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Macroeconomic research 21 February 2017 Central Asia Macroeconomic Report Striving for the Future Tengri Capital research team made the first approach to review macroeconomic statistics of the Central Asia economies and projected the future development of the region. Dmitriy Sheikin, Leila Kulbayeva Tengri Capital |Central Asia Macroeconomic Report Sector Report Contents Dmitriy Sheikin [email protected] +7 (727) 311 05 06 Tengri Capital MB, JSC Leila Kulbayeva [email protected] +7 (727) 311 05 06 Tengri Capital MB, JSC February 21, 2017 CENTRAL ASIA ECONOMIC DEVELOPMENT RATIONALE 3 Supranational factors 3 External trade partners 3 Kazakhstan 4 Uzbekistan 6 Turkmenistan 7 The Kyrgyz Republic 9 Tajikistan 11 Central Asia GDP summary data 13 INFLATION IN THE CA REGION RATIONALE 14 Kazakhstan 14 Uzbekistan 16 Turkmenistan 17 The Kyrgyz Republic 18 Tajikistan 19 Central Asia CPI summary data 20 EXTERNAL TRADE SECTOR OF CENTRAL ASIA ECONOMIES 21 Kazakhstan 21 Uzbekistan 22 Turkmenistan 24 The Kyrgyz Republic 26 Tajikistan 27 Central Asia current account and trade summary data 28 CENTRAL ASIA REGION FX RATE RATIONALE 29 Central Asia Region FX rate specification 30 Central Asia Region FX rate Outlook and Assumptions 30 Kazakhstan (KZT) 31 Uzbekistan (UZS) 32 Turkmenistan (TMT) 32 The Kyrgyz Republic (KGS) 32 Tajikistan (TJS) 33 APPENDIX I: ABBREVIATIONS AND ACRONYMS 34 2 Tengri Capital |Central Asia Macroeconomic Report Sector Report Central Asia Economic Development Rationale Tengri Capital research team have analyzed the Central Asia economies and made several conclusions and assumptions on its development over next five years. The team applied two level approach. We observed the region at large to identify the principle trends (supranational level) and made a step down to single economies (national economy level) to monitor the immediate impact of the macro-trends in Central Asia region and in the world upon the individual economies. Supranational factors Three major supranational factors would determine the economic development in the CA region in 2017-2021, in our view. The first factor is the Central Asia Regional Economic Cooperation (CAREC) program initiated by ADB. The regional program facilitates the regional economic development by cooperation and integration through the development programs in sphere of transport, trade facilitation and trade policy, and energy sector. The second is the participation in the framework of Silk Road Economic Belt (SREB) initiative that focuses on connectivity and cooperation of the Peoples’ Republic of China and Eurasia though the CA regional countries. The initiative would amount to circa US$4-8tr upon completion. North part of the economic belt goes through Central Asia and the Russian Federation to Europe. Asian Infrastructure Investment Bank (AIIB) and Silk Road Fund are two institutions that would implement the initiative in the period. The third is the EAEU framework that unites two countries of the region as its members (Kazakhstan and the Kyrgyz Republic). Tajikistan is the potential member for accession. Free movement of labor, capital and special trade regime as well as coordination of the members’ economies would continue in the region under this framework. The trade policies, tax policies, labor codes and price leveling would continue to undergo unification within the Union that would certainly produce the economic effects on the member countries. External trade partners Economic development of the external trade partners would determine the demand for commodities of the local economies Economic development of the largest economies in Eurasia would exert economic effect on the CA economies who are the mutual foreign trading partners. Thus, economic development of the Russian Federation, the People’s Republic of China, Italy, France Germany and Turkey would determine the external demand for commodities of the local economies. The WB forecasts the Russian economy would grow 1.5 and 1.7 percent in the nearest two years. Considering that the CA economies receive up to US$12.9bn February 21, 2017 remittances from the Russian Federation, the expected 3 Tengri Capital |Central Asia Macroeconomic Report Sector Report improvement of the Russian economy would increase annual capital inflow in the CA economies to circa US$9-10bn. Along with capital inflow, the CA economies would benefit on the production level as for the most regional economies the Russian Federation is the principal importer of its exports. According to the WB outlook, the People’s Republic of China would demonstrate 6.5 percent growth in 2017. Slowing down of the Chinese China expected to slow down from 6.5 percent growth in 2017 to 5.8 percent in 2021 economy would continue. In 2018-2019, the growth rate would plateau at 6.3 percent. The IMF’s outlook is less optimistic at 6 percent in 2018-2019, with the further decline to 5.8 percent by 2021. The slowing down of the Chinese economy might affect Turkmenistan, the major Chinese energy exporter, as well as Tajikistan and Uzbekistan. However, we believe that the People’s Republic of China would increase the presence in the region by pumping investments in developing road and trade infrastructure and in the major commodity priority sectors of the CA (esp. metals). According to the IMF’s WEO from October 2016, France, Germany and Italy would demonstrate growth in 2018 whilst in 2017 the principal trading partners of CA region in Europe would equal the growth of 2016 (France), show marginal increase (Italy) or decline 3 percent (Germany). We expect growth for the Central Asia region in 2017-2019 on recovering commodity prices We believe that the CA economies would grow in 2017-2018 on slowly recovering commodity prices as well as on the regional integration through trade and transportation logistics. The national imports substitution, industrialization and modernization initiatives of Kazakhstan and Turkmenistan as well as imminent emergence of new economic course of economic development in Uzbekistan would spur the economic growth in the region. Tajikistan might follow the suit of the Kyrgyz Republic and accede the EAEU in the future to benefit on lower prices for energy for the members of the Union as well as unrestricted labor inflow in the Russian Federation. External investments in the CA economies would originate from the Peoples’ Republic of China whilst the state programs of development, modernization and innovation would be the principal source of the internal investments. The largest investments and projects of 2017-2019 would be the major drivers at the national economies levels and be accounted in improving macroeconomic indicators. Kazakhstan Kazakhstan is the largest petroleum producing and trading country in the CA region. Implementation of the largest energy projects would dominate As petroleum remains the major economy input, the Government is pursuing diversification via implementation of state programs February 21, 2017 over the rest of the economy in the period. Kazakhstan strives to diversify the economy though number of governmental economy development projects. Adverse energy prices with slackening demand seriously reverse the economy. The largest economy of the CA region pursues the economic policy that has been evolving since Kazakhstan adopted and implemented the first program for accelerated industrial-innovative development of Kazakhstan for 4 Tengri Capital |Central Asia Macroeconomic Report Sector Report 2010 – 2014. In the succession of the first program there was initiated the State Program for Innovative and Industrial Development of the Republic of Kazakhstan for 2015 – 2019 (SPIID 2015-2019). Since the SPIID 2015-2019 is valid and covers the part of the period of our forecast we would consider the state investments in 2017-2019 as a support of the economic development. Thus, allocations for the period amounts to US$587m (KZT205.1bn). The Business road map 2020 is the second major program that extends the strategic economic development until 2020. The post-crisis management of the economy is a major priority of the program and includes multifarious support and stimulation of the entrepreneurship in the country. The budget allocations under the program for 2017-2019 amount to US$355m (KZT124.0bn). The state program “Nurly Zhol” 2015-2019 aimed to improve country’s infrastructure, paves the future long-term economic development of the country. The amount of international co-finance in 2017 would amount to US$3bn. Indicative volume of co-finance from international financial institutes would amount to US$8.97bn. (WB, EBRD, IDB etc.) In 2017-2019, Kazakhstan would finance the program at the amount of circa US$428.6m. Figure 1. Nominal and Real GDP growth of Kazakhstan in 2010-2021 80,000 70,000 8.0% 7.5% 7.3% 7.0% 6.0% 60,000 6.0% 5.0% 50,000 5.0% 4.3% 40,000 30,000 2.4% 20,000 1.2% 3.0% 2.8% 3.2% 3.7% 3.0% 2.0% 1.0% 10,000 0 4.0% 1.0% 21,816 28,243 31,015 35,999 39,676 40,884 43,839 48,350 53,211 58,451 64,094 70,167 2010 2011 2012 2013 2014 2015 2016E 2017F 2018F 2019F 2020F 2021F NGDP, KZT bn, LHS 0.0% RGDP, percent,RHS Source: Committee on Statistics, IMF, Tengri Capital _ Kazakhstan and ADB have mutually developed business plan for investments under the framework of the Bank’s country partnership strategy (CPS). Under the CPS, the Bank circularizes the following economic objections: economic development and diversification through infrastructure modernization that is consistent with the State project “Nurly Zhol”; finance sector development, including improved access to finance for small and medium-sized enterprises (SMEs) that goes in line with the State SMEs support program (the Business road map 2020). The CPS for Kazakhstan reflects the CAREC initiative since modernization of road infrastructure and trade finance are the parts of the ADB investments, loans and technical assistance (TA). The total proposed allocations amount to US$1.5bn by 2018.Kazakhstan would implement the major Chinese investment projects in the period of 2017-2019. February 21, 2017 5 Tengri Capital |Central Asia Macroeconomic Report Sector Report According to the Kaznex Invest JSC (National Export and Investment Agency), the total amount of US$24bn would be invested in the period and circa 50 projects would be realized. Expected investments in Kazakhstan would total US$28-30bn or 1819 percent of the average 2017-2019 GDP Therefore, the amount of expected investments in the economy of Kazakhstan from the mentioned sources and programs would total circa US$28-30bn in the period of 2017-2019 or circa 18-19 percent of the average GDP in the period. We believe that slow and protracted recovery of petroleum prices as well as the prospected investments would stimulate the economy to perform at 3 percent on average in the period of 2017-2021. The recently announced technological modernization of the economy is not accounted in our forecast since it is still to be developed by the Ministry of National Economy. We also expect moderate fiscal expansion through adjustments of expenditures for increase within the current government economic programs. Privatization of state-owned property until 2020 (Privatization 2020) would back up the expected fiscal expansion whilst the redistributed funds would exert additional stimulus in the manufacturing industry and services. The projected fiscal expansion would not affect the budget deficit that we expect to be less of 2 percent in the forecast period. The internal consumption of households has been on a decline since 2013 (YoY volume index decreased from 110.6 percent to 101.1 percent in 2014 whilst in 2015 the index amounted to 101.8 percent. 