Political Instability Prompts Pessimistic Outlook for CIS

CEIC WorldTrend Data Talk - July 10, 2014 The Ifo World Economic Survey (WES) published in the second quarter of this year reveals a positive outlook on the global economy, but with the Commonwealth of Independent States (CIS) as an exception. The survey results point to strong expectations of a better economic situation in the Middle East, North America and the European Union. On the other hand, the CIS, which consists of Kazakhstan, Kyrgyzstan, Russia, Ukraine and Uzbekistan, stand out among all the regions, with the worst outlook since 2009, due to tensions within the region. The Ifo WES provides experts’ consensus on the general economic situation, with expectations of trade volume and value (the trade balance), the inflation rate, interest rates, currency valuation and share price level. Survey results are aggregated into region level and presented on a 9-point scale. Indicators within the range of 5 to 9 suggest that the majority expects the trend of the indicator to be positive (good, better or higher), while the range of 1 to 5 suggests the opposite. Other than qualitative sentiment, the WES also includes inflation and growth rate estimates, which offer quantitative insights. The outlook for the CIS is pessimistic mainly due to the political unrest between Russia and Ukraine. The CIS has the worst half year outlook among all the regions in terms of its overall economy (3.5 out of 9), capital expenditure (3.1) and private consumption (3.2), which have all edged down from a level above 4 points in the previous quarter. It indicates that a majority of the respondents in the CIS expect these aspects to deteriorate in the next six months. The survey also highlights the lack of capital expenditure in the CIS, with a present score of 2.3, close to the post-crisis period in 2009. The low level of capital expenditure is a sign of corporate caution over the outlook for product demand and spending on plant and equipment. Apart from the general economic situation, the results also suggest the CIS has the worst outlook on the foreign investor climate, the overall investment climate, trade volume and share price level among all the regions. The majority of the CIS respondents believe that the volume of imports will decrease in the second half of 2014 - the indicator has halved from a neutral level of 5.3 in the previous quarter, to 2.7. The severing of natural gas supplies by Gazprom, Russia’s state-controlled gas company, to Ukraine in mid-June is behind the slump in confidence. If the dispute persists, disruptions of gas supplies in Europe are conceivable as the region is at the receiving end of the gas pipeline from Ukraine. Chart 2 shows the impact of the two previous gas wars in 2007 and 2008 (highlighted in pink) on the natural gas price from Russia. During December 2006 to March 2009, when the gas supplies from Russia to Ukraine were limited, the quarterly average price index (2010 = 100) surged from 105.2 to 170.1, a 61.7% increase. Although the price index was quite stable at the beginning of the dispute, history shows that the pressure of insufficient supply will push up the price eventually. Regarding the most important economic issue in the CIS, the top three selected by respondents are: i) Lack of international competitiveness; ii) Capital shortage and; iii) Insufficient demand, as illustrated in Chart 3. Political instability is an evident deterrence for foreign investments and economic activities within the region. Worries about inflation, ranked the fifth serious problem within the CIS, are not very strong. Despite its relatively low priority, inflation is overwhelmingly perceived to increase, with the outlook indicator for inflation at 8 points out of 9, the highest since 1999. In the second quarter of 2014, the average expected inflation rate among the surveyed experts in the CIS was 8.6%, compared to 6.8% in the previous quarter. High inflation would have a negative impact on the economy, but the political unrest is a more compelling issue to be handled. Unless Russia and Ukraine settle the crisis, confidence is unlikely to be restored within the region. By Eric Ng Google+ Author Profile - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
10th July 2014 Political Instability Prompts Pessimistic Outlook for CIS