Dependence On Energy Imports And Remittances Key Vulnerabilities

BMI View : The Tajik economy remains highly dependent on imports (especially energy), remittances inflows, and one export commodity - aluminium. As such, fluctuations in aluminium prices and the Russian economy (its key source of remittances inflows) remain key vulnerabilities to Tajikistan.

Tajikistan remains highly dependent on one commodity export - aluminium, comprising 55% of total exports, and volatility in aluminium prices constitutes a key risk to its macroeconomic landscape. While ongoing aluminium warehousing on the back of financing deals will likely prop up prices in the short term, longer-term prospects for prices look subdued due to increasing global oversupply, coupled with the weakening investment story in China, the main consumer of aluminium, and a normalisation of US monetary policy, among other factors. As such, our Commodities team has recently revised downward out forecast for the benchmark LME Aluminium three-month contracts to average US$1,850/tonne from US$1,900/tonne previously in 2014 and to US$1,950/tonne from US$2,000/tonne previously in 2015.

As prices are the primary driver of production volumes, the modest increase in prices that we project should translate in a more moderate contribution of aluminium exports to overall export growth in 2014-2015. Nevertheless, we forecast slightly more robust overall export growth than aluminium prices would warrant - of 7.3% in 2014, slightly above an estimated 7.0% for 2013, and 7.5% in 2015. The main reason for our sanguine growth projections is Tajikistan's prospects of joining the Russia-Belarus-Kazakhstan customs union by end-2014, with Armenia and Kyrgyzstan also in line to join over the next two years, as the elimination of tariffs is likely to bolster Tajikistan's agricultural and cotton exports.

Aluminium Prices Key For Export Growth
Tajikistan - Aluminium LME 3Month, US$/tonne (LHS) And Domestic Aluminium Production, tn (000)

BMI View : The Tajik economy remains highly dependent on imports (especially energy), remittances inflows, and one export commodity - aluminium. As such, fluctuations in aluminium prices and the Russian economy (its key source of remittances inflows) remain key vulnerabilities to Tajikistan.

Tajikistan remains highly dependent on one commodity export - aluminium, comprising 55% of total exports, and volatility in aluminium prices constitutes a key risk to its macroeconomic landscape. While ongoing aluminium warehousing on the back of financing deals will likely prop up prices in the short term, longer-term prospects for prices look subdued due to increasing global oversupply, coupled with the weakening investment story in China, the main consumer of aluminium, and a normalisation of US monetary policy, among other factors. As such, our Commodities team has recently revised downward out forecast for the benchmark LME Aluminium three-month contracts to average US$1,850/tonne from US$1,900/tonne previously in 2014 and to US$1,950/tonne from US$2,000/tonne previously in 2015.

Aluminium Prices Key For Export Growth
Tajikistan - Aluminium LME 3Month, US$/tonne (LHS) And Domestic Aluminium Production, tn (000)

As prices are the primary driver of production volumes, the modest increase in prices that we project should translate in a more moderate contribution of aluminium exports to overall export growth in 2014-2015. Nevertheless, we forecast slightly more robust overall export growth than aluminium prices would warrant - of 7.3% in 2014, slightly above an estimated 7.0% for 2013, and 7.5% in 2015. The main reason for our sanguine growth projections is Tajikistan's prospects of joining the Russia-Belarus-Kazakhstan customs union by end-2014, with Armenia and Kyrgyzstan also in line to join over the next two years, as the elimination of tariffs is likely to bolster Tajikistan's agricultural and cotton exports.

However, we do not expect the customs union arrangement to improve Tajikistan's trade balance, as it is likely that the tariff elimination will usher in cheaper and higher-quality Russian goods to flood the domestic market. This will further ramp up imports, which already account for 75% of total GDP in 2012. The country's underdeveloped manufacturing base underpins its high dependence on basic imports, such as clothes, footwear, flour, grains, and energy (mainly oil from Russia), and the customs union will further impede Tajikistan's prospects of developing its productive capacities.

Indeed, the country's ability to achieve energy independence remains limited despite the recently completed coal-fired Heating Power Plant Dushanbe-2. With a second unit commissioned for the Dushanbe-2 plant later in 2014, the government has claimed that the power plant alone will meet 40% of Tajikistan's heating and electricity needs. However, there are a lot of controversies surrounding the plant, not least because of the heavy pollution it has inflicted on the nearby population, which forced the government to halt production a few days after the plant began operations early January. While the plant has started operating again, we remain sceptical that it will see imports reduced, as the country needs to import the coal that powers the plant.

Similarly, we remain sceptical of the government's plans to develop hydropower generation capacity. The most famous of these plans is the Rogun dam, designed to be 335 metres high and cost around US$6bn to construct, almost as much as the entire country's GDP in 2012. However, opposition from neighbouring Uzbekistan, coupled with the bureaucratic inefficiencies characteristic of the country reduce the chances for this dam to be completed by 2015.

Taking into account these factors, overall we forecast persistently high import growth rates over the next few years, at 7.0% in 2014 and 7.2% in 2015, before accelerating further to 7.5% in 2016. This will translate into increasingly negative contribution from net exports to GDP, with GDP poised to arrive at 5.9% in 2014 and 5.8% in 2015. The main drivers of growth will remain government spending on infrastructure and social transfers, propping the gross fixed capital formation and private consumption components of GDP.

Remittances Propping Massive Trade Deficit
Tajikistan - Migrant Remittances Inflows And Goods Imports, US$mn

Nevertheless, the country's staggering trade deficit will continue to rely on workers' remittances from abroad, especially Russia. Remittances have helped offset around 86% of the trade deficit in 2011, while in 2012 remittances inflows reached 47% of GDP, the highest level in the around adjusted for GDP. With savings sent from expats working in Russia effectively being the lifeblood of the Tajik economy, a key vulnerability of the latter remains its exposure to the Russian economy. However, while we project economic growth in Russia to average 2.4% over the next five years, against almost twice the annual average rate of 7.1% over the five years prior to 2009, we do not expect the slowdown to result in an increase of unemployment that would see Tajik workers expelled from Russia.

Risk To Outlook

The main risk to our forecast stem from downside risks to aluminium prices. It is possible that they head lower in 2014-2015 due to larger oversupply of the industrial metal than we currently expect. In addition, a more pronounced slowdown in Russia's economy might see Tajik workers expelled, which would stem remittances inflows, which might seriously undermine Tajikistan's ability to cover its sizeable import needs.

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Related sectors of this article: Economy, Economic Activity
Geography: Tajikistan
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