9M2016 statistics evidences 101.0 percent of volume index) and would remain on slow recovery. Thus, external and internal investments, growth of government expenditures and growing trade balance surplus would stimulate the industrial production and services on the aggregate demand side. Uzbekistan Uzbekistan is the second largest economy in the CA region striving for the new course of development. The economic policy of the country is multilateral and supposed not to develop neither economic nor political dependencies. The new President of the country made a call for the new regional cooperation by improving relations with Tajikistan, the Kyrgyz Republic and Kazakhstan. Ever since independence, macroeconomic statistics about Uzbekistan’s economy is limited and contradictory. A new development strategy for 2017-2021 is introduced in Uzbekistan Quite recently, the government promulgated the strategy of development for 2017-2021. The strategy includes 5 aspects of development of Uzbekistan that include reforming of state management, liberation of the economy, reforms in social sphere and judicial system and the principles of external relations. Besides the development strategy, Uzbekistan develops the project of delimitation of its boarders with the neighboring countries. The government has revised the program for development of free economic zones in the country (currently three, other four would be opened in the nearest future). Part of the program would be one window framework for investors. The state government would realize 649 investment projects at the amount of US$40bn in 2017-2020. The industrial production in the next five February 21, 2017 6 Tengri Capital |Central Asia Macroeconomic Report Sector Report years would increase at 1.5 times and the share of industrial production would grow up from 33.6 percent to 36 percent while the share of the processing industry would grow up to 85 percent of the GDP. Uzbekistan develops the Strategy of cooperation with the IBD, WB and ABD for 2017-2021 to attract circa US$7.7bn. Figure 2. Nominal and Real GDP growth of Uzbekistan in 2010-2021 350,000 8.5% 10.0% 8.3% 300,000 8.2% 8.0% 8.1% 8.0% 7.8% 9.0% 7.6% 7.5% 7.4% 7.2% 7.0% 8.0% 7.0% 250,000 6.0% 200,000 5.0% 4.0% 150,000 3.0% 2.0% 100,000 62,388 50,000 2010 78,764 97,929 2011 2012 120,862 145,846 171,369 197,420 221,434 241,890 261,277 290,063 315,662 2013 2014 2015 2016E NGDP, UZS bn, LHS 2017F 2018F 2019F 2020F 1.0% 0.0% 2021F RGDP, %, RHS Source: State Committee of the Republic of Uzbekistan on Statistics, IMF, Tengri Capital We do not incorporate the following plans in our forecasts since the economic and political initiatives require the managers and experts for its realization whilst the current state management is also to be reformed. Thereby, implementation of the programs might skid by mismanagement or would take more time than expected. Our real GDP forecast would average 7.3 percent whilst the nominal GDP would average 10.7 percent in the period of 2017-2021. The state budget would stimulate the growth of economy since the state authorities have chosen the course of economy liberalization. The growing remittances would stimulate slackened internal consumption of households whilst trade balance surplus on growing commodity prices would provide the country with the funds necessary for implementing the extensive economy and state management reforms. Turkmenistan Turkmenistan adheres to the policy of neutrality and develops multilateral relationship with regional and global economies. The economy prospered on high-energy prices and developed dependence on trading natural gas and oil. It is the third largest economy in the Central Asia. Most industrial assets are state-owned and the economy is not market oriented. The basic principles of economic policy of Turkmenistan are industrialization, renovation and rational utilization of the natural resources as well as import substitution program. February 21, 2017 7 Tengri Capital |Central Asia Macroeconomic Report Sector Report Under the framework of CAREC program and its own programs, Turkmenistan improves competitiveness of its exports by renovation of natural gas and petrochemical complex of the country by building gas, oil refinery facilities, and reconstructs the current facilities. Westport Trading Europe Limited (USA) made reconstruction of Seydi oil refinery to increase the output of road bitumen to annual capacity of 37,200 tons as well as to produce highoctane gasoline with the output to one million tons. ADB facilitated TurkmenistanAfghanistan-PakistanIndia (TAPI) natural gas pipeline project expansion, which is worth US$10bn In 2017, Turkmenneftegazstroy would finish the construction of the domestic 150 km. East-West gas pipeline. Building of the regional Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline project is an example of implementation of the state initiative. ADB facilitated the expansion of export potential of energy complex of Turkmenistan by establishing TAPI Pipeline Company Limited (TPCL) consortium. The project would exceed US$10bn on completion. In 2018, the building oil refinery Ahal Region in Ovandep city is expected to be finished. The refinery would process 1.8bn cubic meters of natural gas, the diesel output would be 12 thousand tons, 115 thousand tons of liquefied gas and 600 thousand tons of gasoline Euro-5. In Balkan Velayat of Turkmenistan, there is the project on the polyethylene and polypropylene production gas chemical complex implemented by Turkmenistan with the consortium of companies TOYO Engineering (Japan), LG International Corporation and Hyundai Engineering Corp. Ltd (the Republic of Korea). On the project completion by 2018, the complex would process five billion cubic meters of natural gas and with the annual output of 386,000 tons of polyethylene and 81,000 tons of polypropylene. As a part of renovating electric power system, Turkmenistan installs the four gas and two steam turbines (GE) at Mary Hydropower Plant to double its capacity. The Ministry of Energy of Turkmenistan implements the complex renovation of the old facilities, builds the new power stations and power lines in Ashgabat, Balkanabat Ahal, Dashoguz and Avaza National tourist zone. In 2017-2020, Turkmenistan would renovate the agricultural equipment and machinery stock in the country. The Ministry of agriculture and water would purchase in large quantities the agricultural equipment, machinery and combines from «Umax Trade GmbH» and «John Deere International GmbH». Turkmenistan diversifies its agriculture by financing cattle breeding, poultry, apiculture, viniculture etc. In the framework of renovation of the transport system under ADB CAREC program, Turkmenistan would build high-speed highway AshgabatTurkmenbashi international seaport, Ashgabat-Mary-Turkmenabat-Farab and Ashgabat-Karakums-Dashoguz. The built railroad China-Kazakhstan- Turkmenistan-Iran became the shortest way from the Peoples’ Republic of China to the countries of the Persian Gulf. The transition of the railroad through the territory of Turkmenistan in Iran would extend trade in the region as well as would provide transition dues for the country. February 21, 2017 8 Tengri Capital |Central Asia Macroeconomic Report Figure 3. Sector Report Nominal and Real GDP growth of Turkmenistan in 2010-2021 160,000 16.0% 14.7% 140,000 14.0% 11.1% 120,000 100,000 10.2% 12.0% 10.3% 9.2% 10.0% 80,000 6.5% 6.2% 6.6% 6.8% 6.8% 6.8% 6.7% 8.0% 60,000 6.0% 40,000 4.0% 20,000 0 2.0% 63,122 2010 83,314 100,217 118,480 131,733 125,493 128,006 132,341 138,791 145,111 151,303 158,852 2011 2012 2013 2014 2015 NGDP, TMT m, LHS 2016E 2017F 2018F 2019F 2020F 0.0% 2021F RGDP, percent, RHS Source: IMF, Tengri Capital, State Committee of Turkmenistan on Statistics The building of Turkmenbashi international seaport since 2013 (US$2bn.) would be continued for the furtherance of making it the pivotal joint of logistics system, connecting the route Europe-Caucasus-Asia (TRACELATransport Corridor Europe-Caucasus-Asia). The construction of the new port infrastructure was a part of the second component of SREB initiative - Maritime Silk Road (MSR). We expect Turkmen economy to grow 6.7 percent on average in 2017-2021 Turkmenistan would pursue expansionary fiscal policy in the forecasted period that would stimulate the economy through implementation of governmental programs of industrialization of the regions, increasing the local production of import substituting goods and by encouraging the private sector of economy. Turkmenistan would continue the state property privatization, though we do not expect sizeable returns from it as the state-owned nonproductive assets are not likely to be in demand. Growing energy prices would boost the fiscal expansion keeping the budget deficit circa 1-1.5 percent of the GDP. The expected growth of remittances would increase the internal consumption of households in the country impaired by recession in the Russian economy. In 2017-2021, we think, Turkmenistan would run decreasing trade balance deficit due to the growth of imports that would impede GDP growth. The listed projects, recovery in remittances inflow, improving trade balance and moderate fiscal expansion would spur the real rate of Turkmen economy to perform 6.7 percent on average in 2017-2021. The Kyrgyz Republic The Kyrgyz republic pursue the multilateral economic policy. The economy of the Kyrgyz republic is undiversified and liable to adverse declines. Absence of refinery facilities makes economy dependent on fluctuations of energy prices. Remittances from the Russian Federation supports internal February 21, 2017 9 Tengri Capital |Central Asia Macroeconomic Report Sector Report consumption of households. Gold mining companies decline production since the gold field reserves depleted of high-grade ore. Mining industry, hydropower electricity