LONG READ: The Growers - a handful of countries in New Europe are coping with the coronacrisis and are still expanding

LONG READ: The Growers - a handful of countries in New Europe are coping with the coronacrisis and are still expanding
Gold-exporting Uzbekistan has the emerging Europe region's best shot at achieving positive GDP growth this year.
By bne IntelliNews May 29, 2020

The Central Asian economies of Tajikistan, Turkmenistan and Uzbekistan are the only countries in our New Europe region that have any chance of ending 2020 with positive growth, according to the most recent forecasts from the various international financial institutions (IFIs). Everyone else will see their economies shrink, and some by very painful amounts.

As the first quarter comes to an end other countries apart from those three resilient ‘Stans have managed to post some growth. As lockdowns were imposed later in the first quarter in most places, countries had enough momentum to keep their growth in the black – at least as far as the statistical reporting is concerned.

The breaking pandemic was even a boon for retailers, boosting their sales in March to record levels. But the effect will be short-lived. None of the countries in New Europe will be able to escape the impact of the pandemic: virtually all are set to contract in Q2 and for the full year.

The irony of the coronacrisis is that it is the very countries that have made the least progress reforming their economies and integrating into the global economy have found themselves best protected. In addition to the three resilient 'Stans, Russia, Bulgaria and Romania all put in positive growth in the first quarter. In Russia’s case the Kremlin has been actively pursuing autarky in anticipation of new harsh US sanctions that never appeared, but the “fiscal fortress” that President Vladimir Putin has constructed in preparation means Russia is one of the best prepared of any major economy in the world to weather the current storm.

The International Monetary Fund (IMF) anticipates positive growth of 1.8% in both Turkmenistan and Uzbekistan, and 1% in Tajikistan, all of which are virtual pariah states that have failed to integrate themselves into the global, or even regional, economy, although Uzbekistan is now trying to undo that legacy.

The EBRD issued its latest Regional Economic Prospects report in May that projects 1.5% growth in Uzbekistan and 1% in Turkmenistan, with all the other countries across the region contracting.

Following the 2008 global financial crisis in Europe only Poland managed to maintain positive growth the following year. This time round that list could be a lot longer, depending on how fast the expected rebound is. But it is already clear Poland won’t be included in the list this time round: it is projected to contract by 3.5% in 2020 according to the EBRD.

The EBRD and IMF forecasts are broadly in line with each other and considerably more pessimistic than those the World Bank released in April.

A total of ten countries still managed to put in positive growth in the first quarter, but clearly not many of these will make it to the finish line with positive growth for the full year. However, according to the more optimistic World Bank, Armenia, Georgia, Kyrgyzstan, Poland, Romania, Tajikistan, Turkey and Uzbekistan are still in the race with a chance of making it.

2020 GDP Growers in first quarter and full year

Country      1Q20              FYE20 (IMF)

Russia        1.6%               -5.5%

Bulgaria     2.4%              -4%

Romania    2.4%              -5%

Poland       1.6%              -4.6%

Croatia      0.4%              -9%   

Czech Republic 2.2%      -6.5%

Hungary 2.2%                  -3.1%

Lithuania 2.5%                -8.1%

Georgia      1.5%              -4%

Armenia     3.8%              -1.5%

Azerbaijan 1.1%              -2.2%

Kazakhstan 2.7%             -2.5%

Turkey        4.5%             -5%  

Uzbekistan  4.1%             1.8%

Source: bne IntelliNews

 

 

Uzbekistan’s golden growth

Gold exports and growth momentum from its opening up process are expected to make Uzbekistan the top growth story in the region this year.

Tashkent’s gradual but steady economic reforms since long-time dictator Islam Karimov died in 2016 and was replaced by current President Shavkat Mirozayev have resulted in an opening up of the economy. Investors are returning to Central Asia’s most populous country, which also has considerable hydrocarbon and mineral wealth. While the crisis could dampen interest in planned privatisations, carried out in tandem with the overhaul of the local capital market, pre-crisis the country was already seeing strong investment growth in sectors such as retail and construction.

The country saw robust growth of over 5% per year for the last two years, and maintained a healthy 4.1% expansion in 1Q20, according to the EBRD. While the economy is forecast to contract this quarter due to a strict lockdown, for the full year the projection is for positive growth. This is despite risks including the fall in remittances from Russia, significantly lower external trade and domestic economic disruption.

