Topic of the week: Lifting CCA growth forecasts

CAUCASUS / CENTRAL ASIA - Report 21 Jul 2023 by Ivan Tchakarov

Strong early 2023 economic showing in the Caucasus and Central Asia warrants a review of our already more constructive view on GDP growth in the region. Indeed, average GDP growth inched down to 6.8 percent in 1Q23 from 7.8 percent in 4Q22, and remained virtually flat if one were to exclude Azerbaijan from the sample. We investigate the reasons behind this robust economic performance and revisit our current GDP growth forecasts.

There are differential explanations for the overdrive in economic momentum. While in Armenia net exports of goods provide the bulk of the contribution to growth, reflecting the use of the country by Russia as the primary hub in the Eurasian Economic Union to re-route trade flows, it is more the net exports of services that drive growth in Georgia. In contrast, domestic demand is responsible for propping up economic activity in Tajikistan and Uzbekistan. 

We thus upgrade our forecasts for 2023 GDP growth rate for Armenia, Georgia and Tajikistan, but lower our projection for Azerbaijan. In Armenia, we now see 9.0 percent GDP growth vs our earlier 7.0 percent projection. In Tajikistan, we upgrade GDP growth from 6.5 percent to 7.5 percent, while in Georgia to 6.0 percent versus our previous forecast of 5.0 percent. We leave our 5.0 percent GDP forecast for Uzbekistan unchanged, but now lower our expected growth for Azerbaijan from 2.5 to 1.5 percent. We thus maintain a significantly more positive view than the IFIs on Armenia, Georgia and Tajikistan, a less constructive view on Azerbaijan and hold closer to their views on Uzbekistan.

Global headwinds still matter and may intensify as the year progresses. Although we upgrade our growth forecast for 2023 due to the stronger early-year momentum, we still forecast an average 2023 GDP growth of 5.8 percent (versus 5.2 percent previously), which is sizeably lower than the 8.1 percent performance last year. Geopolitical risks continue to be relevant for the region, including the one of harsher sanctions on the ability to trade with Russia. The emerging turnaround in external positions and expectations for weaker currencies may also impinge on overall consumer confidence. The totality of these risks may thus come to a head more forcefully in 2024, when we see CCA growth normalizing to its longer-term average of around 4.5 percent.

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