generation, cotton growing and textile industries are the major assets of the economy. Agriculture (circa 14 percent) and tourism (circa 4 percent) are the other two sectors that generate the income of the Kyrgyz economy. The structure of the largest investments evidence that the investors view the Kyrgyz Republic as transition territory (investments in road infrastructure), as hydropower regional suppler (renovation of current assets) or the source of mineral resources. Figure 4. Nominal and Real GDP growth of the Kyrgyz Republic in 2010-2021 700,000 12.0% 10.9% 600,000 10.0% 500,000 8.0% 6.0% 400,000 4.0% 300,000 3.5% 3.5% 4.0% 4.3% 4.6% 5.0% 5.4% 4.0% 200,000 -0.5% 100,000 6.0% 2.0% -0.9% 0.0% 220,369 273,108 310,471 355,295 400,694 423,636 458,027 476,033 514,107 552,163 590,306 628,619 0 2010 2011 2012 2013 2014 2015 2016E 2017F 2018F 2019F 2020F 2021F NGDP, KGS m, LHS -2.0% RGDP, percent, RHS Source: National Statistical Committee of the Kyrgyz Republic, IMF, Tengri Capital China remains one of the key foreign investors in the Kyrgyz Republic The Kyrgyz Republic plans to realize the projects under three large bilateral agreements with China in the nearest future. The first is the construction of the ring road around Issyk-Kul Lake. The second is the construction of China–Kyrgyzstan railway road (project is pending) and the third project is land apportioning for relocation of the excessive industrial production capacity of the Peoples’ Republic of China on the territory of the Kyrgyz Republic. The Kyrgyz Republic together with ADB in the framework of Country Partnership Strategy until 2017 develops the inclusive economic growth in the country by reducing key constraints to economic growth, improving the investment climate, and reducing disparities in access to economic opportunities. To enhance regional trade for the Kyrgyz Republic, ADB helped to rehabilitate 831 kilometers of major transport corridors. ADB approved financing of US$3m as an advance for the Central Asia Regional Economic Cooperation (CAREC) Corridors 1 and 3 Connector Road Project, with a further US$1m approved for preparatory technical assistance. The government has February 21, 2017 10 Tengri Capital |Central Asia Macroeconomic Report Sector Report made the country’s energy security a top priority, adopting an action plan to reform the sector. The Power Sector Rehabilitation Project commenced in 2013 with a total investment of more than US$274m. Under the project would be the full rehabilitation of the Toktogul Hydroelectric Power Plant. The other proposed largest projects in the country are the reconstruction of “Isyk-kul” hotel at US$65m, construction of Chok Suu river hydropower station US$31m and construction Karakul hydropower station US$24.5m. We believe the dependence on the largest gold producers, such as Kumtor, TaldyBulak and Makhmal would remain However, we believe the dependence on Kumtor, Taldy-Bulak and Makhmal gold fields would remain. The positive trend in gold prices would favor the expansion of production that would be hurdled by the growing depletion of the current goldfields. Thus, Kyrgyzaltin JSC dropped gold production on Makhmal goldfield as is almost depleted of high-grade ore. The EAEU integration, increase in personal remittances from labor migrants, improvement of competitiveness of the domestic products, implementation of energy projects (gas and hydropower) as well as targeted support of tourism and agriculture would support the economy in the period. We do not expect accelerated economy growth through the budget expansion since it is sustainable so far to serve the external debt (circa 60 percent of GDP). Annual GDP growth in real terms would average 4.7 percent whilst nominally GDP would average 6.5 percent in the period of 2017-2021. Tajikistan The Tajik economy has a narrow commodity nomenclature of industrial production that is regionally uncompetitive. Tajikistan is an agrarian–industrial country with the largest part of services within GDP. Absence of consumer industry and petroleum energy resources makes it heavily dependent on imports. Hydropower system is decrepit and require investments for renovation. The major sectors of national industry are the mining industry, hydropower sector and cotton-growing sector. Currently the state government realizes large-scale programs to renovate and modernize the hydropower generating facilities. It is planned to increase hydropower generation capacity of the country by building Sangtuda-2, Zerafshan (will be built by Chinese stateowned construction company Sinohydro) and Rogun power plants. Aluminum production (TALCO state owned company) is another industrial sector that represents the largest part of industrial production in the country. There are the gold extracting and processing industry that is gaining ground in Tajikistan (Tajik-British enterprise Zarafshon and Davroz). Cotton growing industry represents circa 50 percent of the agriculture in the country. In the recent years, we observe an expansion of Chinese presence in the country. China Exim Bank and China Global (New Technology Export & Import) Company are the largest investors in the Tajik industry. The infrastructural projects are implemented in the framework of Private Public Partnership together with international development institutes – WB, IFC, ADB February 21, 2017 11 Tengri Capital |Central Asia Macroeconomic Report Sector Report and IDB. Thus, ADB plans to support economic growth in Tajikistan in 2017-2018 by investing US$241m by project financing of transport and energy infrastructure, improving water resources management, fund structural reforms and improving investment climate of the country. Figure 5. Nominal and real GDP growth of Tajikistan in 2010-2021 90,000 7.4% 80,000 7.5% 8.0% 7.4% 7.5% 70,000 60,000 7.0% 6.7% 6.5% 6.3% 6.0% 50,000 6.1% 6.0% 6.5% 5.9% 40,000 5.7% 5.6% 5.5% 30,000 5.0% 20,000 10,000 0 6.0% 4.5% 24,707 30,017 36,163 40,526 45,605 48,409 50,591 57,492 63,139 68,788 74,462 80,177 2010 2011 2012 2013 2014 2015 2016E 2017F 2018F 2019F 2020F 2021F NGDP, TJS m, LHS 4.0% RGDP, percent, RHS Source: Statistical Agency under President of the Republic of Tajikistan IMF, Tengri Capital Currently Tajikistan in cooperation with the Peoples’ Republic of China builds concentration and processing zinc and copper plant in Sogdiyskaya Oblast. There are plans to build five industrial combines in the oblast as a part of Tajik-Chinese industrial zone. The current price of the project is US$200m China Global Company built the first zinc and copper processing plant in the oblast. The development of metal industry in Tajikistan through the Chinese investments is a part of China’s priority in capacity cooperation in steel manufacturing. As a part of China Silk Road Economic Belt (SREB) initiative and under the framework of the CAREC program, the Peoples’ Republic of China built and renovated the road and tunnel infrastructure in the country. Exim Bank of China invested circa US$88m built three TALCO chemical plants on the south of Tajikistan. In the future, circa US$6bn would be invested in Tajikistan for building Tajik part Central Asia –China gas pipeline. Along with gas pipeline D there will be realized the Central Asia –South Asia power project (CASA-1000) US$1.16bn worth that would direct surplus of hydroelectricity from Tajikistan and the Kyrgyz Republic to Pakistan and Afghanistan. The project would be completed by the end of 2018. Expected that Tajikistan would export circa 1.000MW of hydroelectricity on its completion. The participation in regional programs of development institutes under the (CAREC) program as well as realization of projects under bilateral agreements with the Peoples’ Republic of China would produce a positive effect on growth of the. Recovering remittances would expand internal consumption of households, though the GDP growth would be limited by trade balance deficit that would pick up in the period. According to our production side regressive February 21, 2017 12 Tengri Capital |Central Asia Macroeconomic Report Sector Report analysis, the nominal growth of GDP expressed in the national currency would average to 9.1 percent whilst growth in real terms would average 5.9 percent in the period of 2017-2021. We do not expect fiscal expansion since 2017 и 2018 scheduled as the years of the largest public debt repayment (circa 35.6 percent of GDP). Thus, we believe that the budget would service the due repayments rather than to expand to stimulate economy in the period. Central Asia GDP summary data The table below represents the overview of factual GDP data for the five CA republics as well as our forecasts over next five years. _Table 2. Central Asia GDP growth statistics, US$ m 2010 2011 2012 2013 2014 2015 2016E 2017F 2018F 2019F 2020F 2021F Kazakhstan NGDP, KZT bn. NGDP, US$ bn. RGDP, percent 21,816 148.0 7.3% 28,243 200.4 7.5% 31,015 215.9 5.0% NGDP, UZS bn. NGDP, US$ bn. RGDP, percent 62,388 39.0 8.5% 78,764 45.4 8.3% 97,929 51.2 8.2% NGDP, TMT m. NGDP, US$ bn. RGDP, percent 63,122 22.1 9.2% 83,314 29.2 14.7% 35,999 243.8 6.0% 39,676 227.4 4.3% 40,884 184.4 1.2% 43,839 125.2 1.0% 48,350 141.3 2.4% 53,211 151.3 2.8% 58,451 164.4 3.0% 64,094 177.9 3.2% 70,167 191.5 3.7% Uzbekistan 120,862 145,846 171,369 197,420 221,434 241,890 261,277 290,063 315,662 57.2 63.2 65.5 66.8 69.0 70.6 71.6 74.6 76.2 8.0% 8.1% 8.0% 7.8% 7.6% 7.5% 7.4% 7.2% 7.0% Turkmenistan 100,217 118,480 131,733 125,493 128,006 132,341 138,791 145,111 151,303 158,852 35.2 41.6 46.2 35.9 36.6 39.7 42.4 44.7 46.5 48.7 11.1% 10.2% 10.3% 6.5% 6.2% 6.6% 6.8% 6.8% 6.8% 6.7% Kyrgyz Republic NGDP, KGS m. NGDP, US$ bn. RGDP, percent 220,369 273,108 310,471 355,295 400,694 423,636 458,027 476,033 514,107 552,163 590,306 628,619 4.8 6.2 6.6 7.3 7.5 6.7 5.8 6.7 7.0 7.4 7.8 8.1 -0.5% 6.0% -0.9% 10.9% 4.0% 3.5% 3.5% 4.0% 4.3% 4.6% 5.0% 5.4% Tajikistan NGDP, TJS m. NGDP, US$ bn. RGDP, percent 24,707 5.6 6.5% 30,017 6.5 7.4% 36,163 7.6 7.5% 40,526 8.5 7.4% 45,605 9.2 6.7% 48,409 7.8 6.0% 50,591 6.7 6.3% 57,492 6.9 6.1% 63,139 7.1 6.0% 68,788 7.5 5.9% 74,462 7.8 5.7% 80,177 8.2 5.6% Source: Tengri Capital, IMF, National Agencies and Committees on Statistics _ February 21, 2017 13 Tengri Capital |Central Asia Macroeconomic Report Sector Report Inflation in the CA Region Rationale Decline in commodity prices urged the CA countries to offset current accounts and trade balances deficits by FX rate adjustments. Heavy adjustments of FX rate translated its effect on the inflation of prices evidencing FX pass-through effect. We witness regulators switching to the inflation targeting under monetary policies Adherence to free float regime and dwindling foreign reserves that supported managed free float conditioned the Regulators to switch to the inflation targeting under the monetary