasingly impor- tant role in underlying economic stabil - ity through the first half of 2010. With the IMF having recently suspended Ukraine’s US$16.4bn Stand-By Arrangement, saying that it will wait until after the election to resume talks on the disbursement of the next

tranche in emergency funding, a swift and decisive outcome following the vote will be crucial for Ukraine’s ability to tap this key source of external financing. Unfortunately, given that the second round of voting will likely be tight, with a significant possibil- ity that one side will dispute the eventual results, we caution of the growing risk that the authorities will be unable to push through necessary reforms aimed at restarting the lending programme before H210.

Who Will Win – According to latest opinion poll data from the Razumkov Centre, Prime Minister Yulia Tymoshenko and leader of the opposition Party of Regions Viktor Yanukovych remain the clear frontrunners ahead of the first round of voting on Janu- ary 17. Indeed, when asked in October who they intended on voting for in the election, 28.9% of respondents said they intended to support Yanukovych (up from 22.5% in De-

4

  • 4 RUSSIA & CIS – FEBRUARY 2010

www.emergingeuropemonitor.com

cember), with 20.3% backing Tymoshenko (compared with 17.9% in December). With the fortunes of former parliamentary speaker Arseniy Yatseniuk (who was previously considered the only one capable of making

it to the second round vote) beginning to

fade rapidly, and neither Tymoshenko nor Yanukovych likely to obtain a majority of the vote in the first round, we believe the

stage has been set for a run-off between the

two in late February. When asked who they would support should the second round of voting come down to Tymoshenko or Yanukovych, 40.5% of respondents said they would back the former, with 33.3% saying they would vote for the current prime minister. While Yanukovych can certainly benefit from the ongoing macroeconomic mael- strom, particularly by laying the blame for

ongoing troubles at the feet of the current

government, the fact that his support has not surged higher throughout the crisis is

indicative of the reservations a large pro - portion of Ukrainians have over his candi-

dacy. As the chart from 2004’s presidential election shows ( right ), Yanukovych’s

support base remains firmly rooted in the

eastern, Russian-speaking regions, with

little support emanating from the west

and centre.

Although the second round will be extremely close, we believe that the prime

minister has the best chance of becoming

Ukraine’s next president given that she will

DATA & FORECASTS

undoubtedly be the preferred candidate in west and central Ukraine, and having been perceived to develop increasingly cordial relations with Moscow throughout 2009.

What To Expect Post-Election – Problem- atically, whoever wins Ukraine’s election will still be forced to nominate a prime min- ister, and attempt to form a stable, workable government. Given the country’s fractious and crisis-prone parliamentary environment, we caution that this will not come easy.

Divisions Run Deep

Ukraine – Distribution Of Votes To Presidential Candidates In 2004 Election, %

cember), with 20.3% backing Tymoshenko (compared with 17.9% in December). With the fortunes of former parliamentary

Source: Central Election Commission of Ukraine/Electoral Geography

Although rumours of the Tymoshenko- Yanukovych alliance continue (whereby the winner of the presidential vote will nominate

the other as prime minister), we do not be-

lieve this would be a stable coalition by any measure, and would leave the government in a similar position to that in which it has found itself since 2004.

We caution of the growing risk that the next president will decide to call a snap parliamentary election following the vote in an effort to consolidate power and form a workable government. This could prove cru- cial for underlying stability throughout the country, particularly as it would risk further delaying Kiev’s ability to meet the IMF’s conditions to restart its lending programme. With the SBA likely to play an integral role in helping the sovereign meet its external debt repayment obligations, we reiterate our concern that further policy paralysis will elevate risk aversion towards the country further through the medium term, potentially delaying post-crisis recovery.

Key Risks – With Ukraine’s political sta - bility set to remain tenuous through H110, we caution that even minor events could risk plunging the country further into crisis going forward. Given that 2004’s presiden- tial election led to mass protests throughout the country, there is an underlying concern that this vote may also lead to a large-scale

uptick in public unrest. While such an outcome remains outside our core scenario, particularly given that there is not yet a charismatic or identifiable politician who could rally widespread sup- port, we caution that the risks could spike commensurately should the vote be per- ceived to have been marred by widespread irregularities, which is a scenario we can not yet rule out.

BMI View:

In light of a host of leading

indicator data continuing to show that a macroeconomic recovery in Ukraine has yet to gain hold, we have slightly revised

down our 2009 real GDP growth forecast to -15.3%. At the same time, although we have slightly revised up our forecast for real GDP growth in 2010 to 1.9% (from

our previous projection of 1.3%), we caution that this is primarily a reflection of base effects as opposed to any fundamental recovery in demand conditions.

2008 2009e Latest Period 2010f 2011f
2008
2009e
Latest Period
2010f
2011f

Population, mn [3]

46.1

45.9

-

-

45.7

45.5

Nominal GDP, US$bn [3]

183.1

108.1

26.6

Apr-Jun

121.4

148.7

Nominal GDP, UAHbn [3]

949.9

846.1

207.1

Apr-Jun

992.4

1,152.8

GDP per capita, US$ [4]

3,969

2,355

-

-

2,655

3,266

Real GDP growth, % change y-o-y [3]

2.1

-15.3

-15.3

Jul-Oct

1.9

3.3

Budget balance, UAHbn [3]

-14.2

-77.9

-16.7

Jan-Aug

-69.9

-56.7

Budget balance, % of GDP [3]

-1.5

-9.2

-

-

-7.0

-4.9

Consumer prices, % y-o-y, eop [3]

22.3

15.0

13.6

Nov

16.0

10.0

Central Bank policy rate, % [1,5]

10.5

9.0

10.2

Oct

8.0

7.0

Exchange rate UAH/US$, eop [6]

7.80

7.85

7.96

Dec-09

8.50

7.00

Goods imports, US$bn [7]

84.7

61.0

66.6

Jan-Sep

64.0

73.6

Goods Exports, US$bn [7]

67.7

55.9

54.1

Jan-Sep

59.5

66.6

Trade balance, US$bn [7]

-16.9

-5.1

12.5

Jan-Sep

-4.5

-7.0

Current account, US$bn [7]

-12.9

0.4

-

-

1.7

0.8

Current account, % of GDP [8]

-7.1

0.3

-

-

1.4

0.6

Foreign reserves ex gold, US$bn [7]

31.5

27.0

27.3

Nov

18.0

20.0

Import cover, months g&s [7]

3.8

4.4

-

-

2.7

2.6

Total external debt stock, US$mn [2,7]

103,230.0

104,950.0

104,376.0

Oct

106,591.0

116,689.0

Total external debt stock, % of GDP [8]

56.4

93.1

-

-

87.8

78.4

Notes: e BMI estimates. f BMI forecasts. 1 Discount Rate; 2 JEDH; Sources: 3 State Statistics Committee. 4 State Statisitics Committee; 5 NBU/BMI; 6 BMI; 7 National Bank of Ukraine; 8 National Bank of Ukraine/BMI Calculation.

