TOPIC OF THE WEEK: CAs return to "normal" deficit positions in 2023 (and beyond)

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

The publication of current account data for the CCA economies for 4Q23 allows us to assess overall external performance in 2023. Our key conclusion is that the one-off sizable improvement of CA positions in 2022 on the back of excess monetary inflows (remittances) from Russia has mostly come to an end in 2023 as CCA current accounts ex-Azerbaijan posted a deficit of 2.5 percent of GDP vs a surplus of 2.7 percent of GDP in 2022. More importantly, the 2023 external gap has basically returned to the average level of 4.0 percent of GDP that held during the previous five years, from 2017 to 2021.

The normalization of these excess monetary transfers in 2023 has revealed the dominant role of trade balances in determining CA positions as they (current account balances) switched back to their more natural deficit state in the face of the still robust, if moderating, pace of economic growth in the region. We thus forecast the 2024 CCA CA deficit to worsen modestly, to 3.0 percent of GDP.

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 in 4Q23, presumably because of higher risk perceptions in the aftermath of the Sep formal loss of Nagorno-Karabakh to Azerbaijan. Georgia has registered its lowest CA deficit on record supported by much steadier (than peers) monetary inflows from Russia. Azerbaijan unsurprisingly continues to enjoy large CA surpluses, while Tajikistan, perhaps unexpectedly, although not to us, has posted its 4th annual CA surplus in a row.

The switch back to CA deficits has weighed on FX reserves and resulted in a worrying deterioration of FX reserve import cover, which has now fallen to the lowest in a decade. This could be aggravated, in particular in the case of Uzbekistan and Tajikistan, by an even sharper decline in remittances from Russia should cross-border labor flows become impeded in the aftermath of the terror attack in Moscow.

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