policy. Through upward adjusted interest rates, Regulators curbed inflation transmitted on the economies through the monetary channels. Reduced trade turnover between the Russian Federation and the CA economies limited imported inflation and spurred up the trade partners’ FX leveling. Thus, imported inflation to the local economies through the trade channel was limited. While food comprises the majority of CA CPIs, the prices of major food items declined in 2015-2016 according to OECD According to the OECD‑FAO Agricultural Outlook 2016‑2025, the prices for major food items declined in 2015-2016, thus minimizing the upward pressure of consumer prices. The outlook of the FAO for food prices within the period of our forecast is positive, i.e. the food prices would grow but the previous shocks would not intervene in the period. Therefore, the food prices would not contribute to the consumer inflation in the period. The decline in household consumption that was subdued by decline in remittances for the Russian Federation kept transactional inflation low. We believe the moderate recovery of the economy of the Russian Federation would not boost the consumption in CA countries keeping transactional inflation low in the forecasted period. The expected price levelling under the EAEU would continue in the member-countries and that, in our view, would be the only channel that might contribute to consumer inflation in Kazakhstan and the Kyrgyz Republic. We do not expect heavy depreciation of FX rates in the CA in the short term We do not expect heavy depreciation of FX rates in the CA region in the short term (except of Uzbekistan due to uncertainty of liberalization effect on the economy), thus pass-through effect on the consumer inflation through this channel would also be limited. Kazakhstan FX rate adjustments in 2015-2016 surged up two-digit inflation in the Republic and forced the Regulator to switch to inflation targeting regime. Introduction of the base rate at 17 percent curbed the picking up inflation in the country. Two-digit inflation dropped from 16-17 percent to 8.5 percent evidencing efficiency of the approach. Since August 2015, the National Bank of the Republic of Kazakhstan adopted the new inflation-targeting framework of monetary policy. Under the new framework, the Bank strives to provide stability of prices and to keep CPI February 21, 2017 14 Tengri Capital |Central Asia Macroeconomic Report Sector Report within 6-8 percent targeted range. Thus, in the period of 2020-2021, the Regulator plans to lower inflation to 3-4 percent. The base rate is the principal Kazakh regulator plans to lower inflation from current 6-8 percent corridor to 3-4 percent level in 2020-2021 tool of managing inflation. The spike in inflation in the beginning of 2016 increased the base rate from initial 12 percent to 17 percent. Currently the rate is 11 percent. The rate proved an efficient tool since CPI that reached 17.7 percent subsided to 8.5 percent (YoY) in the end of the year (period end CPI). The spike in CPI resulted from FX market fluctuations in the beginning of the 2016 (KZT327.7-383.9 per US$) that were transmitted at the level of prices in the middle of the year. Previously the Bank used refinance rate that amounted 5.5 percent. Refinance rate used to be the base for calculating the price of funds at the money market (interbank market). Currently TONIA is the rate that incorporates the base rate and defines the cost of money (overnight repos). Hicks-Hansen concept reflects the regulating mechanism of the base rate tool. The major objectives for the period of 2017-2020 the Bank would strive to reach under the monetary policy include the following - convergence of refinance rate and the base rate, monitoring of inflation expectations, specifying of the target rate for the money market. Figure 6. CPI in Kazakhstan 2010-2021 14% 18% 12.0% 16% 12% 14.7% 14% 12% 10% 10% 7.4% 7.4% 6.0% 8% 6% 8.5% 8% 6.8% 5.7% 4.8% 8.3% 4% 7.3% 5.1% 5.8% 6.7% 7.8% 6.5% 7.2% 6.7% 5.5% 5.9% 2% 0% 2011 2012 2013 2014 2015 2016 Annual average CPI,LHS 2017F 2018F 2019F 2020F 5.0%6% 4% 5.2% 2% 0% 2021F Period end CPI, RHS Source: National Bank of the Republic of Kazakhstan, IMF, Tengri Capital We believe that in the period of 2017-2021 we would witness the gradual leveling of energy prices within the EAEU and that would produce upward pressure on the consumer inflation. The shift from price regulation framework to antimonopoly regulation would add to the upward pressure. Household consumption that would not be supported by exports revenues due to the moderate recovery of energy prices would not stimulate the rate of transactional inflation thus balancing it down. The current base rate translated at the money market would stimulate the economic agents’ marginal propensity to save rather than consume. The National Bank statistics of February 21, 2017 15 Tengri Capital |Central Asia Macroeconomic Report Sector Report deposits per period within the banking system reflects the tendency. Devaluation turbulence of 2015 conditioned withdrawal of deposits from the banking system and massive migration in US dollars whilst the high rates in 2016 and subsequent stabilization and appreciation of KZT increased deposits at 148% in the national currency. We forecast the moderate devaluation of the national currency to We expect a moderate depreciation of Kazakh tenge to stimulate the external trade stimulate the external trade. Under this economic assumption, we do not expect any pass-through effect at the consumer inflation in the period of 20172021. The subdued lending by the commercial banks, the forecasted negative growth of real wage planned by the Ministry of the National Economic would press the consumer inflation down making the inflation targets of the Bank attainable. Uzbekistan The inflation data in the country differs from source to source or is absent completely. Liberalization if initiated would send inflation to the spin doubling our forecasts. With the current economic stance and monetary policy, we are comfortable with 8.2 percent on average in the period of 2017-2021. We believe that consumer inflation in Uzbekistan would average 8.2 percent in the period of 2017-2021. Recovery of remittances from the Russian Federation and Kazakhstan would support 12.4% 13% 16% the customer’s inflation at such a level. Since the recovery of the Russian economy and the 11.9% rate11.7% economy 12% 12.3% of Kazakhstan would average 1.5 percent and 3 percent in the period, we do not expect 14% a considerable growth of internal consumption to accelerate the prices growth. Current forecast 11% 13.6% possible devaluation of the national currency that might occur in the country. does not include 12% If liberalization of the foreign currency regulation occurs, the consumer inflation would spike 11.9% 10% considerably.Figure 7. CPI in Uzbekistan 8.5%2010-2021 10% 9% 10.8% 8.4% 10.8% 8.2% 8.1% 8.2% 8.1% 8.1% 8.0% 8.1% 8.1% 8.0% 8.0% 6% 8% 7% 7.3% 8.4% 7.6% 7.0% 6% 6.8% 5% 4% 2010 8% 8.0% 4% 5.6% 2011 2012 2013 Annual average CPI, LHS 2015 2016 2017F 2018F Annual average CPI official data, LHS 2019F 2020F 2% 2021F Period end CPI,RHS Source: IMF, Tangri Capital, State Committee of the Republic of Uzbekistan on Statistics The WB has no statistical data on consumer inflation in Uzbekistan. In 2015, the CIA in the World Factbook estimated the average inflation in Uzbekistan at 10 percent and in 2016 at 11.5 percent. We used the IMF consumer inflation data for our forecast since the official data at least 3-5 percent closer to the IMF. We do not expect pass-through of inflation through import operations since the inflation in the countries of trading partners is lower than in Uzbekistan. We have not found the monetary policy for 2017-2021 at the official site of the Central Bank of Uzbekistan. In our future updates, we analyze the February 21, 2017 16 Tengri Capital |Central Asia Macroeconomic Report At current refinance rate of 9 percent, Uzbek regulator considers CPI rate manageable Sector Report framework of the monetary policy upon its availability. Current refinance rate at 9 percent seems to indicate that the Central Bank of Uzbekistan considers the current consumer inflation rate manageable and acceptable for the economic development of the country. Turkmenistan Turkmenistan demonstrates quite high rate of GDP growth accompanied by consumer inflation. The data on inflation is either absent or inconsistent. Monetary and command admiration of inflation would keep it within the range of 6-7 percent in the period. The State Committee on Statistics of Turkmenistan publishes only period end inflation data on its official site that coincides with the data in the IMF database. Information about period average inflation is not published; therefore, we use the IMF historical data as the source for this indicator. The experts from the CIA in yearly World Factbook estimate double-digit inflation in Turkmenistan. Thus, the annual inflation rate in 2015 was 16 percent whilst in 2016 it lowered to 11 percent. In our forecast analysis, we use the IMF data since the official data of Turkmenistan is partly consistent with the IMF data. The WB database we found no information about the inflation in Turkmenistan. Figure 8. CPI in Turkmenistan 2010-2021 8% 9% 7.8% 7% 6.8% 6.0% 6% 5.3% 3% 6.2% 6.5% 6.4% 6.0% 5.8% 5.0% 4.8% 5.8% 5.5% 6.3% 6.70% 4% 3% 1% 0% 2010 6% 5% 4.0% 2% 8% 7% 6.8% 5.6% 6.90% 5.5% 5.3% 5% 4.4% 4% 6.4% 6.7% 2% 1% 2011 2012 2013 2014 2015 2016E Annual average CPI, LHS 2017F 2018F 2019F 2020F 2021F Period end CPI, RHS Source: IMF, Tengri Capital As known, the local authorities concurrently with the Regulator administer inflation in Turkmenistan. The law of the Central Bank states the universally applied instruments to manage inflation but the aspects and current implementation of the monetary policy remains unclear to us, at least for the time being. The monetary policy is unavailable on the official site of the Central Bank of Turkmenistan. We believe that Turkmenistan would run 6.2 percent to 6.9 percent annual average consumer inflation due to the recovery of remittances from the February 21, 2017 17 Tengri Capital |Central Asia Macroeconomic Report Sector Report Russian Federation that would boost internal consumption accompanied with circa 6.8 percent of real economy growth on average in the period. The Kyrgyz Republic Deflation in the Kyrgyz Republic resulted from the decline in household consumption, stable prices for food as well as low prices for energy. Restoration of remittances inflow would fuel consumption whilst growing energy prices would speed inflation up. The consumer inflation in the Kyrgyz Republic is sensitive to external factors – remittances inflows and imported inflation from the trade partners. The National