Overall, Uzbekistan has a more balanced economy than some of its neighbours that are more tilted towards commodity exports. The EBRD points out that Uzbekistan’s exports are “much more diversified in terms of products and markets compared to other countries in Central Asia”.

Gold stands out among Uzbekistan’s major exports. Gold accounts for over half of Uzbekistan’s commodity exports, which in turn make up around half of the country’s total exports. The EBRD points out that gold provides a “natural hedge in turbulent times”, while the World Bank notes that “an increase in gold prices would help offset the fall in the prices of other metals exported by the country.” Overall, Uzbekistan’s exports declined by 11% year on year in Q1, the EBRD said. This was not surprising, as China, the first economy to be struck by the coronavirus (COVID-19), is Uzbekistan’s top export market, in common with most of Central Asia. Still, China absorbs only 14% of Uzbekistan’s exports, mainly natural gas.

On the other hand, the tourism and hospitality sector, which accounts for around 6% of GDP, is predicted to perform poorly this year as restrictions remain in place and people around the world are nervous about risking long-haul holidays.

Far frontiers

What the three countries tentatively pegged for growth have in common is that they are on the far frontiers of emerging Europe. All three are landlocked countries led by local “strongmen”. Over the last few years, growth has been robust, never dipping below 4% a year and reaching as high as 10-11% in Turkmenistan in the first part of this decade (though figures coming out of Ashgabat need to be treated with a great deal of scepticism). Not yet affluent enough to see the consumption-led growth that has driven their Central European peers in recent years, commodity exports are an important part of their economies. They were therefore hit first by the Chinese contraction at the start of the year, and later (Turkmenistan and Uzbekistan) by the oil price shock, although the lockdowns have been less painful than they have been to their consumer-orientated western peers.

Turkmenistan still claims to be coronavirus free – which no one believes – and is being hit mainly through its trading relationship with China. While the government has introduced restrictions on movement, it “refrained from imposing a strict lockdown that would have disrupted business activities”, said the EBRD.

“Turkmenistan still depends on China for most of its gas exports (more than 90% in 2018). The spread of the coronavirus has caused Chinese gas imports to decline by 17% y/y in the first two months of 2020, and in March they were suspended altogether. Turkmenistan’s economy as a whole will be hit by a reduction in the value of its gas exports,” wrote the EBRD earlier in May.

Turkmenistan faces other problems too, not least from extensive storm damage that reportedly forced many Turkmens to sell cars, jewellery, livestock and household items to be able to afford food and medicine, according to RFE/RL. Hundreds of people gathered in a rare protest on May 14 to call attention to the government's failure to provide assistance. Maksat Saparmuradov, who founded the Conservative Party of Turkmenistan in 2012 and formerly worked for the Turkmen security forces, forecast that by June or July, Turkmenistan will face severe disruptions to its food security to the point that there will be riots and wide-scale mass unrest.

IFIs still forecast the country will achieve modest growth this year, albeit only a fraction of the expansion it reported in previous years. However, this is likely based on official figures of around 6% growth a year for the last few years; in fact, there is speculation the economy has been in crisis for the last five years and could even have been shrinking before the pandemic.

Tajikistan also claimed until the end of April to have had no coronavirus cases (no one believed that either), but has now officially reported 2,929 as of May 26 – more than most countries in Central and Southeast Europe – and there are fears it could end up with the largest outbreak in the Central Asian region.

As a result of the crisis, growth is anticipated to either slow dramatically or fall into negative territory, as a consequence of the pandemic and the related slowdown in trading partners Russia and China, according to the World Bank. “These implications include the sharp decline of trade and lower commodity prices, a likely large drop in remittances, and worsened prospects for transport and tourism industries.”

And things could get worse: “An extended COVID-19 outbreak, an escalation of global trade tensions, or a deeper-than-expected economic slowdown in the region’s large economies would negatively impact the Tajik economy through trade, FDI and remittance channels,” according to the World Bank.

"Also rans" still in with a chance of growth in 2020

The three resilient ‘Stans are the only economies in the wider region where the EBRD and/or IMF forecast positive growth this year, but there is a longer list of “also rans” that have already ready managed to put in positive growth in the first quarter, even if they might run out of breath before they reach December’s finish line. And following the imposition of lockdowns across the region there has been a rash of downgrades in the last few weeks.