 GEORGIA
GEORGIA
 

RISK SUMMARY

 

POLITICAL RISK

Russian Relations To Improve

Further signs of improved cooperation between Georgia and Russia emerged on December 24 with the news that the two countries have agreed to reopen the Verkhny Lars border crossing, connecting the Russian city of Vladikavkaz with the Georgian capital Tbilisi. The border cross- ing, which was closed in 2006 as relations between the two countries worsened, is expected to be reopened in early March 2010. We view this decision as a further indication of a gradual improvement in relations between the two countries, fol- lowing their 2008 war. That said, we do not expect a restoration of formal diplomatic ties through the medium term.

Our short term political risk rating remains at 37.3.

ECONOMIC RISK

Growth In 2010

Georgian GDP came in at GEL12.7bn from January to September, down 5.5% in real terms from the same period in 2008. How - ever, in q-o-q terms the 7.8% contraction recorded in Q309 was less steep than the 9.2% q-o-q fall posted for Q209, and as a result, we expect the pace of decline to slow further in Q409. We see Georgia posting a 7.2% real GDP contraction in 2009, and expect a robust recovery in 2010, with real GDP forecast to grow 3.2%.

We hold to our short term economic risk rating of 48.5.

BUSINESS ENVIRONMENT

Energy Sector Liberalisation

A Turkish-Korean consortium, including Ko - rea Electric Power Corporation,SK Engi- neering And Construction Company and Nurol Construction And Trading Co.,has signed a deal to build three hydropower plants at Namakhvani on the Rioni River in Tsageri, western Georgia. Combined, the power plants will have a capacity of 450MW, equal to 13% of current electricity capacity in the country. We see the ongoing liberalisa- tion of Georgia’s hydropower sector as an important step in meeting domestic energy demand, which could result in Georgia be- coming an electricity exporter over the medium term.

BMI’s business environment rating is 52.8.

...

continued

from bottom of front page

banks falling by GEL453mn (5.4%) from

March to September. The drop in assets ef-

fectively mirrored a commensurate decline in net loans, with the total stock falling by GEL675mn through the second and third quarters, while net loan flows to the banking sector have remained well below 2007 and

  • 2008 levels.

With assets as a percentage of GDP totalling 46% in Georgia, the 8.5% y-o-y real GDP contraction over H109 has been particularly hard-hitting on the banking system, especially as net loans account for more than 60% of total assets. Non- performing loan (NPL) rates hit a record 18.8% in June, rising from just 4.1% over

the same period in 2008. This has effec- tively destroyed profitability in the short

term, with net losses for the banking sec-

tor totaling over GEL1bn from September

  • 2008 to October 2009.

We therefore believe that the ability of

the banking system to stage a quick recovery is very limited. Unwinding NPLs will take a protracted period, especially as we are only expecting a weak fundamental demand recovery in 2010, which will in turn limit capital available for new growth.

That said, our core view is that the worst

effects of the recession and the financial crisis on the Georgian banking sector have likely passed. Multilateral support has boosted eq-

DATA & FORECASTS

uity capital levels, while capital reserves and paid-in capital levels have continued to rise through 2009 (albeit tentatively). As a result, capital adequacy ratios have remained well above required minimums, with aggregate

Tier 1 capital in the system having risen by a healthy GEL78mn since March. Interest rate dynamics, too, are showing a steady recovery after peaking in Q1. Weight-

ed average loan to deposit rate spreads have steadily come off after peaking near 15% in January, suggesting that some of the tight- ness in the credit market is being alleviated.

This further suggests that the worst of the

loan contractions is likely behind us. In addition to clear signs of stabilisa- tion, there has been a steady rebalancing, especially on the liabilities side. Georgian banks were heavily exposed to the global credit crunch due to their high level of external leverage, which made them vulner- able to tightening liquidity. The process of

the recession, has resulted in an increasing rebalancing of the system’s liabilities back toward a more traditional deposit base, which should place the banking sector on a more sustainable footing going forward. Banks’ gross external debt is a case in point, having fallen by more than US$300mn over H109, mainly as a result of paying down at the short-end. The loans to depos- its ratio too, has fallen rapidly from nearly 190% at the beginning of the year to 149% by end-September.

BMI View: The Georgian general government deficit continued to widen in Q309, reaching GEL608.0mn for the first nine months of 2009, up from a GEL293.3mn deficit over the same period in 2008. This was mainly caused by a 13.5% y-o-y fall in revenues, compared with a milder 6.3% contraction in expenditures. Although we expect the fiscal deficit to narrow to 3.3% of

GDP in 2010, from an estimated 5.4% in 2009, we caution that Georgia is becoming increasingly reliant on foreign borrowing to finance its fiscal shortfall, which could have negative implications going forward should borrowing costs rise significantly on the back of increased risk aversion.

2008 2009e Latest Period 2010f 2011f
2008
2009e
Latest Period
2010f
2011f

Population, mn [1]

4.4

4.4

-

-

4.4

4.4

Nominal GDP, US$bn [2]

12.8

10.7

4.9

Jan-Sep

11.3

12.6

Real GDP growth, % change y-o-y [2]

2.1

-7.2

-5.5

Jan-Sep

3.2

5.6

Industrial production index, % y-o-y, ave [2]

17.8

-20.0

-16.6

Jan-Sep

-6.8

3.4

Budget balance, % of GDP [3]

-1.8

-5.4

-

-

-3.3

-2.7

Consumer prices, % y-o-y, eop [4]

5.5

0.5

0.2

November

3.0

3.3

Exchange rate GEL/US$, eop [5]

1.66

1.67

1.68

30-Dec

1.67

1.60

Goods imports, US$bn [6]

6.3

3.9

3.0

Jan-Sep

3.7

4.0

Goods Exports, US$bn [6]

2.4

1.6

1.2

Jan-Sep

1.7

1.8

Trade balance, US$bn [6]

-3.8

-2.3

-1.8

Jan-Sep

-2.1

-2.2

Current account, % of GDP [6]

-22.8

-8.9

-

-

-3.8

-3.2

Foreign reserves ex gold, US$bn [7]

1.5

2.0

2.0

Sep

1.9

1.8

Total external debt stock, US$mn [6]

7,302.3

7,854.1

8.4 September

7,876.4

8,311.9

Total external debt stock, % of GDP [6]

57.1

73.5

-

-

69.4

65.8

Notes: e BMI estimates. f BMI forecasts. Sources: 1 IMF IFS / BMI Calculation. 2 Statistics Georgia / BMI Calculation; 3 Statistics Georgia / BMI; 4 National Bank of Georgia / BMI Calculation; 5 BMI; 6 National Bank of Georgia / BMI; 7 Na- tional Bank Of Georgia / BMI Calculation.