Bank of the Kyrgyz republic sets the inflation target for 2017 at 5-7 percent range. The Bank applies inflation targeting to regulate the inflation. According to the Forecast of Social Development of the Kyrgyz Republic for 2017-2019, CPI projections for the period ranges from 5.6 percent to 6.5 percent. In 2019, the Ministry of Economy of the Kyrgyz Republic forecasts CPI to equal 5.7 percent. The current rate of the National Bank is 5 percent. Figure 9. CPI in the Kyrgyz Republic 2010-2021 24% 18% 16% 18.9% 19% 14% 12% 10% 7.8% 8% 14% 10.5% 7.5% 6% 4% 2.8% 6.6% 7.5% 4.0% 3.4% 3.4% 1.0% 2% 0% 2010 6.7% 6.5% 4.6% 4.5% 4.9% 2013 2014 2015 2016E Annual average CPI,LHS 9% 5.4% 6.0% 7.3% 7.7% 2020F 2021F 0.4% 2012 7.7% 4% -1% 2017F 2018F 2019F Period end CPI, RHS Source: National Statistical Committee of the Kyrgyz Republic, IMF, Tengri Capital In 2016, the Kyrgyz Republic ran the lowest consumer inflation among the rest of the CA economies. In the end of 2016, there was registered deflation. The cause for the deflation was decline in internal consumption resulted from decrease in remittances as well as low food prices (imported wheat) and relatively low imported energy prices. We expect Kyrgyz CPI to average 5.4 percent in 2017-2021 We expect that consumer inflation in the Kyrgyz Republic would increase to 3.4 percent whilst the period end inflation would reach 4.6 percent in 2017. The average consumer inflation in the period of 2017-2021 would equal 5.4 percent. The picking up inflation rate would result from increased remittance from the Russian Federation and Kazakhstan as well as upward correction of energy prices among the EAEU member-countries. February 21, 2017 18 Tengri Capital |Central Asia Macroeconomic Report Sector Report Tajikistan Remittance inflows from the Russian Federation as well as import of inflation from the trade partners largely governs consumer inflation in Tajikistan. Growing economy and improving household consumption would condition pick-up in inflation in Tajikistan in the forecasted period. The major reason why annual inflation in Tajikistan would remain less than 7 percent is low consumption level that in 2016 was impaired by recession in the Russian economy that, in its turn, decrease the inflow of remittances in the country. Devaluation of the Russian ruble to US dollar affected the volume of remittances. The regulation of the National bank to accept and convert remittances by the Bank’s FX rate produced further discount upon the dwindling inflows. Figure 10. СPI in Tajikistan 2010-2021 12.4% 13% 12% 12% 9.8% 10% 11% 10% 9.3% 7.4% 6.4% 9% 6.3% 6.5% 6.7% 6.7% 6.9% 5.1% 8% 6% 7% 4% 3.7% 6% 6.5% 6.1% 5.8% 5% 5.8% 6.3% 6.5% 6.6% 6.6% 6.8% 2016 2017F 2018F 2019F 2020F 5.0% 4% 2010 6.9%8% 2011 2012 2013 2014 2015 Annual average CPI,LHS 6.9% 2% 0% 2021F Period end CPI, RHS Source: IMF, Tengri Capital The National Bank of Tajikistan under the monetary policy sets the objective to keep inflation rate within 7 percent range. Targeting of the reserve money would serve for the purpose. Current reserve requirement rate in TJS is 1.5 percent whilst in foreign currency it amounts to 7 percent. Growth of the economy would determine money supply (MS). The annual growth of reserve money would average 20% in the middle term period. The Bank would minimize the inflationary pressure on the economy by selling government bonds. Refinance rate of the National Bank of Tajikistan in 2016 amounted 6 percent until July and grew up to 11 percent. In the beginning of 2017, the rate went up to 12.5 percent. Current overnight interest rate is 16.5 percent. We do not expect inflation pass-through effect via the import operations with the largest trading partners since the inflation in the Russian Federation and Kazakhstan would decrease and be forecasted within 5-7 February 21, 2017 19 Tengri Capital |Central Asia Macroeconomic Report Sector Report percent in 2017-2021. Since commodity prices tend to grow slightly within the period, we do not expect the pass-through effect on inflation through devaluation. Central Asia CPI summary data The table below represents the overview of factual inflation data for the five CA republics as well as our forecasts over next five years. Table 3. Central Asia Inflation Statistics 2010 2011 2012 2013 7.1% 7.8% 8.3% 7.4% 5.1% 6.0% 5.8% 4.8% Annual average CPI 12.3% Period end CPI 11.9% 12.4% 13.6% 11.9% 10.8% 11.7% 10.8% 4.4% 4.8% 5.3% 5.6% 5.3% 7.8% 6.8% 4.0% Annual average CPI 7.8% Period end CPI 18.9% 16.6% 5.7% 2.8% 7.5% 6.6% 4.0% Annual average CPI Period end CPI 12.4% 9.3% 5.8% 6.4% 5.0% 3.7% 2014 2015 2016 2017F 2018F 2019F 2020F 2021F 14.7% 8.5% 7.8% 7.3% 7.2% 6.8% 6.7% 5.7% 5.9% 5.5% 5.2% 5.0% 8.4% 8.0% 8.2% 8.0% 8.1% 8.1% 8.2% 8.1% 8.1% 8.0% 8.1% 8.0% 5.5% 5.0% 6.2% 5.8% 6.4% 5.5% 6.5% 5.8% 6.7% 6.3% 6.9% 6.7% 0.4% 1.0% 3.4% 4.6% 4.5% 4.9% 5.4% 6.0% 6.7% 7.3% 7.7% 7.7% 6.3% 6.3% 6.5% 6.5% 6.6% 6.7% 6.6% 6.7% 6.8% 6.9% 6.9% 6.9% Kazakhstan Annual average CPI Period end CPI 6.7% 7.4% 6.5% 12.0% Uzbekistan 9.1% 9.2% 8.5% 8.4% Turkmenistan Annual average CPI Period end CPI 6.0% 6.8% 6.4% 6.0% Kyrgyz Republic 7.5% 10.5% 6.5% 3.4% Tajikistan 6.5% 9.8% 6.1% 7.4% 5.8% 5.1% Source: Tengri Capital, IMF, National Agencies and Committees on Statistics _ February 21, 2017 20 Tengri Capital |Central Asia Macroeconomic Report Sector Report External Trade Sector of Central Asia Economies Current account structure of the CA economies differs according to the extent of openness of the each economy as well as to a resource type that is the principal item of its exports. Thus, energy-exporting countries in CA region, as a rule, have trade balance surplus (Kazakhstan and Uzbekistan, Turkmenistan) whilst energyimporting countries have trade balance deficit (the Kyrgyz Republic and Tajikistan). Energy and metal commodities are the major export items throughout CA region. The industrialization, modernization, large investment projects in the region (Kazakhstan and Turkmenistan) would urge to import complicated technological appliances, machinery and equipment thereby exerting an additional pressure on trade balances of the countries. Dependence upon imports of energy in the Kyrgyz Republic and Tajikistan would persist hence exerting additional pressure on trade balances of the countries and consequently widening current account deficits. Uzbekistan is at the cross roads of complex liberalization of the economy. If the country remains on its current course, the current account and trade balance would remain at surplus. Kazakhstan Kazakhstan’s exports are limited to voluminous mineral and metal commodities. Adverse changes in commodity prices affects external trade of the country by narrowing trade balance surplus. Since trade balance is the major balancing item of current account of Kazakhstan, the state authorities effectively observe trade balance surplus. The further economy industrialization and modernization would require technologically advanced and complex appliances, machinery and equipment that would exert extra pressure on trade balance. Kazakh export of hydrocarbons and minerals totaled 82-93 percent of all exports from the country in 2013-2016 Exports nomenclature in Kazakhstan consists mostly of mineral products and metals. Mineral exports gradually decreased from 80 percent in 2013 to 65 percent in 2016. Non-precious metals in exports ranges from 13.117.9 percent. In 2016, metals amounted to 16.9 percent of exports. In total, those two items range from 82 percent to 93 percent. Contrary to the efforts of the state government to diminish mineral commodities in the exports by increasing the volume of manufactured products, the amount of two items remains high and makes the value of the exports susceptible to adverse decline in commodity prices. Exports go mostly to the EU and amount to 50 percent (half of exports goes to Italy and France). Exports to the Peoples’ Republic of China and the Russian Federation ranged 20-22 percent in the recent years. Exports to GDP ratio averaged 34.8 percent in the period of 2010-2016. After Turkmenistan, it is the second largest ratio in the CA region. According to the latest statistical data of the Committee on Statistics of the Republic of Kazakhstan, imports in Kazakhstan consist of machines and appliances, transport vehicles at 37.4 percent. Chemicals and chemical February 21, 2017 21 Tengri Capital |Central Asia Macroeconomic Report Sector Report products amount to 16.2 percent. Food and consumer products amount to 12 percent; metal products make 12.8 percent of the import nomenclature. The total of the listed imports amounts 78.4 percent. Imports from the Peoples’ Republic of China and the Russian Federation amount circa 50 percent whilst imports from the EU amount circa 23 percent of the total in the recent years. Imports to GDP ratio averaged 19.1 percent in the period of 2010-2016. The ratio is the best indicator in the CA region evidencing lesser dependence of Kazakhstan on imported goods and products. _ _ Figure 11. External Trade of Kazakhstan, US$ bn Source: Committee on Statistics of the Republic of Kazakhstan, IMF, Tengri Capital _ _ Current account of Kazakhstan would remain negative in the forecasted period though account deficit would narrow since economy would generate more exports revenue at higher commodity prices. Successful realization of oil projects would increase re-investment of returns by investors in the economy thus reducing current account deficit. Moderate devaluation of KZT would stimulate exports adding price competitiveness to energy commodities as well as to manufactured products. In 2017, current account deficit would narrow to US$2.7bn. In 2020, current account deficit would decrease to its minimum USD763m. The current account deficit would average circa -1.0 percent of GDP in the forecasted period. Uzbekistan The country trades in rare metals, gold, cotton and mineral oils as well as oil distilled products. Adverse price movements for the commodities have not impaired the trade balance. Annual inflow of personal remittances keep the balance of the current account at surplus. Unless the new industrial projects that might be initiated in the future, trade as well as current account balance would be at surplus. Half of Uzbek exports go to Switzerland and the Peoples’ Republic of China. February 21, 2017 22 Tengri Capital |Central Asia Macroeconomic Report Sector Report The State Statistics Committee of Uzbekistan gives no information about the structure of exports or imports except of the value of external trade operations. Therefore, we use the statistical data from Trade map statistical database to specify the structure and nomenclature. Metals (precious, semiprecious, copper, rare earth) comprised 36 percent of total Uzbek export in 2016 Exports nomenclature includes