2024 Caucasus/Central Asia Outlook: Less growth, less risk
We anticipate 2024 will bring, unsurprisingly, lower, if still robust, growth in the Caucasus and Central Asia. Yet, more surprisingly, along with lower growth, we also foresee less risk.
Economic growth in the region has been steadily diminishing from the peak of 11.6 percent YoY in 2Q21 to 5.7 percent YoY in 3Q23. The drivers of growth that fueled above-par performance in 2021 (a bounce back from the lows of the 2020 crisis) and 2022 (excess monetary inflows from Russia) lost their shine already this year. The slowdown will now be complemented by a more challenging global backdrop and policymakers’ desire to err on the side of caution and maintain tight monetary policy despite declining price pressures. As a result, we see an environment in which GDP growth will moderate from 8.2 percent in 2022 to an estimated 5.8 percent in 2023 and a forecast 4.7 percent in 2024.
The decline in the pace of economic activity will be relatively uniform, with Armenia experiencing the largest deceleration in GDP growth, including because of the more challenging backdrop in the wake of its defeat in the 3rd Karabakh War. While Armenia may be paying the price of defeat, Azerbaijan will be enjoying the spoils of victory, being the only country in the region where we see some pick up of growth on the back of a more favorable base, a strengthening of real wages and incomes and supportive monetary and fiscal policies. Georgia’s unique position in the tenser underlying backdrop in the South Caucasus will ensure steady support for the economy as we do not anticipate the election cycle will darken its bright economic prospects. In Uzbekistan, we expect the growth impulse to continue amid accelerating reforms, while Tajikistan should maintain growth momentum as domestic demand remains robust.
We also expect policymakers to face a somewhat easier task in managing the slowdown as it will be accompanied by broadly well-behaved inflation, which should allow central banks to persist in easing monetary policy, albeit in a cautious manner. Tajikistan will present the only exception in the Caucasus and Central Asia as we forecast the policy rate to increase next year. Fiscal policy will remain supportive for growth next year but will still consolidate to manageable deficits. The loss of the powerful support of excess monetary flows from Russia has already manifested itself in widening CA deficits across the region (save for Azerbaijan), and this state of affairs will entrench itself in 2024, presenting headwinds to FX reserves and local currencies. At the same time, public external debt repayments should be met relatively easily as they only account for single-digit figures in relation to FX reserves and budgetary revenues. Moreover, the countries that face maturing Eurobonds in 2024, Azerbaijan and Uzbekistan, seem to be the most robust in their ability to repay external obligations.
The world has in recent years become a whirlwind of dangerous geopolitical encounters, and the CCA has been no exception. Internal unrest in Kazakhstan (2022), Uzbekistan (2022), Georgia (2023), military clashes between Tajikistan and Kyrgyzstan (2021/2022) and the 3rd Karabakh war (2023) are key examples. It would perhaps be easy and only natural to extrapolate this trend, but instead, we see emerging signs of a more stable political/geopolitical backdrop in 2024. Most importantly, and contrary to the consensus view, we do not now foresee any further military escalation of Azerbaijan-Armenia conflict, including because of Armenia’s recent announcement of the “Crossroads of Peace” initiative, which we read to mean that Yerevan is ready to give everything Baku (and Ankara) want without a fight. We thus expect 2024 to mark the year when the peace deal between Armenia and Azerbaijan is formally signed. The parliamentary elections in Georgia in Oct may in theory muddle the country’s bright economic prospects, but we forecast a relatively easy win for the ruling Georgian Dream, which will be riding on the coattails of the European Commission’s recent decision to make Georgia an official candidate country to join the EU. Tajikistan and Kyrgyzstan have made a lot of progress recently in delineating their contested border while the situation in Kazakhstan and Uzbekistan has significantly stabilized.
In conclusion, we envision a CCA region that will deliver stable growth with fewer surprises for market participants.
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