6

  • 6 RUSSIA & CIS – FEBRUARY 2010

www.emergingeuropemonitor.com

 AZERBAIJAN
AZERBAIJAN

ECONOMIC OUTLOOK

C/A Surplus To Surge Higher

BMI View: We expect the rebound in Azerbaijan’s current account surplus in Q209 to have continued through to the end of the year, and forecast a US$7.18bn full-year surplus. A further production surge and stronger demand in Azerbaijan’s key export markets should see the country’s current account surplus rise even further in 2010 to US$11.49bn, 17.6% of GDP. From 2011, we expect the surplus to narrow in per- centage of GDP terms, falling to 14.7% by 2014, in line with a peak for oil produc- tion in 2013 and rising imports as private consumption grows.

Azerbaijan’s goods trade surplus rebounded strongly in Q209 to reach US$3.81bn, up from a multi-year low of US$2.11bn in Q109. The bounce was driven primarily by an uptick in oil export revenues, as a result of rising oil prices and production. Oil exports totalled US$5.02bn in April-May, up from US$3.42bn over the previous three months. Contributing to the increased trade surplus was the 19.1% y-o-y fall in imports to US$1.45bn. The improvement in the goods trade account in Q209 commensurately drove the current account surplus higher, reaching US$2.69bn, up from US$1.80bn in Q109 and US$1.66bn in Q408.

F/A And Reserves Also Looking Better – In addition to the improvement in the current account, Azerbaijan’s financial account also looked healthier in Q209, following on from a dire Q109, when the flight of foreign capi-

tal had led to a US$3.08bn deficit in the net portfolio and other investments account. In Q209 the net portfolio and other investment account recorded a US$969.0mn deficit, resulting in a net shortfall of US$978.0mn for the overall financial account. The stabilisation of Azerbaijan’s bal - ance of payments dynamics in Q209 also

reduced the pressure on foreign reserves.

Indeed, while reserves saw a net drawdown of US$2.04bn in Q109 (the first quar - terly net outflow since Q205), they grew by US$1.56bn in Q209.

Pressures Likely To Have Eased Further

– We expect the pressures on Azerbaijan’s

current and financial accounts to have con- tinued to mitigate through H209. With oil prices having stabilised in the US$65.00- 80.00/bbl range, this should serve to keep

export earnings high. In addition, a recent

data release from the Statistics Office of Azerbaijan indicated that oil production volumes had risen 13.5% y-o-y in the first 11 months of 2009. As a result, we forecast Azerbaijan’s current account surplus to total US$7.18bn for 2009, equivalent to 13.3%

of GDP.

Crisis Averted, Exports To Grow In 2010

– We expect growth from 2010 to be based

much on expanded oil production, with our Oil and Gas team forecasting a jump to 1.35mn barrels per day (b/d), a significant in- crease on the estimated 1.04mn b/d in 2009, with output from the key Azeri-Chirag- Guneshli field set to continue increasing. In addition to our sanguine outlook for

the current account in 2010, we expect the

stabilisation of global financial markets to mitigate the risks of another major capital outflow. As such, we are not currently ex- pecting any significant pressure on reserves (which fell sharply in H109), and see the Azeri manat remaining in the AZN0.8000/ US$ range through 2010.

Oil To Peak In 2013 – We expect the trade surplus to remain above 20.0% of GDP through to 2013, although we expect it to fall after that, coming in at 10.5% of GDP by

2019. This will come about as a result of two key developments. First, we expect Azeri oil production to peak in 2013 at 1.45mn b/d, indicating that its role as the main factor driving Azeri growth is set to fall thereafter. Although some of the slack will be picked up by gas production, which we forecast to

reach 25.0bn cubic metres (bcm) in 2014,

we nevertheless see total exports declining from 31.3% of GDP in 2014 to 18.9% of GDP by 2019. Second, we expect private consumption to expand as a proportion of GDP over the long run, as a result of oil wealth filtering into a relatively under-leveraged domestic economy. This should push total imports to US$15.4bn in 2014, from US$7.80bn in 2009. As a result, we do not expect the current account surplus to return to anything like its 2008 levels, when record oil prices pushed it to US$23.01bn (49.7% of GDP).

Indeed, we forecast the current account

surplus to average 16.0% between 2011

and 2014.

 

RISK SUMMARY

 

POLITICAL RISK

Rights To Remain Limited

Police in Azerbaijan charged newspaper edi- tor Eynulla Fatullayev with narcotics posses- sion on December 29, after guards at Prison Colony No.12 in Baku claimed to have found 0.2 grams of heroin in his jacket. Fatullayev, who is already serving an eight and a half year sentence for defamation, incitement of ethnic hatred, terrorism and tax evasion, will face a further three years behind bars if found guilty. The European Court of Human Rights is currently considering a charge brought by Fatullayev against the Azeri government for wrongful imprisonment. Going forward, we expect progress on human rights in Az- erbaijan to remain slow, despite international pressure for reform.

Our short term political risk rating is 66.7.

ECONOMIC RISK

Oil Production Boost

Azerbaijan’s State Statistics Committee revealed on December 16 that the coun- try’s oil production averaged 1.02mn bar- rels per day (b/d) in the first 11 months of 2009, up 13.5% from the same period in 2008. The majority of this increase was provided by higher production levels from the Azeri-Chirag-Guneshli field, which provided 83.3% of Azerbaijan’s oil output from January to November. We expect the increase in oil production to continue into 2010, contributing to our forecast for headline real GDP growth of 11.0%, up from 9.0% in 2009.

We have revised up our short term economic risk rating to 76.3, from 74.8 previously, to reflect our projection for robust real GDP growth in 2010.

