TOPIC OF THE WEEK: 1Q24 entrenches theme of CA return to "normal" deficit position

CAUCASUS / CENTRAL ASIA - Report 05 Jul 2024 by Ivan Tchakarov

The publication of current account data for the CCA economies for 1Q24 allows us to assess overall external performance in the region in the first quarter of the year. The key theme that we have argued previously, i.e., that the one-off sizable improvement of CA positions in 2022 on the back of excess monetary inflows (remittances) from Russia came to an end in 2023 has carried over to 1Q24. Indeed, CCA current accounts ex-Azerbaijan posted a deficit of 2.7 percent of GDP (on a 4-q ma basis) in 1Q24 vs 3.2 percent of GDP in 4Q23. More importantly, the external gaps has basically returned to the average level of 4.0 percent of GDP that held during the five years preceding 2022 (from 2017 to 2021).

In other words, the CAs have normalized to their natural state of affairs, where energy-importing CCA economies are running deficits. This has also been accompanied by some pressure on FX reserves as all energy importers, safe for Uzbekistan, have seen lower FX buffers in the quarter. Uzbekistan has more recently benefited from successfully tapping international capital markets in boosting its FX reserves. Georgia and, in particular, Armenia, still face the lowest FX reserve cover in our space.

There are, of course, notable differences across individual economies. Uzbekistan stands out in terms of CA deterioration on lax fiscal policy, although its FX buffers still remain the most robust across peers. Armenia is also flashing yellow as FX reserves have now dropped below 3 months of imports for the first time at least in 20 years, including because of large outflows on the financial account, presumably because of higher risk perceptions in the aftermath of the Sep formal loss of Nagorno-Karabakh to Azerbaijan. Georgia has also seen some pressure on the financial account due to higher political risk, although the CA continues to be supported by much steadier (than peers) monetary inflows from Russia. Azerbaijan unsurprisingly continues to enjoy large CA surpluses, while Tajikistan continues to enjoy better-than-expected CA position.

We forecast that the CCA CA ex-Azerbaijan will worsen slightly from 2.5 percent of GDP in 2023 to 3.3 percent of GDP in 2024.

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