precious/semi-precious stones, metals circa 21 percent (in 2015 - 31 percent), cotton circa 14.5 percent, mineral fuels, oils and products - 16 percent, copper - 9 percent, precious metals and rareearth metals - 6 percent, edible fruit and nuts, peel of citrus fruit or melons - 5 percent on average in the period of 2012-2015. The largest part of the Uzbek exports goes to Switzerland (31 percent) and to the Peoples’ Republic of China (21 percent). Circa 12 percent of exports go to Kazakhstan and 9 percent - to the Russian Federation. The list of export items average 71 percent of the total. Exports to GDP ratio amounted to 24.9 percent on average in the period of 2010-2016. The largest items in the nomenclature of Uzbek imports are machinery and mechanical appliances - 18 percent, vehicles other than railway or tramway rolling stock - 13 percent, electrical machinery and equipment - 7 percent, pharmaceutical products - 5 percent, mineral fuels, oils and products - 6 percent, iron and steel - 6 percent and wood and wood articles - 5 percent. _ _ Figure 12. External Trade of Uzbekistan, US$ bn Source: State Statistics Committee of Uzbekistan, IMF, Tengri Capital Those items made 60 percent of the total imports on average in 20122015. The Russian Federation and the Peoples’ Republic of China are the largest importers of goods in Uzbekistan. Each country imports circa 22 percent. South Korea imports 13 percent. Kazakhstan follows with 9 percent. Germany and Turkeys import 5 percent each. Imports ratio to GDP averaged 21.8 percent in the period of 2010-2016. February 21, 2017 23 Tengri Capital |Central Asia Macroeconomic Report Sector Report Uzbekistan would not accede the EAEU in the nearest future as the Minister Deputy of External trade and International Relations of Uzbekistan announced recently. The accession does not meet the interests of the country. Uzbekistan declared that it would continue to develop the external bilateral trade relations with the Peoples’ Republic of China under the framework of the SREB. Uzbek current account has never been in deficit since 2005 and we expect it to remain in surplus in 2017-2021 The current account has never been at deficit since 2005 and would remain at surplus in the forecasted period. In 2017, the current account surplus would amount US$81m and would continue to pick up to US$384m in 2021. The growing prices of gold, cotton, metals and energy would favor the current account balance provided the country would not take extensive liberalization of the economy at a quick pace. Current account balance would range from 0.1 percent to 0.5 percent of GDP of the country in the period of 2017-2021. Turkmenistan Energy concentrated nomenclature of exports is liable to considerable value decline on adverse change in energy prices. Large technological projects would require imports of technologically advanced machinery and equipment thus affecting trade balance and current account. Returns from the infrastructure and energy transportation projects would narrow current account deficit in 2018-2019. High concentration of exports by country (the Peoples’ Republic of China). The State Committee on Statistics of Turkmenistan publishes only the information of the amount of exports and imports in the period of 2007-2015. The IMF and the WB give inconsistent statistical data for the country. The Central Bank of Turkmenistan has no data available. In Turkmen exports, energy products prevail (91 percent in the 2015 structure) According to the Trade map database, the export nomenclature is largely limited to energy products (mineral fuels, mineral oils and products of their distillation) that average circa 91 percent in the structure in 2012-2015. Another 5 percent of the exports is cotton. Two major items make 96 percent of exports. Turkmenistan increases its export potential by building gas pipeline Turkmenistan–Afghanistan–Pakistan–India Pipeline (TAPI) that is to be completed in 2019. Transportation capacity of 33bn cubic meters of gas promises to increase the export revenues of the country. The major part of the exports goes to the Peoples’ Republic of China (79 percent), 6 percent to Pakistan and 6 percent to Turkey. Export to GDP ratio averaged 44.2 percent and is the largest in the CA region. Turkmenistan develops the bilateral relationship with the Peoples’ Republic of China under the SREB framework. Turkmenistan reconstructs and builds new road infrastructure, builds multimodal transport system to integrate in the SREB. It would increase the transition potential of the country as well as facilitate the local exports of the country. February 21, 2017 24 Tengri Capital |Central Asia Macroeconomic Report Figure 13. Sector Report External Trade of Turkmenistan, US$ bn Source: State Committee on statistics of Turkmenistan, IMF, Tengri Capital The structure of Turkmenistan imports in 2012-2015 comprises machinery and mechanical appliances at circa 18.6%. Articles of iron and steel stand for 14 percent of the structure, electrical machines and appliances constitute to another 14 percent of imports. Iron and steel add another 5 percent. Railway vehicles and tramway rolling stock amount to 7 percent. Complex appliances and machinery, steel and iron comprises circa 58-60 percent of the imports in Turkmenistan. Turkey imports circa 33 percent, the Russian Federation circa 15 percent whilst the Peoples’ Republic of China imports circa 14 percent of the total. Circa 6 percent of goods comes from Germany. Kazakhstan imports 2 percent. Thus, five countries form 70 percent of country’s import. Imports to GDP ratio amounted to 38.2% on average and is the largest in the CA region. Current account balance of Turkmenistan, according to the IMF statistics, has demonstrated a decline since 2012 to US$3.70bn. According to the IMF estimation, in 2016 the current account deficit struck US$6.78bn. (no We expect Turkmen current account balance to be negative in the forecasted period and range from -14.6 to -7.1 percent of GDP other source of current account of the country is available about the country). According to our forecast, current account deficit would improve in 2017 on growing natural gas and oil prices to US$5.8bn. In the period of 2018-2021, current account deficit would continue to improve and in 2021, it would reach US$3.47bn. We do not expect localization of the production of complicated and technologically advanced machinery in the country, therefore the pressure on trade balance would continue. However, uptrend of commodity prices would make it possible to pick up in exports revenues to pay the imports. Current account balance would be negative in the forecasted period and range from -14.6 percent to -7.1 percent of GDP. February 21, 2017 25 Tengri Capital |Central Asia Macroeconomic Report Sector Report The Kyrgyz Republic Low competitiveness of the Kyrgyz exports and price dependent imports adversely affect current account of the country. Personal remittances and inflows at financial accounts of the BoP balance current account and trade balance deficit. Exports are very concentrated by country and by product. Current account deficit would persist and widen by 2021. The republic reexports Chinese imports in the CIS countries. Exports nomenclature of the country comprises food products and life stock circa 9 percent, circa 37-38 percent of gold and circa 5 percent clothes and textile products. Cotton fibers amount to circa 1.5-2 percent of the total. The listed items constitute to 53-55 percent of exports. The Kyrgyz exports are seasonally variable. Figure 14. External Trade of the Kyrgyz Republic, US$m Source: National Statistical Committee of the Kyrgyz Republic, IMF, Tengri Capital Food products and life stock support the Kyrgyz exports in the summer and in the autumn whilst in other seasons it is on a decline. Low competitiveness of the Kyrgyz exports and relatively undiversified nomenclature are the major weakness of the external trade of the country. Switzerland receives circa 34 percent of the Kyrgyz exports; Kazakhstan 21 percent of exports, 9 percent of exports goes to the Russian Federation and circa 2 percent to the Peoples’ Republic of China. Export to GDP ratio averaged 29.4 percent in the period. Imports of the country comprise circa 20 percent of mineral fuels, oil and oil products, circa 15 percent are food, beverages, tobacco and natural oils and 26 percent are machines and transport equipment. Those items amount to 61 percent of imports. Imports from the Russian Federation amounted to circa 32 percent, 26 percent of all imports come from the Peoples’ Republic of China, another 14 percent from Kazakhstan. Imports to GDP ratio amounted to 72.2 percent on the average and is the largest ratio in the CA region. February 21, 2017 26 Tengri Capital |Central Asia Macroeconomic Report Sector Report Accession of the Kyrgyz Republic in the EAEU improved current account deficit from US$1.3bn to US$721m. In 2017, current account deficit would widen to US$772m. Subsequently, current account deficit would increase to US$862m in 2018 and to US$1.1bn in 2021. Current account deficit would average circa 12.7 percent of GDP of the country in the forecast period. Tajikistan Tajikistan has a limited export nomenclature. Personal remittances, investments and grants balance current account deficit. Tajikistan’s aluminum and cotton exports cannot compete with such regional and global aluminum and cotton exporters as the Russian Federation, Kazakhstan and Uzbekistan. Current account deficit would plateau at 5.5 percent of GDP in the future. The republic re-exports Chinese imports in the CIS. Metals (aluminum various ores, precious and semi-precious) contributed almost 60 to the total Tajik export in 2012-2015 According to Trade Map international statistics, the largest items of the Tajik exports were aluminum (36.1 percent), ores, slag and ash (13.9 percent), cotton (10 percent) and precious or semi-precious stones, metals (9.6 percent) in the period of 2012-2015. The listed items averaged 70 percent of the total in the period. Among the CA economies it the smallest indicator of openness of the economy. The major export trade partners of Tajikistan are Kazakhstan (18 percent), Turkey (22 percent), Switzerland (15 percent), Afghanistan (10 percent), the Peoples’ Republic of China (6 percent) and the Russian Federation (5 percent). The listed countries receive 77 percent of the Tajik exports. Exports to GDP ratio averaged 15.5 percent in the period of 2010-2016. Figure 15. External Trade of Tajikistan, US$ m Source: Statistical Agency under President of the Republic of Tajikistan, IMF, Tengri Capital The nomenclature of the Tajik imports consisted of mineral fuels and products circa 11.7 percent, articles of apparel and clothing accessories circa 12.9 