BUSINESS ENVIRONMENT

Rail Upgrade Planned

Azerbaijan agreed a loan worth US$450.0mn with the World Bank on December 18 to finance improvements to its rail infrastructure. The loan will target restructuring of around 300km of track on the Baku-Boyuk-Kesik line, including financing for improved passenger and cargo train speeds, to 100km/h and 80km/h respectively. We see the willingness of the Azeri government to finance improve- ments to its transport network as a positive sign going forward, as it attempts to build better links with its major export destinations.

BMI’s business environment rating is 44.7.

AZERBAIJAN XXXXXX
AZERBAIJAN XXXXXX

ECONOMIC OUTLOOK

Oil To Boost Fiscal Account

BMI View: We expect the Azeri state surplus to reach AZN293.1bn by end-2009 (0.7% of GDP), up from AZN82.0bn in 2008 (0.2% of GDP), with revenues and expenditures both set to fall in line with declining oil prices. That said, with stronger oil production and higher oil prices forecast for 2010, and the government announc- ing large-scale spending plans for 2010, we expect both components of the fiscal account to bounce strongly, with state revenues and expenditures forecast to grow 30.0% y-o-y.

The Azeri state fiscal surplus came in at AZN778.2mn from January to September, according to latest data from the National Bank of Azerbaijan. This represented a 12.3% y-o-y nominal contraction from the AZN887.4bn outturn recorded during the same period a year earlier. Government revenues from January to September fell 4.9% y-o-y (in nominal terms) to AZN7.2bn, compared to a mas- sive 73.5% expansion over the same period in 2008. Declining revenues through to September are reflective of the plunge in oil-related income, with Brent crude trad- ing in the US$70.00/bbl area in September 2009, down from around US$100.00/bbl a year earlier. In line with declining government rev- enues, expenditures also contracted, falling 3.9% y-o-y during January-September to AZN6.5bn. In cumulative terms, this was the first time that expenditures have fallen

DATA & FORECASTS

into negative territory since January 2007, reflecting the increased strains on govern- ment spending as oil prices remained well below 2008 levels. For 2009 as a whole, we hold to our forecast for a 5.0% full-year contraction in state expenditures, which should see total spending come in at AZN10.1bn. We expect revenues to fare slightly better, falling 3.0% to AZN10.4bn, bolstered by slightly higher

oil prices in Q4 (compared to Q1 lows). The

outperformance of expenditures over rev -

enues on the downside should see the 2009 fiscal balance reach AZN293.1mn (0.7% of GDP), up from AZN82.0mn (0.2%) in 2008. Going forward, we expect increased oil

production over the medium term to drive

state revenues higher. Indeed, BMI’s Oil and Gas team are currently expecting a surge in Azeri oil production through to 2013, and an average Brent crude price of US$85.02/ bbl in 2010.

We expect revenues to grow 30.0% y-o-y in 2010 to AZN13.6bn, and to

maintain strong growth after that, reach -

ing AZN30.5bn by 2014. The uptick in revenues should enable the government to carry through its 2010 spending plans, which include outlays on education, de - fence and social spending. We forecast a 30.0% y-o-y increase in expenditures in 2010 to AZN13.2bn, increasing further to AZN29.6bn by 2014. This should see the state fiscal surplus expand gradually, to AZN856.1mn by 2014, although remain relatively stable in percentage of GDP terms, reaching 0.9% of GDP in 2014, compared to 0.7% in 2010.

Risks To Outlook – Given the importance of oil for state government revenues in Az-

erbaijan, we see a slump in energy prices as the major risk to our outlook going forward. Although the government’s 2010 budget expects revenues from the State Oil Fund of Azerbaijan to make up 49.1% of govern- ment income in 2010, this is based up an

expected oil price of US$45.00/bbl. Given our projections for a much higher price, we expect oil to make up well over 50.0% of total state government revenues, and as such caution that government revenues will remain vulnerable to fluctuations in global oil prices going forward.

BMI View: Azerbaijan posted real GDP growth of 8.3% from January to October, reflecting a strong uptick in growth since the middle of the year, with H109 economic

expansion having stood at just 3.6%. The growth surge reflects increased oil produc- tion and rising oil prices, which have helped to bolster net exports. We expect further

increases in oil production going forward to further boost headline growth, and as a result we currently forecast real GDP expansion of 11.0% in 2010.

2008 2009e Latest Period 2010f 2011f
2008
2009e
Latest Period
2010f
2011f

Population, mn [2]

8.6

8.7

-

-

8.8

8.9

Nominal GDP, US$bn [3]

46.3

52.5

33.0

Jan-Oct

63.4

75.6

Nominal GDP, AZNbn [3]

38.0

42.3

26.6

Jan-Oct

50.7

60.5

GDP per capita, US$ [4]

5,367

6,023

-

-

7,200

8,507

Real GDP growth, % change y-o-y [3]

10.8

9.0

8.3

Jan-Oct

11.0

7.5

Budget balance, AZNbn [3]

0.1

0.7

0.8

Jan-Sep

0.4

0.5

Budget balance, % of GDP [4]

0.2

0.7

-

-

0.8

0.8

Consumer prices, % y-o-y, eop [4]

20.8

5.0

2.6

August

12.0

10.0

Exchange rate AZN/US$, eop [5]

0.81

0.80

0.80

30-Dec

0.80

0.80

Goods imports, US$bn [3]

7.6

7.8

2.9

Jan-Jun

9.0

10.5

Goods Exports, US$bn [3]

30.6

18.4

8.8

Jan-Jun

24.8

28.5

Trade balance, US$bn [3]

23.0

10.6

5.9

Jan-Jun

15.8

18.0

Current account, US$bn [3]

16.2

7.2

4.5

Jan-Jun

11.5

13.5

Current account, % of GDP [4]

35.1

13.3

-

-

17.6

17.3

Foreign reserves ex gold, US$bn [6]

6.5

5.0

4.2

Jan-Nov

5.2

5.4

Import cover, months g&s [1,7]

7.2

5.4

-

-

5.1

4.7

Total external debt stock, US$mn [8]

2,034.4

2,461.6

-

-

3,077.0

3,938.6

Total external debt stock, % of GDP [9]

4.4

4.7

-

-

4.9

5.2

Notes: e BMI estimates. f BMI forecasts. 1 Goods and Services; Sources: 2 The State Statistical Committee of the Republic of Azerbaijan. 3 Central Bank of Azerbaijan; 4 Central Bank of Azerbaijan / BMI Calculation; 5 BMI; 6 IMF IFS; 7 IMF IFS / BMI Calculation; 8 IMF; 9 IMF / BMI Calculation.