Other major oil and gas exporting countries – Azerbaijan, Kazakhstan and Russia – managed to achieve positive growth in Q1 but are expected to see a contraction for the full year.

Russian GDP was up by 1.6% y/y in 1Q20, according to preliminary data from Rosstat, decelerating slightly from 2.1% seen in 4Q19. However, as reported by bne IntelliNews, in a harbinger of what is to come as soon as the second quarter, GDP dropped by an eye-watering 20% in April in real terms, according to the data from the finance ministry, even though the government managed to also maintain surpluses in the federal budget, trade balance and current account. Russia’s second-quarter macro results are going to be bloody.

"[The] economic activity most likely sharply decelerated in April due to the lockdown measures introduced in late March and the cuts to oil production under the new OPEC+ deal. This should push GDP growth in 2Q20 deep into the red," Sberbank CIB commented on May 20.

All of the main indicators took a plunge off the cliff in April. Industrial production was down 6.6%. Retail turnover was down a massive 23.4%. Unemployment shot up to 5.8%. And the forward-looking PMI index is at its lowest ever of 13%.

Against the bad news, many of the fundamental macro indicators are still faring well. Inflation has not budged, despite the 20% devaluation in the ruble. And the ruble has only devalued by 20% despite an almost 60% fall in the price of oil. Likewise, Russia has actually managed to add to its international FX reserves, bringing them up to $570bn as of the start of May, while incomes – both nominal and real – were still growing in April. And the banking sector remains in good health, although profits are obviously going to be hurt this year. These results suggest the Russian economy is still fundamentally healthy and although it has come to a stop, not that much fundamental damage has been done so far. If the Kremlin can restart the economy now by lifting the lockdown there is a good chance for a strong rebound in 2021.

Several other countries find themselves in a similar position. Kazakhstan’s GDP grew by 2.7% y/y in January-March, the Kazakh prime minister’s website stated on April 14, citing a government meeting. Growth stood at 4% in the same period last year.

Industries that recorded an expansion in the first quarter included the mining industry (+5% y/y), manufacturing (+8.8%) construction (+11.7%) and engineering (+30.4%). However, the financial sector and insurance services only grew by 0.7% and the transport sector saw a 1.3% contraction due to the impact of the countrywide lockdown caused by the coronavirus pandemic.

Azerbaijan also grew by 1.1% in Q1. All of Russia, Kazakhstan and Azerbaijan are probably feeling a little more relaxed as May comes to an end as oil prices have recovered to $35 much faster than expected. And with the new OPEC++ production cut deal that will reduce production of oil by 9.7mn bpd signed on April 13, there is now talk that the oil market demand and supply may be balanced as soon as in the second half of this year.

Elsewhere in the region, Georgia grew by 1.5%. Armenia achieved some of the region’s strongest growth in Q1, when an expansion of 3.8% was reported.

Armenia has been riding high since the Velvet Revolution last year put a new reformist government in place and its robust Q1 growth – albeit down by more than half from the 7.1% in the first quarter of 2019 – was supported by gains in the mining sector, communication services, finance and insurance and government expenditure. This year the government has revised its expectation to 2% from its previous forecast of 4.9%, largely because of the coronavirus (COVID-19) outbreak.

Still, the small impoverished country is having a tough time and its hospitals are becoming overloaded, according to local reports. All the governments in the region want to end the economically debilitating lockdowns; Armenia’s government says it has to as the economic damage of continuing will be worse than letting the virus have its head.

Lending spree boosted Turkey in Q1

Turkey has more or less been in a permanent currency crisis for several years now, so it maybe comes as a surprise that the economy posted a very strong 4.5% growth y/y in Q1. Even that was less than expected but still among the highest growth rates in the region, according to newly released data. GDP was also up by a seasonally and calendar-adjusted 0.6% quarter on quarter.

What happened is the government of President Recep Tayyip Erdogan turned to its tried and trusted strategy: pump the economy full of cheap credit that drives a surge in lending. It is, to say the least, not the safest strategy in the world.

Turkey moved out of recession in the third quarter of last year and rebounded strongly in the fourth quarter, growing 6% y/y, mainly thanks to a big expansion in lending as the central bank, urged on by the Erdogan administration, brought in ultra-aggressive monetary easing in the second half of the year.

The central bank’s policy rate stood at 24% in July last year following the August 2018 currency crisis. It now stands at 8.25% following a succession of rate cuts that carved as much as 1,575bp off the prime rate. Officials instructed state banks to ignite a wave of lending and pushed private banks to join in the credit spree.