percent, machinery and mechanical appliances circa 7.1 percent, electrical equipment circa 5.3 percent, vehicles other than railway or tramway rolling stock circa 5.8 percent and cereals - 4.6 percent. Iron and steel amounted to 4.1 percent. Thus, the total of the major import items averaged 51.4 percent in the February 21, 2017 27 Tengri Capital |Central Asia Macroeconomic Report Half of Tajik imports comes from China, another 21 percentfrom Russia and 12 percent- from Kazakhstan Sector Report period of 2012-2015. Half of imports (circa 50 percent) in Tajikistan comes from the Peoples’ Republic of China, 21 percent from the Russian Federation and 12 percent from Kazakhstan. Imports to GDP ratio averaged 47.7 percent in the period of 2010-2016 and the ratio is the second largest in the CA region after the Kyrgyz Republic. Tajikistan is not a member of the EAEU and the price for oil products from the Russian Federation is higher than for the Kyrgyz Republic. Increase in oil prices, decrease in price of gold and decrease of remittances widens the countries trade deficit. Current account deficit of Tajikistan ranged from US$261m to US$699m in the period of 2010-2016. According to our calculations, deficit would persist until the end of the forecasted period. Current account deficit would reach US$276 -275m in 2017-2018 period and would continue to pick up to US$404m in 2021. Current account deficit would equal circa 5-5.5 percent of GDP in the period of 2016-2021. Central Asia current account and trade summary data The table below represents the overview of factual current account and trade data for the five CA republics as well as our forecasts over next five years. Table 4. Central Asia External Trade Statistics, US$m 2010 2011 2012 2013 EXP IMP TRB CAB CAB/GDP 60,271 31,127 29,144 -4.121 -2.8% 84,336 36,906 47,430 1.385 0.7% 86,449 46,358 40,090 10.199 4.7% 84,700 48,806 35,895 1.058 0.4% EXP IMP TRB CAB CAB/GDP 13,023 9,176 3,848 2.397 6.2% 13,356 9,256 4,100 2.612 5.8% 13,600 12,817 783 0.921 1.8% 14,323 13,947 376 1.631 2.9% EXP IMP TRB CAB CAB/GDP 9,679 8,204 1,476 -2.349 -13.5% 16,751 11,361 5,390 0.582 -8.0% 19,987 14,138 5,848 0.015 1.7% 18,854 16,090 2,764 -2.983 0.0% EXP IMP TRB CAB CAB/GDP 1,756 3,223 -1,467 -448 -9.3% 2,242 4,261 -2,019 -477 -8.1% 1,928 5,576 -3,649 -1,025 -15.5% 2,007 5,987 -3,980 -1,009 -13.8% EXP IMP TRB CAB CAB/GDP 1,195 2,657 -1,462 -0.540 -9.6% 1,257 3,206 -1,949 -0.476 -7.3% 1,360 3,778 -2,419 -0.699 -9.2% 1,162 4,151 -2,989 -0.659 -7.7% 2014 2015 Kazakhstan 79,460 41,296 38,164 0.858 0.4% 45,956 30,568 15,388 5.994 3.3% 2016E 2017F 2018F 2019F 2020F 2021F 35,768 26,513 9,255 -5.464 -3.9% 42,257 27,627 14,629 -2.681 -1.9% 46,521 29,708 16,813 -1.563 -1.0% 48,519 31,177 17,342 -1.748 -1.1% 51,917 33,188 18,729 -1.401 -0.8% 56,045 35,218 20,828 -0.763 -0.4% 12,055 11,172 883 0.047 0.1% 13,576 13,109 467 0.081 0.1% 14,192 13,565 627 0.180 0.3% 14,516 13,751 765 0.221 0.3% 15,460 14,332 1,128 0.365 0.5% 15,814 14,738 1,076 0.384 0.5% 10,868 13,784 -2,915 -6.780 -10.1% 13,048 14,866 -1,818 -5.795 -14.6% 14,490 15,826 -1,336 -5.008 -11.8% 15,301 16,588 -1,286 -4.379 -9.8% 16,229 17,225 -996 -3.876 -8.3% 17,369 17,988 -619 -3.474 -7.1% 1,565 3,953 -2,388 -867 -13.4% 1,679 3,899 -2,222 -772 -11.6% 1,705 4,302 -2,598 -862 -12.5% 1,789 4,688 -2,898 -959 -13.2% 1,841 5,027 -3,184 -1,037 -13.4% 1,935 5,183 -3,243 -1,058 -12.9% 924 3,246 -2,322 -0.331 -4.7% 972 3,419 -2,446 -0.276 -4.8% 1,006 3,601 -2,595 -0.275 -5.0% 1,017 3,755 -2,738 -0.303 -5.1% 1,101 3,929 -2,828 -0.371 -6.0% 1,125 4,119 -2,994 -0.404 -5.5% Uzbekistan 13,546 13,984 -439 0.454 0.7% 12,139 12,417 -278 0.093 0.1% Turkmenistan 19,782 16,638 3,144 -3.475 -6.5% 12,164 14,051 -1,887 -3.695 -9.7% Kyrgyz Republic 1,884 5,735 -3,851 -1,301 -17.4% 1,676 4,070 -2,393 -721 -11.0% Tajikistan 977 4,297 -3,320 -0.261 -2.8% 891 3,436 -2,545 -0.472 -6.0% Source: Tengri Capital, IMF, National Agencies and Committees on Statistics _ February 21, 2017 28 Tengri Capital |Central Asia Macroeconomic Report Sector Report Central Asia Region FX rate Rationale Commodity prices and remain the major factor to impact FX rates, mainly for Kazakhstan The CA countries are under a combination of several factors that adjustments of the FX rates (foreign currency exchange rate) of the respective countries to the economic challenges of the global and regional character. The larger the openness and GDP of the country, the more essential are FX rate fluctuations. Some countries of the CA region are the mono exporters of commodities; some have several staple products in the structure of its exports. The fluctuations in prices of commodities at the international exchanges inevitably change the value of exports and urge the FX rate adjustments as well. The global price movements not the only factor to trigger FX rate As Russia is the largest trade partner of Central Asia, the changes in the FX rate in Russia translates into FX adjustments locally adjustments. Neighboring trade of the CA economies conditions the further FX adjustments to level the misalignments with the local trade partners. The largest trade partner of the CA countries is the Russian Federation. The changes in FX rate of the Russian Federation is immediately translated to FX rate adjustments of the local countries even though the uptrend prices of commodities favor the FX rate by strengthening it. It is evident that countries with free-floating regime have already developed pass-through effect on its FX rate adjustments. Thus, appreciation of RUB to USD resulted in depreciation of the national currencies of relatively small economies - the Kyrgyz Republic (KGS) and Tajikistan (TJS). The pass-through effect differs depending on the openness as well as of the amount of GDP economy generates. Thus, correlation between RUB FX rate changes produce a pass-through effect upon KGS FX rate amounts (19) percent in the period of August 2016 – February 2017, whilst the reverse correlation with TJS is strong and amounts 72 percent. Currently FX rate movement of the Russian Federation translates at the FX rate of the largest economy of the CA, Kazakhstan. KZT and RUB are the free floaters with limited FX rate management. Inflation targeting priority in monetary policy of both countries and oil export profile as well as openness of the economies find reflection in unison movements of FX rates. RUB passthrough effect on FX rate of KZT evidence positive correlation at 80 percent. The rest economies are less susceptible to changes FX rate movements of the Russian Federation, as the economies are less open to each other through trade or FX alignments have a lag in time. Personal remittances is another FX rate adjustment factor for Kyrgyz Republic, Tajikistan and Turkmenistan Personal remittances is another FX rate adjustment factor has an essential effect over the national currencies. Thus, personal remittances in the Kyrgyz republic averaged 28.6 percent of GDP, in Tajikistan – 38.1 percent, Turkmenistan -14 percent and Uzbekistan -2.9 percent in the period of 20102015. Annual inflow of 1.7 - 4.7bn. US dollars in the country requires regular alignment of FX rates of the respective countries. Therefore, USD/RUB FX rate fluctuations produce the same effect upon the CA regional currencies as USD fluctuations produce upon the major global currencies. February 21, 2017 29 Tengri Capital |Central Asia Macroeconomic Report Sector Report Central Asia Region FX rate specification Most of the FX rate regimes of the CA countries are free floating with different anchoring (Kazakhstan, Tajikistan, and the Kyrgyz Republic). The monetary policy of the mentioned economies prioritize inflation targeting whilst market regulates exchange rate with limited participation of the Regulators. Turkmenistan’s FX rate is a conventional peg anchored to US dollar with rare adjustments. In Turkmenistan, the Regulator (CBT- the Central Bank of Turkmenistan) arrange TMT FX rate by law, however, the President of the country is a principle decision maker. Thus, TMT FX rate is not under the market mechanisms of FX rate formation. Uzbekistan FX rate is a crawl peg arrangement and unlike other exchange rates of the CA region has limitations. The Regulator (CBRU – the Central Bank of the Republic of Uzbekistan) acts as a seller and a buyer of the foreign currency to meet demands of the economy. UZS FX rate has the limited effect of market price formation. Central Asia Region FX rate Outlook and Assumptions In the FX rate forecast analysis, we input commodity prices as the independent variables conditioning the FX rate adjustments. Country-tocountry FX rate analysis evidences strong correlation between the changes of prices of corresponding commodity that is the principal item of exports of the respective economy. Commodities promise moderate uptrend We base our FX forecast that the prices for energy commodities (Brent and NG), gold, metals and cotton would show a moderate uptrend dynamics. In 2017, we use forward quarter contract prices for Brent as a forecast following the market sentiment. Subsequently we incorporate the Bloomberg consensus forecast prices for the major commodities in our FX forecast module. Evidently, the Brent as well as NG uptrend prices would favor Kazakhstan, Uzbekistan and Turkmenistan, the major energy exporters of the CA region. Energy dependent countries, such as Tajikistan and partly the Kyrgyz Republic would suffer adverse effect from such an up-movement. The metal pries seems to follow the energy prices and it would produce a positive effect on value of exports of all CA economies, as almost all of them are the metal exporters. Turkmenistan, Tajikistan and Uzbekistan would benefit on growing cotton prices in 2017-2021 as well. Current picking up in gold prices is due to weakening of global USD FX rate on political uncertainties of the President Trump’s administration. This year it might evidence the best pick-up in prices as a hedge tool against global uncertainties but in the long term, it would grow up gradually and more or less February 21, 2017 30 Tengri Capital |Central Asia Macroeconomic Report Sector Report stable. Gold price up movement would favor the Kyrgyz Republic, Uzbekistan and Tajikistan as well known as the major gold exporters in the CA region. Federal Reserve tightening of monetary policy The expected increase in the Federal Reserve rates is would make the US dollar strong CA region FX rate adjustments would be conditioned by expected the FRS increase of discount rate up to 1.50 -1.75 percent this year. The expected change in the FRS discount rates is not the only driver that technically would make the US dollar strong. Mr. Trump promised in his election campaign to restore Glass Steagall Banking Act, which prohibited commercial banks to participate in