8

  • 8 RUSSIA & CIS – FEBRUARY 2010

www.emergingeuropemonitor.com

TURKMENISTAN
TURKMENISTAN

...

continued from top of front page

as the key driver of robust economic growth in recent years, the country is set to gain sig- nificantly from both of these developments. Not only will the diversification of trade partners be key for improving macroeco- nomic stability, but it will also be crucial

for expanding investment in gas production.

We outline our core views for Turkmen trade dynamics over the short, medium and

long term.

Short Term: We believe that Moscow’s decision to renew imports only one week after the launching of the Central Asian- China gas pipeline has a strategic emphasis as well as an economic one. While Russia

has not specified volumes for 2010, we be- lieve the signing of long-term contracts has been expedited in order to maintain Russia’s

dominant position in the market for Turkmen

gas. This is especially the case since Russia

re-exports much of the gas to markets in

Western Europe, earning substantial transit

fees in the process.

It is estimated that Turkmenistan lost upwards of US$1bn a month as a result of Russia’s cessation of imports. Owing to this fact, and considering also that China’s pipeline capacity will be limited to 13bcm over the short run, we expect Turkmenistan’s reliance on Russia as key energy customer will continue through 2010.

Medium Term: Over the medium term, while we expect both China and Russia to

increase their demand for Turkmen gas, we

anticipate that Russia will remain Turk - menistan’s largest customer. As a result, we expect Turkmenistan’s total gas exports to surpass pre-April 2009 highs as Chinese pipeline capacity increases from 13bcm to

40bcm by 2012 and Russian imports increase to meet its re-export strategy, in line with

resurgent demand from the eurozone.

Long Term: Over the long term, we high- light the potential for China to overtake Russia and become the largest importer of Turkmen gas. China has already openly expressed its intention to reduce reliance on energy suppliers in the Middle East. With China financing the development of new gas fields in Turkmenistan (namely in the massive undeveloped South Yolotan-Osman fields), and stating its intention to construct new pipelines between China and Central Asia, we foresee Russia’s near monopoly

of gas purchases in both Turkmenistan and

the wider Central Asian region declining.

Geo-Political Implications – Going for- ward, we see geo-political dynamics within Turkmenistan specifically, and Central Asia as a whole, changing as Russia’s influence over trade dynamics diminish and Chinese influence concurrently rises. Indeed, China’s growing economic clout could serve to un- dermine Russia’s export-strategy in Europe, as well as Russian exports of Siberian gas

to China. We also highlight the potential for

renewed price and trade disputes between Russia and Turkmenistan over the short-

medium term, as Russia attempts to under-

mine Turkmenistan’s diversification efforts.

DATA & FORECASTS

BMI View The macroeconomic growth outlook looks increasingly strong. The decision by Rus- sia to begin importing gas again, alongside increasing interest from China in further developing Turkmenistan’s hydrocarbon sector following the opening of the Central Asia-China pipeline bodes well for energy-sector-led growth. Energy has historically been the main driver of Turkmenistan’s relative economic outperformance in the region. While we hold to our view that 2009 saw sub- dued growth of 5.4%, we believe that growth will accelerate to 8.5% in 2010 and 9.0% in 2011.

2008 2009e Latest Period 2010f 2011f
2008
2009e
Latest Period
2010f
2011f

Population, mn [1]

5.3

5.4

-

-

5.4

5.5

Nominal GDP, US$bn [2]

14.9

17.6

-

-

21.0

24.9

Real GDP growth, % change y-o-y [2]

10.5

5.4

-

-

8.5

9.7

Industrial production index, % y-o-y, ave [3]

24.0

7.9

-

-

6.5

7.2

Budget balance, % of GDP [2]

13.2

6.7

-

-

5.6

6.7

Consumer prices, % y-o-y, eop [4]

12.0

11.0

-

-

9.0

7.5

Exchange rate TMM/US$, eop [4]

14,215.00

14,215.00

14,215.00

31-Dec

14,215.00

14,215.00

Goods imports, US$bn [2]

4.6

5.1

-

-

6.0

6.7

Goods Exports, US$bn [2]

10.9

11.4

-

-

13.7

15.1

Trade balance, US$bn [2]

6.3

6.3

-

-

7.7

8.4

Current account, % of GDP [2]

12.0

11.3

-

-

10.3

9.6

Foreign reserves ex gold, US$bn [2]

9.5

10.9

-

-

12.5

14.4

Total external debt stock, % of GDP [2]

6.2

6.1

-

-

5.9

5.8

Notes: e BMI estimates. f BMI forecasts. Sources: 1 UN Population Division. 2 EBRD/BMI; 3 BMI/EBRD; 4 IMF/BMI.

 

RISK SUMMARY

 

POLITICAL RISK

Rights Concerns Remain

Turkmenistan freed almost 4,000 prisoners including 19 foreigners on December 12, ac- cording to a government official. This move was initiated by President Kurbanguly Berdy- mukhamedov as part of a public holiday tradi- tion dating back to the era of former President Saparmurat Niyazov. However, there has been no confirmation that any political prisoners were among those released. With the press freedom and the right to political protest still suppressed by the state, we highlight that the release does not portend any significant improvement in human rights conditions.

Our short-term political risk rating remains at 86.0

ECONOMIC RISK

Gas Diversification Continues

As part of efforts to diversify Turkmenistan’s export base, Energy Minister Oraznur Nur- myradov has announced plans to significantly increase gas exports to Iran over the medium term. While the existing pipeline is expected to double in capacity to 14 billion cubic metres (bcm), a further pipeline expected to be in operation by early 2010 will sup- ply another 6bcm, with scope for further capacity increases in the future. With Russia and China agreeing in December to renew gas export contracts with Turkmenistan for 2010, we expect increased gas revenues to support robust economic growth of 8.5% in 2010, up from 5.4% in 2009.

We hold to our short-term economic risk rating of 71.3

BUSINESS ENVIRONMENT

FDI For LNG

Turkmenistan is seeking foreign investment to construct plants producing liquefied pe- troleum gas (LPG), according to a statement by Yagshigeldy Kakayev, head of the Budget State Hydrocarbons Resources Agency on November 18. Indeed, Turkmenistan has openly expressed its interest in working with Western firms to increase output from 400,000 tonnes to 2mn tonnes by 2020. However, while we view Turkmenistan’s desire to open up to foreign investors posi- tively, we still believe that Ashgabat will hold back from allowing extensive investment into its onshore gas development, promoting offshore developments instead.

