TOPIC OF THE WEEK: CA positions firm up in CCA in 3Q24

CAUCASUS / CENTRAL ASIA - Report 10 Jan 2025 by Ivan Tchakarov

The 3Q24 data for our CCA economies, which was published late last year, shows that the regional current account position has continued to improve, although it remains in deficit. In particular, the CA deficit ex-Azerbaijan has come in at 1.7 percent of GDP vs 2.0 percent of GDP in 2Q and 3.1 percent of GDP in 1Q (4-q ma basis). Including the only energy exporter in our sample, Azerbaijan, yields a small surplus of 0.2 percent of GDP (vs. a broadly neutral position in 2Q and a deficit of 0.7 percent of GDP in 1Q).

Three countries registered surpluses, Georgia, Azerbaijan and Tajikistan, although the driving forces for that were markedly different. Georgia benefited from the seasonally strong performance of services, chiefly tourism, which proved resilient to the fraught political backdrop. Azerbaijan has traditionally enjoyed a robust trade surplus, which underpinned the CA surplus, while Tajikistan saw higher-than-anticipated remittances. The latter was also key in driving the much improved CA deficit in Uzbekistan, while in Armenia it was mainly the wider trade gap that led to the widening CA deficit in the quarter.

The broader improvement of external positions has benefited reserve accumulation, with the notable exception of Georgia. This has also manifested itself in some increase of FX reserve import cover for the region as a whole. This is primarily driven by improvements in Uzbekistan and Tajikistan, and the traditionally large FX buffer in Azerbaijan. Armenia and Georgia continue to exhibit low reserves cover, which constitutes a key external risk for these two economies.

I anticipate CAs to vacillate around 2.5 percent of GDP in 2024 and 2025 and see Azerbaijan and Tajikistan remaining in surplus CA positions, with Armenia, Georgia and Uzbekistan continuing to run CA deficits. While I forecast Uzbekistan to continue to face the largest external gap this year, it will be cushioned by the most copious FX reserve cover in the CCA. Armenia and Georgia will need to manage somewhat smaller, if still significant, CA deficits with much thinner FX buffers.

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