the investment banking. Bill Clinton repealed the Act in 1999. Besides, Mr. Trump promised to dismantle Dodd-Frank Act (2008) to make the banking system more viable. Overall, it might make commodity markets more predictable and driven fundamentally by economy and not by speculation. The Wall Street and banking policy changes as well as tight money policy of the FRS would make USD globally strong and that, in its turn, will urge adjustments of FX rates of the regional currencies. If Mr. Trump’s election promises are to be implemented the speculative capital would search for the new markets. Russian economy recovery accompanied by lifting sanctions becomes attractive for capital inflows We believe, Russian economy is attractive for foreign investors at this stage, which may cause capital inflows and RUB strengthening We believe that the Russian Federation would experience the inflow of investments in 2017. The capital inflow accompanied with growing commodities might produce the expressive strengthening of the Russian ruble. We believe the partial lifting of the sanctions from the Russian Federation are possible to occur by 1H2017. The sovereign debt of the Russian Federation would became attractive for the investors and ruble denominated assets would be on a demand in the middle of the year. High key rate of the Central Bank of the Russian Federation would make the fund instruments attractive for investors as well as for market speculators. Inflow of hot money at the stock exchange would appreciate RUB FX rate urging regional currencies to align. The afore-mentioned factors would determine so far the changes in FX rates of the regional economies. Kazakhstan (KZT) KZT FX rate would depreciate to 342.1 KZT per dollar Kazakhstan FX rate would be under several diametrically opposed influences. The forecasted level of oil prices would support the FX rate from depreciating whilst the FRS restrictive monetary policy would urge depreciation. If our lifting sanctions scenario finds place, appreciating Russian ruble would strengthen KZT. In two years’ time, we expect investment inflows into Kazakhstan, especially in oil and gas sector as well as into agricultural sector. Capital inflow in those sectors would appreciate KZT FX rate. Such a tug of warring influences would level the FX rate at 342.1-342.6 KZT per USD in 2017. Slight depreciation in Kazakhstan in the subsequent years would technically stimulate exports under the moderately growing prices for energy commodities hence keeping the expanding imports balanced to meet the industrialization February 21, 2017 31 Tengri Capital |Central Asia Macroeconomic Report Sector Report and modernization plans of the state. KZT FX rate for 2018-2021 would range from 351.7 to 366.4 KZT per US dollar on average. Uzbekistan (UZS) UZS FX rate limitations imposed by the Regulator in 2013 on free exchange conversion gave growth of non-formal exchange market where UZS FX rate anchored to USD is double higher of the official one. Crawling depreciation of UZS is half behind of the real alignment with the currencies of neighboring countries. The FX liberalization of the new President of Uzbekistan proposes a new framework for exchange regulation including free conversion of foreign currency, purchase of foreign currency by exporters and importers in the country, opening of the accounts in the local banks by non-residents etc. The initiative is to liberalize foreign trade and improve investment climate in the country. The new exchange regulation would be prepared in 1H2017. UZS FX rate would continue crawling depreciation to 4,145 by 2021 We believe that such exchange regulations would result in temporary misalignments with major currencies. Our current FX model does not incorporate the effect from the offered initiative since it is only a project and its implementation might be gradual or postponed. The model, based on the historical and current inputs, shows depreciation of the UZS anchored to USD in the forecasted period. If the project of the President comes in effect as the law on exchange regulations, UZS FX rate gradually would approximate the black exchange market rate or the level of FX rate used for EXIM operations (8000.00 UZS per US dollar) and would increase 2.5 times our FX forecast for the country. In 2017, UZS FX rate would be 3,211 per US dollar on average whilst in 2018 it would average 3,423 and by 2021 would reach 4,145 UZS per US dollar. Turkmenistan (TMT) We do not expect neither depreciation nor appreciation of TMT FX rate TMT FX rate would be pegged in the period at 3.50 TMT per dollar to US dollar in 2017. TMT FX rate would plateau at 3.50 TMT per US dollar. We base our assumption on stable or moderately positive outlook for commodity prices that would favor and support the current peg of TMT to USD. Energy prices would support TMT at the same level in the period. The CBT (Central Bank of Turkmenistan) temporally imposed a ban of free conversion of foreign currencies for legal entities. Free currency conversion is allowed only under the state projects. We believe it would raise the black market for illegal conversion of foreign currency in the country and would impair the external trade. Parallel co-existence of two markets would create an additional pressure on the national currency urging its further depreciation in the future. The Kyrgyz Republic (KGS) KGS FX rate has relatively weak correlation between the Russian ruble and Kazakh tenge, nevertheless the external trade with both countries would require adjusting the FX rate by slightly depreciating it. Slowly growing prices February 21, 2017 32 Tengri Capital |Central Asia Macroeconomic Report KGS FX rate would be 70.9 KGS per UA dollar Sector Report for gold in the period would slightly appreciate KGS FX rate. We do not expect appreciation of KGS FX rate through investments channel as excepted infrastructure projects of the government investments would be limited. The Russian economy would demonstrate growth in 2017 and that would boost up the money transfers into the republic effecting appreciation of KGS FX rate. Tourism is a seasonable factor that also supports the Kyrgyz national currency by appreciating it. Adjustments of KGS FX rate would occur several times in 2017 reflecting appreciation of US dollar to the global currencies and regional alignments to it. In 2017, the average KGS FX rate would be 70.90 per US dollar. In the period of 2018-2021, KGS FX rate would range from 73.26 to 77.80 per US dollar. Tajikistan (TJS) TJS FX rate would depreciate to 9.7351 by 2021 Tajikistan’s FX rate has multi-dependence on prices of energy resources, metals esp. aluminum, gold and cotton prices. The growing prices would appreciate TJS but concurrent uptrend of energy prices (Brent has strong negative correlation at 78.5% since 2010) would depreciate the currency. Unlike the Kyrgyz Republic, Tajikistan is not a member of the EAEU, thus has to buy oil products on special terms lower than the market price but higher than it goes to the Kyrgyz Republic. However, the principal TJS FX rate mover is the remittances from the Tajik labor migrants. The National Bank of Tajikistan minimizes TJS FX rate fluctuations by converting all remittances into TJS according to the official exchange rate set by the Bank. The Peoples’ Republic of China is the principal foreign investor in the country with circa 50-53 percent of total FDIs would extend its presence in the economy. Inflows of foreign currency and growing remittances would produce appreciating effect on TJS; however, growing energy prices would push the value of imports up and urging exports to expand through adjusting TJS FX rate down (depreciating). TJS FX rate would keep aligned with RUB and KZT as it is another passthrough channel influencing TJS. TJS FX rate manifested a strong negative correlation ratio at 72 percent to RUB and 67 percent to KZT. In 2017, the TJS FX rate to US dollar would average 8.88 whilst in 2018-2021 we expect it to depreciate from 8.8831 to 9.74 TJS per US dollar. Table 5 Central Asia FX Rate Statistics ( year average) USD/KZT USD/UZS USD/TMT USD/KGS USD/TJS 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F 147.4 1588 2.85 45.96 4.37 146.6 1716 2.85 46.15 4.49 149.7 1890 2.85 46.99 4.76 152.1 2096 2.85 48.43 4.76 179.2. 2315 2.85 53.65 4.85 221.7 2573 3.50 64.45 5.79 342.2 2969 3.50 69.91 7.77 342.1 3211 3.50 70.90 8.19 351.7 3425 3.50 73.26 8.88 355.5 3651 3.50 74.89 9.21 360.3 3891 3.50 76.09 9.51 366.4 4145 3.50 77.80 9.74 Source: Tengri Capital, National and Central Banks, National Agencies and Committees on Statistics February 21, 2017 33 Tengri Capital |Central Asia Macroeconomic Report Sector Report Appendix I: Abbreviations and Acronyms CA – Central Asia NGDP – Nominal GDP RGDP – Real GDP EXP – Exports IMP – Imports TRB – Trade Balance CA- Current account CAB – Current account balance ADB - Asian Development Bank WB – World Bank IBD – Islamic Development Bank CAREC - Central Asia Regional Economic Cooperation EAEU – Eurasian Economic Union SME – Small and Medium Size Enterprises TAPI – Turkmenistan –Afghanistan- Pakistan-India gas pipeline NG - natural gas GE – General Electric CPS - country partnership strategy SREB - Silk Road Economic Belt TRACELA- Transport Corridor Europe-Caucasus-Asia OECD ‑ Organization for Economic Co-operation and Development FAO – Food and Agriculture Organization SPIID - State Program for Innovative and Industrial Development TALCO - Tajik Aluminum Company IFC – International Finance Corporation FX – Foreign Exchange CIA – Central Intelligence Agency BoP – Balance of Payment February 21, 2017 34 Tengri Capital |Central Asia Macroeconomic Report Sector Report ANALYST CERTIFICATION: The research analyst(s) responsible for authoring this report hereby certifies or certify that (i) the views expressed in this report accurately reflect the personal views of the author(s), while not necessarily representing the viewsof their employer and (ii) no part of this report was influenced by commercial considerations of their employer. IMPORTANT DISCLAIMER: The information provided in this report is for informational purposes only. No warranty or representation is made as to the correctness, completeness and accuracy of either the information provided or the conclusions drawn. Opinions reflected in this document may change without notice. Opinions expressed may be different or inconsistent with views reflected in other reports produced by Tengri Capital, and Tengri Capital assumes no obligation to bring such other reports and opinions to the attention of any recipient of this present report. © Copyright 2016. Tengri Capital, JSC, Nurly Tau 4B, 17 Al-Farabi, Almaty 050059, Kazakhstan. All rights reserved. When quoting please cite “Tengri Capital Research”. February 21, 2017 35