BMI’s business environment rating is 26.9

UZBEKISTAN
UZBEKISTAN
 

RISK SUMMARY

 

POLITICAL RISK

Tajik Relations To Deteriorate

Uzbekistan pulled out of the Central Asian power grid on December 1. Government officials had previously claimed that Tajikistan had stolen power from the grid on a number of occasions. It is likely that the timing of Uz- bekistan’s decision is due to the completion of a US$1bn domestic power transmission system within the country on the same date. Bilateral ties with Tajikistan have worsened as a result, and we highlight the risk of retaliation by Dushanbe in the summer months by with- holding water supplies, which are essential for Uzbek industry and irrigation.

We have revised down our short-term political risk rating to 62.7 as a result of a deterioration in the policy-making process.

ECONOMIC RISK

Gas Exports To Increase

Russian energy giant Gazprom announced new contracts for future gas exports from Uzbekistan on December 28. The deal will see existing contracts whereby Gazprom purchases 11.25 billion cubic metres (bcm) a year from Uzbekistan, rise to 15.50bcm as of January 1 2010. Alongside increased gas exports to China at some point in 2010, fol- lowing the inauguration of the Central-Asian Gas Pipeline on December 14, we expect Uzbekistan’s energy sector to grow substan- tially over the medium term.

We maintain our short-term economic risk rat- ing of 66.0

BUSINESS ENVIRONMENT

Corruption To Limit FDI

Public sector corruption continues to pose a major obstacle to foreign investment. According to Transparency International’s Corruption Perception’s Index Uzbekistan slipped from 166th place in the world rank- ings in 2008 to 174th in 2009; its overall score dropped from 1.8 to 1.7 (with 10 implying no corruption and 0 implying total corruption), making it the lowest ranked Central Asian republic. We do not believe that significant attempts to counter public sector corruption will be undertaken under President Islam Karimov’s authoritarian government, and foresee only limited foreign investment over the medium term.

BMI’s business environment rating is 25.4

POLITICAL OUTLOOK

Elections Will Not Weaken Karimov

BMI View: We do not expect parliamentary elections in Uzbekistan, held on De- cember 27, to yield any significant changes to the make-up of parliament. Further- more, with all four political parties expressing support for President Islam Karimov’s leadership and US and EU criticism likely to remain muted, we do not foresee any strong challenge to his political agenda going forward.

Elections were held on December 27 for the lower chamber of parliament (Oliy Majlis) along with local and regional assemblies. While turnout exceeded 88% according to

state election authorities, results were yet to be

announced at the time of writing. However, we do not expect the composition of parliament to change significantly, with the president’s ruling party, the Liberal Democratic Party of

Uzbekistan (UzLiDep) currently holding 41 seats. Additionally, owing to a lack of real opposition, we believe that the result of the election will not weaken President Karimov’s control of Uzbekistan’s political agenda. Although the four main political parties have engaged in criticism of each other’s policies in the lead-up to the vote (the first parliamentary elections in which this has oc- curred), all parties have applauded Karimov’s leadership and policies. As such, firm opposi- tion to President Karimov’s executive power is still lacking. Karimov has openly stated that

parliament’s power over the executive branch

is weak and has pledged to work to change this in the future. However, we believe that

DATA & FORECASTS

denying independent candidates the opportu-

nity to stand for elections runs counter to this promise and as such does not bode well for

future reforms to the constitution.

We also note that criticism from the US

and EU has been fairly muted in the lead up to the elections. Indeed, with Uzbekistan serving as a valuable transit route for US supplies heading for Afghanistan, US-Uzbek relations have improved considerably in recent years. Additionally, the possibility of re-opening a US base (following Uz- bekistan’s decision to remove US forces in 2005) will likely tone down Washington’s

criticism over the medium term. In addition to there being few risks to the

political status quo, we also expect certain areas of society to remain under state sup- pression, including the freedom of the media and freedom of religion. Karimov won a third seven-year term as president in 2007, and while we do not preclude a fourth term, set for 2014, at 71 years of age we also highlight the possibility that the grooming process for a successor may begin in the near future.

BMI View According to latest GDP figures released by the State Statistical Committee, the Uzbek economy grew by 8.0% through the period January to September 2009. This follows an 8.2% expansion through H109 (with individual quarter breakdowns unavailable). We believe that Uzbekistan’s relative economic isolation and lack of integration with global financial markets has helped to avoid the worst effects of the global financial crisis. We therefore hold to our estimate of full-year growth of 7.6% for 2009 and expect 2010 to deliver robust economic growth of 8.0%.

2008 2009e Latest Period 2010f 2011f
2008
2009e
Latest Period
2010f
2011f

Population, mn [1]

27.2

27.5

-

-

27.9

28.3

Nominal GDP, US$bn [2]

27.5

30.7

18.3

Jan-June

34.5

39.3

Real GDP growth, % change y-o-y [2]

9.5

7.6

8.2

Jan-Jun

8.0

8.2

Budget balance, % of GDP [2]

-0.8

-0.7

-

-

-0.5

-0.5

Consumer prices, % y-o-y, eop [2]

14.4

14.2

-

-

11.3

9.5

Exchange rate UZS/US$, eop [3]

1,388.00

1,515.00

1,511.40

31-Dec

1,638.00

1,719.90

Goods imports, US$bn [4]

7.5

8.9

4.5

Jan-June

10.2

11.7

Goods Exports, US$bn [4]

11.6

12.7

6.0

Jan-June

15.0

17.1

Trade balance, US$bn [4]

4.0

4.0

1.6

Jan-June

5.0

5.0

Current account, % of GDP [4]

13.8

7.8

-

-

0.0

0.0

Foreign reserves ex gold, US$bn [4]

9.1

9.3

-

-

9.7

10.7

Total external debt stock, % of GDP [4]

13.6

11.6

-

-

9.8

8.8

Notes: e BMI estimates. f BMI forecasts. Sources: 1 UN Population Division. 2 State Committee of the Republic of Uz- bekistan on Statistics/BMI; 3 BMI; 4 EBRD/BMI.

