Page 35 - BNE_magazine_06_2020 Growers

bne June 2020 Cover story I 35
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.
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