TOPIC OF THE WEEK: Activity in CCA is still strong, but signs of a more pronounced slowdown emerge in 3Q

CAUCASUS / CENTRAL ASIA - Report 08 Sep 2023 by Ivan Tchakarov

As summer draws to an end, we take a snapshot of economic activity in the Caucasus and Central Asia and update the country “cheat sheets” that we introduced in our initiation report in May. We focus on the key issues of growth, monetary and fiscal policy, external position, and political/geopolitical risks.

The key conclusion is that, while economic growth is continuing apace, there is now increasing evidence of a more pronounced slowdown in the region. In particular, CCA GDP growth averaged double digits over 3Q22 to 1Q23, sported a still impressive 8.1 percent rate of expansion in 2Q23, but decreased to an estimated 6.1 percent in Jul. Besides the technical reason of the high base that has now started to act as a steady headwind to economic performance, growth is being increasingly affected by the more challenging global backdrop, lower remittances from Russia and policymakers’ desire to err on the side of caution and maintain tight monetary policy despite declining price pressures.

Of course, performance differs across countries, with Armenia and Georgia seeing the fastest deceleration of growth while Uzbekistan and Tajikistan manage to maintain momentum for now given robust support from domestic demand. Azerbaijan has its own distinctive story, with growth struggling earlier in the year due to lower oil prices but starting to gradually recover as the energy background turns around. As a result, we see an environment in which CCA growth will moderate from 8.1 percent in 2022 to 5.6 percent in 2023 and further to 4.6 percent in 2024.

We stress the worsening political and geopolitical environment in Armenia, where there are rising risks of escalation with Azerbaijan as the peace process has hit roadblocks. Political temperature is also increasing in Georgia, where Georgian Dream has picked a fresh fight with the President over the distribution of executive power in the country.

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