EBRD forecasts economic slowdown in Central Asia
By Vusala Abbasova
The European Bank for Reconstruction and Development forecasts an economic slowdown in the development of the Central Asia countries because of the Russian recession, as well as weak oil and other commodity prices.
In its latest economic report, the EBRD noted that commodity exporting countries have been directly hit by a further drop in prices of oil, gas and metals.
Kazakhstan switched from a US dollar peg to a floating exchange rate regime in anticipation of lower oil prices on 20 August 2015.
Hence, Kazakhstan’s currency, the tenge, has depreciated by some 30 per cent.
The ruble also weakened and the Russian economy remained in recession, adding to the pressures on currencies in Eastern Europe, the Caucasus (EEC) and Central Asia, given these regions’ strong trade, investment and financial sector links with Russia.
Further, high levels of dollarizations of debt in the region also make economies more vulnerable to spikes in global market volatility and changes in investor sentiments towards emerging markets.
Economies can flexibly adjust to changes in the external environment through exchange rate movements.
However, the exchange rate depreciations needed to equilibrate inflows, and outflows of foreign funds may exacerbate the burden of debt service in economies where debt is highly dollarized, according to the report.
Countries in the region tend to have much higher levels of dollarizations of debt than other emerging markets or advanced economies, according to the forthcoming Transition Report 2015-16.
Foreign currency-denominated debt, both external and domestic, totals between 40 and 130 per cent of GDP in many countries.
In some countries, the adverse impact of currency depreciations on the cost of debt may, to a significant extent, be offset by the appreciation of assets, including international reserves of the Central Bank, while liabilities are naturally hedged by exports of goods priced in US dollars.
The impact also depends on the currency composition of liabilities-such as those denominated in US dollars, which have become particularly costly to service.
In this respect, high levels of dollar-denominated debt may further complicate policy adjustments to the new environment of lower commodity prices and weaker external demand in the EEC and Central Asia.
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