And the results were immediate and visible: the services sector bounced by 12.1% y/y in Q1 and information and communication by 10.7%, according to data from the Turkish Statistical Institute (TUIK). However, construction – until recently a major economic driver – was down 1.5% in Q1.

Delayed reaction

Statistics offices across most of the EU members of Central and Southeast Europe have also now released estimates of their Q1 GDP growth, which was badly affected by the coronavirus pandemic and lockdowns introduced during March. Several states across the region managed to maintain positive growth during Q1 as lockdowns were only imposed towards the end of the quarter, but all are anticipated to contract in Q2 and for the full year.

Of the countries that have released data so far, performance ranges from a contraction of 5.4% q/q in Slovakia to growth of 0.3% q/q in Bulgaria and Romania.

Raiffeisen analysts say that the contractions in GDP in the region are “somewhat less than expected”, as most took a smaller hit than the average 3.8% q/q or 3.2% y/y in the eurozone, with the exception of Slovakia, where GDP slumped by -5.4% q/q.

“The data was slightly more positive for several CEE markets than the analysts' consensus and we expected. With lockdown measures starting in mid-March for many CEE countries, only Q2 data will show the full effect of the anti-coronavirus measures enforced, and GDP could drop by around 10% or even more in several countries. In Q1 the first two months were still unaffected by the crisis in many countries, while retail sales might have profited from panic buying ahead of the lockdowns,” Raiffeisen analysts wrote. They maintain economic projections of recessions in CEE in a range of -4 to -8% for 2020.

The EBRD writes that the Central Europe and Baltics region had entered a cyclical slowdown already in 2019, and the early phase of the global coronavirus crisis in late January 2020 hit selected industries, such as electronics, which heavily rely on inputs from China.

At the beginning of March most countries introduced strict containment measures, including a massive shutdown of businesses and schools. Disrupted value chains are preventing production, including in the automotive industry, which accounts for almost a half of industrial output in the Slovak Republic, which reported the biggest slump in GDP during the quarter.

On the other hand, Polish GDP grew by a seasonally adjusted 1.6% y/y in the fourth quarter, easing 1.9pp against the adjusted expansion rate recorded in the fourth quarter, a flash estimate released by the Central Statistical Office (GUS) on May 15 showed. In quarterly terms, the economy marked the expected start of a recession with a drop of 0.5%. That is a bigger q/q drop than during the 2008-2009 financial crisis.

“The figures for Q2 will be much worse. Consumer confidence has collapsed in Poland and survey measures point to job losses on a scale not seen before,” said Capital Economics.

The fallout from the lockdown had an impact on Hungary’s economic performance in Q1, but to a lesser degree than analysts had projected, according to preliminary figures by the Central Statistics Office (KSH) on May 15. Hungary's annualised Q1 GDP growth slowed 2.2% from 4.5% in the previous quarter, as the coronavirus crisis had a negative impact on most economic sectors in March. On a quarterly basis, GDP contracted 0.4% after a 0.7% increase in Q4.

The KSH said the lockdown had a negative impact on all sectors, but Hungary’s industry, accounting for a third of GDP, remained the engine of growth during the period and market-based services also contributed to growth, albeit at a modest pace.

Despite the shutdown of major car manufacturers, Hungarian industry managed to expand 0.1% in Q1. Hungary’s growth compares favourably to other countries and exceeds the EU average by 5pp and Eurozone growth by 5.6pp, Finance Minister Mihaly Varga commented.

There was also y/y growth in Lithuania in Q1, where GDP was up by 2.5%, according to a first estimate released by Statistics Lithuania on April 30. In quarterly terms, the coronavirus pandemic drove GDP to a seasonally and working day adjusted fall of 0.2% in the first quarter, compared with a revised expansion of 1.1% q/q the preceding three months.

“The global pandemic has affected Lithuanian growth and derailed a trend of strong expansion. Shutdown of the service economy meant that GDP shrunk in the first quarter of the year [in q/q terms]; however, the strong start meant that contraction was minimal,” Swedbank said in a comment on the figures. “Early successful steps in the health policy meant that sectors such as manufacturing were slightly less affected by [the] pandemic than in the western European countries. Most of the damage will be concentrated in the second quarter [and] economy is expected to shrink 5% this year before bouncing back in 2021.”

