ING: Azerbaijan least vulnerable to external shocks among CIS-4 economies

The baseline scenario for monetary policy development and national currency dynamics in the CIS-4 region (Azerbaijan, Armenia, Kazakhstan, Uzbekistan) continues to be positive and relies on domestic economic factors, Report informs citing an analytical review by Dmitry Dolgin, Chief Economist for Russia and the CIS at ING.

"Since the outbreak of Middle East tensions, the CIS-4 has weathered higher volatility, rising global inflation expectations and tighter core rates, easing some of our initial concerns. A gradual deterioration in ING's global base case, or stabilisation, should therefore be broadly neutral for the regional outlook. Higher energy and freight costs lift imported inflation, but CIS-4 currencies, so far resilient to tighter global rates, should keep policy responses country-specific.

Kazakhstan and Uzbekistan still have room for cautious monetary easing as inflation falls from high bases and strong currencies dampen external cost pressures. The tenge has strengthened 11% since the Iran war began, supported by capital inflows, while the backlog of state FX sales provides a medium-term cushion. The soum has gained 2% and should benefit from a catch-up in gold exports, supporting FX in the medium term.

Kazakhstan's inflation has slowed 3ppt this year to 9.3% year-on-year, allowing the National Bank of Kazakhstan to cut the base rate from 18.00% to 16.25%. Uzbekistan's inflation fell almost 1ppt to 6.4%, while its policy rate remains at 14.00%. Meanwhile, inflation remains above both 5% targets, which, combined with domestic demand-side pressures, limits further cuts to 1.0-1.5ppt up to the end of 2027.

Azerbaijan is more stable: higher oil prices reinforce its buffers, while the manat peg limits imported inflation. With CPI within the 4±2% target range, we expect the policy rate to stay at 6.50%.

Armenia remains the hawkish outlier. Tourism and remittance-supported demand has lifted inflation 1ppt this year to 4.3% YoY, above the 3% target. September's 25bp hike to 6.75% appears precautionary, but inflation approaching 5% could warrant another small move," reads the article.

"As the global context this year has a poor track record in fulfilling the base case or optimistic expectations, an alternative and more challenging scenario should be considered. A further spike in commodity prices, which would bring stronger inflation and materially higher core rates, would likely put CIS resilience to a test, with CIS macro sensitivities back in focus.

Higher energy prices. Each additional $10/bbl could lift annual exports by 2-4% of GDP in Azerbaijan and Kazakhstan, although the FX effect is constrained by Azerbaijan's peg and Kazakhstan's export volumes and dividend-outflow dynamics. For Armenia and Uzbekistan, it would add around 0.5% of GDP to import costs.

Imported inflation. Global food prices are already 6% higher YoY. We estimate that each 10% increase could add around 1ppt to the inflation trend in Kazakhstan and Uzbekistan and 1.5-2.0ppt in Armenia and Azerbaijan. Broader exposure to imports from developed markets and the Middle East ranges from 26% in Armenia and 35% in Kazakhstan and Uzbekistan to around 45% in Azerbaijan.

Higher core yields would weaken carry-driven support for the tenge and soum, reducing their insulation from imported inflation. But domestic buffers argue against an indiscriminate sell-off: Kazakhstan has high real rates and a backlog of state FX sales; Uzbekistan will be catching up on delayed gold exports; Armenia can fall back on its remittance inflows and comfortable reserves; and Azerbaijan can rely on its exceptional sovereign assets.

In an adverse global scenario, we therefore see 1-2 ppt upside risk to our medium-term inflation outlook. The cost-driven nature of the shock may not require an immediate policy response, but central banks may need to protect real rates: Armenia could tighten further, Kazakhstan and Uzbekistan have less room to cut, and Azerbaijan's reluctance to hike could be challenged," the author wrote.