10

  • 10 RUSSIA & CIS – FEBRUARY 2010

www.emergingeuropemonitor.com

 MOLDOVA
MOLDOVA

POLITICAL OUTLOOK

Elections Expected H210

BMI View: Having now failed twice to elect a new president, Moldova’s parliament is likely to be dissolved. We highlight that policy paralysis is likely to be the order of the day, at least until new parliamentary elections take place in H210, thus putting essential economic and political reforms on the back seat for now.

The EU-focused Alliance for European

Integration (AEI) was thwarted for a second

time in its attempts to elect Marian Lupu (leader of the Democratic Party of Moldova)

as president of Moldova on December 7. All

  • 48 deputies of the Party of Communists of

the Republic of Moldova (PCRM) staged

a walkout protest preceding the ballot, re- peating their actions of November 10 prior

to the AEI’s first attempt to elect Lupu. Former PCRM member Lupu has thus lost his chance of being able to convince enough former colleagues to join the AEI and break the deadlock. Although the AEI, a coalition of four political parties, shared 53 parliamentary

seats between them, they required a total of

  • 61 votes to secure an electoral victory for

Lupu. Having now failed twice to elect their

choice of prime minister, acting president

Mihai Ghimpu will be forced to dissolve parliament in 2010 and call a new set of parliamentary elections. Given that elections are required to be at least one year subse- quent to previous parliamentary elections (according to the terms of Moldova’s con- stitution), July will be the earliest possible month available to stage the vote. We had previously cautioned that there

DATA & FORECASTS

were significant risks to the potential for

some sort of compromise in the second

round of voting. The PCRM, led by former President Vladimir Voronin, also walked out en masse on August 28 during the election

for parliamentary speaker. More importantly perhaps, we also note that the AEI and PCRM profess major policy differences, while per- sonal animosity between Voronin and Lupu is also substantial. As a result of this divide, intractability and infighting has fast become a mainstay of Moldovan politics. We believe that the failure of both sides to reach a consensus over the presidency will raise a number of concerns, most notably an extended period of political paralysis. Our core view is for the stalemate between both

sides to continue at least until the elections, which, we caution, will further undermine Chisinau’s ability to effectively develop a coherent response to the country’s ongoing

recession, (we forecast unemployment to hit 11% in 2010). We also caution that a number of political concerns are likely to remain unaddressed. While we expect Moldova’s

negotiations with the EU over its integration

with the rest of Europe to be shelved for now, we remain discouraged by the problem of widespread public sector corruption.

BMI View According to the National Bureau of Statistics, the consumer price index fell 0.7% y-o-y in November, down from declines of 1.6% in October and 2.3% in September. This improvement in the headline print has come primarily from the foodstuffs component, where deflation came in at 5.4%, improving on the 8.2% fall of September. We hold to our forecast for inflation to continue rising to 3.0% by end-year.

2008 2009e Latest Period 2010f 2011f
2008
2009e
Latest Period
2010f
2011f

Population, mn [2]

3.6

3.6

-

-

3.6

3.5

Nominal GDP, US$bn [3]

6.1

5.3

4.0

Jan-Sep

5.0

5.1

Real GDP growth, % change y-o-y [3]

7.2

-6.5

-7.8

Jan-Jun

1.0

4.7

Industrial production index, % y-o-y, ave [1,3]

1.3

-18.0

-24.6

Jan-Aug

-5.5

5.5

Budget balance, % of GDP [3]

-1.0

-6.9

-

-

-5.4

-1.5

Consumer prices, % y-o-y, eop [3]

7.2

-0.8

-0.7

Nov

3.0

7.0

Exchange rate MDL/US$, eop [4]

10.35

12.20

12.19

31-Dec

13.00

13.00

Goods imports, US$bn [5]

4.9

3.7

2.2

Jan-Sep

3.7

4.4

Goods Exports, US$bn [5]

1.6

1.4

0.9

Jan-Sep

1.5

1.8

Trade balance, US$bn [5]

-3.2

-2.2

-1.3

Jan-Sep

-2.2

-2.6

Current account, % of GDP [5]

-16.2

-5.7

-

-

-2.6

-3.4

Foreign reserves ex gold, US$bn [5]

1.7

0.9

0.5

June

1.0

1.1

Total external debt stock, % of GDP [5]

67.5

64.5

-

-

69.7

76.8

Notes: e BMI estimates. f BMI forecasts. 1 Average figures derived from averaging eop figures, adjusted for BMI’s intra-year output change forecasts; Sources: 2 UN Population Division/BMI. 3 National Bureau of Statistics/BMI; 4 BMI; 5 National Bank of Moldova/BMI.

 

RISK SUMMARY

 

POLITICAL RISK

Communist Weakness Likely

The Party of Communists of the Republic of Moldova (PCRM) has lost four mem- bers of its organisation in the aftermath of the mass walkout of all 48 deputies from parliament on December 7, which denied Marian Lupu the 61 votes required for the presidency. The four deputies, who will now form an independent party bloc, have pointed towards the boycott of the election instigated by Vladimir Voronin, leader of the communist Party, as the primary reason for their departure. With public support for the Communist Party also waning, we highlight the possibility that further deputies may leave, weakening the communist bloc in the run up to parliamentary elections pencilled in for H210.

We have revised down our short-term political risk rating to 40.8 as a result of a deterioration in the policy-making process .

ECONOMIC RISK

Leu Under Pressure

The Moldovan leu has depreciated since parliament failed to elect a president for the second time on December 7, from MDL11.30/US$ to MDL12.27/US$ at one point on December 30. Economic fundamen- tals continue to look poor over the medium term, with remittances (which account for 30% of GDP) likely to remain subdued for the foreseeable future. We expect further depreciation towards MDL12.50/US$ by end-2010 and MDL13.00/US$ by end-2011.

Our short-term economic risk rating remains at 35.0.

BUSINESS ENVIRONMENT

Energy Sector Investment

The European Bank for Reconstruction and Development (EBRD), along with the International Finance Corporation (IFC), will jointly finance the modernisation of Moldova’s power sector, by providing loans worth US$30mn. The loans will be provided to RED Union Fenosa Moldova,Moldova’s largest electricity provider, and will be tar- geted towards upgrading the distribution network. Upgrades to the sustainability and development of the energy sector within Moldova could help to improve the invest- ment climate.

BMI’s business environment rating is 52.1.