Construction buoys Romanian economy

In Southeast Europe, Romania and Bulgaria both saw positive growth in Q1.

Romania’s GDP increased by 2.4% y/y, in Q1, according to the flash estimate released by the statistics office INS on May 15.

This was the strongest performance among EU member states, according to Eurostat. Compared to the previous quarter, the GDP in Q1 advanced by 0.3%, in seasonally and calendar-adjusted terms, while it contracted by 3.3% in the EU on average.

Romania’s economic performance weakened significantly from last year (+4.1% on average in 2019), but surpassed expectations.

The better-than-expected performance was possibly thanks to the fiscal stimulus provided by the Liberal government since last November.

The full impact of the coronavirus lockdown will be reflected in the second-quarter results because the first-quarter results were only moderately affected by the lockdown in the second half of March after the state of emergency was instated.

Construction was an important contributor to the Q1 growth, with the construction works volume index climbing by 32.6% y/y in Q1 and by nearly 30% y/y in March alone, the statistics office INS announced.

The sector is likely to have contributed 0.7 pp to the 2.4% y/y GDP growth in the quarter, based on the sector’s share in total GDP and a growth of about 20% of the value-added generated this quarter.

Although the residential segment might be negatively affected by lower consumer confidence, other drivers could underpin positive developments in the coming quarters, writes bne IntelliNews’ correspondent in Bucharest.

First, the government has promised to launch major infrastructure projects, and invest 6% of GDP in such projects over two years. Secondly, the logistic and industrial segments will need extra capacity to accommodate a more substantial role played by Romania as a logistics and manufacturing hub.

Bulgaria achieved a similar level of growth, despite imposing a strict lockdown in mid-March. This hit the country’s retail and services sector, which accounts for around 25% of GDP, as well as the transport sector. Bulgaria is also bracing for the impact on tourism, which accounts for around 10% of GDP.

On the other hand, the economies of the Western Balkans – which haven’t yet reported Q1 GDP data – have been hit by a four-pronged attack of the lockdown’s impact on services, the disruption of global supply chains, a slump in tourism and lower remittances. Similarly, Croatia’s economy inched up by 0.4% y/y in Q1 – down from 2.5% y/y in the previous quarter – and is heading for the deepest contraction across Central and Southeast Europe, along with Montenegro, as the pandemic takes its toll on tourism.

 

Q1 GDP growth 

IMF 2020 forecasts (April)

EBRD 2020 forecasts (May)

World Bank 2020 forecasts (April)

Albania 

 

-5

-9

-1.4

Armenia 

3.8

-1.5

-3.5

1.7

Azerbaijan 

1.1

-2.2

-3

-0.2

Belarus 

-1.3

-6

-5

-4

Bosnia 

 

-5

-4.5

-1.9

Bulgaria 

2.4

-4

-5

-3.7

Croatia 

0.4

-9

-7

-6.2

Czechia 

2.2

-6.5

 

 

Estonia 

 

-7.5

-6

 

Georgia 

1.5

-4

-5.5

0.1

Hungary 

2

-3.1

-3.5

 

Iran 

 

-6

 

-8.2

Kazakhstan 

2.7

-2.5

-3

-0.8

Kosovo

 

-5

-5

-1.6

Kyrgyzstan 

 

-4

-4

0.4

Latvia 

-1.5

-8.6

-7

 

Lithuania 

2.5

-8.1

-7

 

Moldova 

 

-3

-4

-0.1

Mongolia 

 

-1

-1

 

Montenegro 

 

-9

-8

-1.3

North Macedonia 

 

-4

-3.5

-0.4

Poland 

1.6

-4.6

-3.5

0.4

Romania 

2.4

-5

-4

0.3

Russia 

1.6

-5.5

-4.5

-0.1

Serbia 

 

-3

-3.5

-0.5

Slovakia 

-3.9

-6.2

-6

 

Slovenia 

 

-8

-5.5

 

Tajikistan 

 

1

-1

1

Turkey 

4.5

-5

-3.5

0.5

Turkmenistan 

 

1.8

1

 

Ukraine 

-1.5

-7.7

-4.5

-3.5

Uzbekistan 

4.1

1.8

1.5

1.6

Contributions from Iulian Ernst in Bucharest, Wojciech Kosc in Warsaw, Denitsa Koseva in Sofia, Clare Nuttall in Glasgow, Kanat Shaku in Almaty.

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