 MONGOLIA
MONGOLIA
 

RISK SUMMARY

 

POLITICAL RISK

Third Neighbour Policy

Minister For Mineral Resources And Energy Dashdorj Zorigt has stated that Ulan Bator will soon announce its decision on licensing for the Tavan Tolgoi coal deposit in Mon- golia’s Ömnögovi Province. Mongolia has previously indicated that the license may be subdivided, with 14 companies in the running. The likelihood of companies from different countries being awarded contracts to develop the deposit fits with our view that Mongolia is likely to continue pursuing a ‘third neighbour’ policy given its concerns about handing too much control over its domestic affairs to China or Russia.

Our short term political risk rating remains at 74.0.

ECONOMIC RISK

GDP Growth From 2010

Jinshan Gold Mines Inchas has announced that it has entered a memorandum of under- standing with Mongolian company Monnis International to jointly explore and develop gold products in Mongolia. Jinshan Gold Mines Inchas will hold a 51% stake in the venture. The news supports our view that the bench- mark Oyu Tolgoi investment by Canadian firm Ivanhoe would be likely to presage further investment in Mongolia’s mining sector, which is likely to support average real GDP growth of 9.7% from 2010-2014.

Our short term economic rating is 42.9.

BUSINESS ENVIRONMENT

Further Investment Likely

Canadian-based coal produced SouthGobi Energy Resources has announced that it plans to spend up to US$800mn to increase output from the Ovoot Tolgoi Mine in Mon- golia in the next three years. The company hopes to increase production to 8 million metric tons by 2012, more than six times current levels, and to build 40km of railway track to transport coal to the Chinese bor- der. SouthGobi Energy Resource’s move supports our view that increased foreign investment in Mongolia is likely to presage a wider development of the Mongolian economy, with transport infrastructure one of the areas set to benefit most.

BMI’s business environment rating is 50.9.

ECONOMIC OUTLOOK

Strong Growth Ahead, But Risks Remain

BMI View: We hold to our forecast for the Mongolian economy to grow by 9.5% in 2010, presaging a sustained period of GDP expansion over the long term. That said, we caution that Mongolia’s reliance on the mining sector and Chinese demand will leave it vulnerable to another global market downturn.

Latest data from the National Statistics Office of Mongolia (NSOM) shows that real GDP fell 3.9% y-o-y in Q309, following 0.7% y-o-y growth in the previous quarter. As a result of the latest figures, we believe that our projection for a full-year real GDP contrac- tion of 2.5% remains broadly on track.

The sluggish economic performance in 2009 was likely caused by a slowdown in government consumption and sharp contractions in gross

fixed capital formation (GFCF) and private spending. GFCF, which has been a key driver of economic expansion in recent years, is likely to have fallen dramatically in 2009, in line with weaker global demand, while government con- sumption, which grew 47.6% y-o-y in real terms in 2008, has been significantly constrained by a US$229.2mn Stand-By Arrangement signed with the IMF in April. One factor preventing a sharper headline GDP contraction is likely to have been net exports, with the trade deficit likely to have contracted significantly as a re-

DATA & FORECASTS

sult of falling domestic consumption weighing significantly on import demand. In 2010 we expect real GDP to grow 9.5%, driven by strong private and govern- ment consumption, as well as a sharp bounce in gross fixed capital formation in line with improved risk appetite. From 2011, as the world economy continues to recover from the effects of the 2008-2009 downturn, and

the impact of increased capital investments in the mining sector filters through to a surge in Mongolian exports, we expect real GDP

growth to remain robust.

That said, we caution that the country’s overreliance on copper and gold for revenues presents risks to our forecasts. Over the long term, Mongolia will remain heavily exposed to external price shocks for its key commodities. In addition, we highlight Mongolia’s increas- ingly heavy reliance on China as an export des- tination (exports to China made up 72.0% of the total volume in September) as a further risk.

BMI View: According to latest data from the National Bank of Mongolia, deflation came in at

1.2% y-o-y in October, improving on the 1.9% deflation recorded in September, and keeping

the consumer price basket broadly on track for our -1.0% end-year forecast. The easing of deflationary pressures was driven primarily by food prices, which recorded a 5.4% y-o-y con- traction, improving on the 7.3% y-o-y fall posted in September. With foreign capital inflows set to pick up strongly in line with a broader economic recovery, we expect inflation to return, and are pencilling in a 7.0% end-year figure.

2008 2009e Latest Period 2010f 2011f
2008
2009e
Latest Period
2010f
2011f

Population, mn [1]

2.6

2.7

-

-

2.7

2.7

Nominal GDP, US$bn [2]

4.4

4.1

-

-

4.7

6.0

Real GDP growth, % change y-o-y [2]

8.9

-2.5

-

-

9.5

8.0

Budget balance, % of GDP [3]

-5.6

-8.3

-

-

-0.0

6.8

Consumer prices, % y-o-y, eop [4]

20.7

-1.0

-1.2

October

7.0

10.0

Exchange rate MNT/US$, eop [5]

1,272.00

1,425.00

1,403.00 30-Dec-09

1,300.00

1,200.00

Goods imports, US$bn [4]

3.1

1.9

1.7

Jan-Oct

2.6

3.4

Goods Exports, US$bn [4]

2.5

1.8

1.5

Jan-Oct

2.2

4.0

Trade balance, US$bn [4]

-0.6

-0.1

-0.2

Jan-Oct

-0.4

0.6

Current account, % of GDP [3]

-16.2

-3.4

-

-

-10.2

9.4

Foreign reserves ex gold, US$bn [6]

1.5

2.1

-

-

3.3

4.0

Total external debt stock, % of GDP [8]

30.6

34.7

-

-

33.8

28.3

Notes: e BMI estimates. f BMI forecasts. Sources: 1 IMF/MNSO. 2 IMF/BOM/BMI; 3 BoM/BMI; 4 BoM; 5 BMI; 6 IMF; 7 EBRD; 8 EBRD/BMI.

© 2010 Business Monitor International. All rights reserved.

All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organisations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd.

All content, including forecasts, analysis and opinion, has been based on information and sources believed to

be accurate and reliable at the time of publishing. Business Monitor International Ltd makes no representation of

warranty of any kind as to the accuracy or completeness of any information provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of

the content.

www.emergingeuropemonitor.com

Analysts: J Patrie, J Pigat, R Grieveson, C Graham Editor: Bruce Jeffery Sub-Editor: Delaina Haslam

Subscriptions Manager: Iwona Hoffman Marketing Manager: Julia Consuegra +44 (0)20 7246 5131 Production: Lisa Church/Chuoc Lam Publishers: Richard Londesborough/Jonathan Feroze