S&P: Central Asia, South Caucasus banking sector stability not at risk in 2025

The international rating agency S&P Global doesn't expect significant risks to the stability of the banking sector of the countries of Central Asia and the South Caucasus in 2025, even in the event of a ceasefire between Russia and Ukraine, Report informs referring to the S&P website.

A hypothetical end to hostilities will have a limited direct impact on the region's economies and their banking systems. Despite possible slowdown in economic growth, reduction in remittances, and decrease in trade flows, according to S&P forecasts, the financial sector will maintain stability and continue to support the region's economy.

According to the agency's estimates, the macroeconomic consequences will be weak, at least in the initial stage. S&P does not expect a significant and rapid outflow of migrants, investments, and capital from Central Asia and the Caucasus after a possible ceasefire. This should minimize economic volatility, the update says.

"Population movements are unlikely to be significant. Positive growth effects are likely to persist albeit at moderated levels. The arrival of migrants and visitors to Central Asia and the Caucasus, along with business relocations, boosted sectors such as information and communications technology (ICT), logistics, financial services, hospitality, and trade. For example, several thousand businesses owned by Russian citizens have been registered in Georgia since 2022. In Kazakhstan, the number of Russian companies in the ICT sector grew sevenfold compared to 2021, and make up 75% of the sector as of early 2024, according to Halyk Finance. In a ceasefire scenario, we expect many businesses would continue to operate abroad given the likely prolonged geopolitical uncertainty and enduring political and economic ties between Russia and its immediate neighbors," S&P noted.

The agency's forecasts for economic growth already partially account for the normalization of the situation after the 2022 surge. GDP growth rates in the Caucasus and Central Asian countries are expected to slow down in 2025-2027 compared to 2022-2024, as the effect of temporary increases in trade, remittances, and capital inflows from Russia gradually weakens.

S&P predicts that GDP growth rates in Georgia and Armenia will decrease by almost half compared to 2022-2024, but will remain stable. GDP growth rates this year will be 2% in Azerbaijan, almost 4% in Kazakhstan, slightly over 5% in Uzbekistan, about 4% in Armenia, and 5% in Georgia.

The agency expects a decrease in remittance volumes to the region. In 2022, their surge helped improve the current account balance by an average of 6.5 percentage points for Uzbekistan, Georgia, Armenia, Azerbaijan, Kazakhstan, and Tajikistan.

Azerbaijan and Kazakhstan also benefited from high oil prices, but in 2023, the effect of remittances weakened due to tighter banking controls and the redirection of Russian funds to other jurisdictions. In 2024, there was a new increase in transfers, especially in Uzbekistan and Armenia, however, according to S&P forecasts, this process will normalize in the future.

Nevertheless, remittances from migrants (predominantly from Russia) will remain an important source of household income, especially in Uzbekistan, Georgia, and Armenia. Regarding trade, further reorientation of flows will depend on the timing and extent of sanctions relief against Russia, according to S&P.

"Since the Russia-Ukraine war started, a significant portion of European export flows to Russia have diverted to Central Asia and the Caucasus. The impact on these countries' current accounts has been broadly neutral because the higher-valued-added imports were re-exported to Russia. However, these trade flows declined markedly in 2024, particularly for Kazakhstan, due to more stringent sanctions and domestic compliance requirements. Overall, increased investment in transport and logistics, trade services, and local production should continue to provide longer-term economic gains for Central Asia and the Caucasus even if trade flows to Russia decline," reads the update.

In addition to the moderate impact on economic growth in the region, among the main possible consequences for the banking sector, S&P identified a decrease in the inflow of non-resident deposits and capital, normalization of the growth rate of banks' commission income, and the maintenance of stability in lending rates.

"Inflows of non-resident deposits, primarily from Russia, to the region have been gradually diminishing after their 2022-2023 peak. Exceptionally strong growth in fees and commissions related to currency exchange and transfers in 2022-2023 has been gradually diminishing; this normalization could accelerate slightly in 2025. Non-interest income will revert to normal levels."

Among the possible channels of influence, the limited impact on housing prices is also emphasized. The agency notes that over the past three years, housing prices in the region have increased, including due to the influx of Russian migrants. However, most of the newcomers preferred to rent housing, which led to an increase in rental rates, especially in Georgia and Armenia.

S&P does not expect sharp changes in the real estate market in the event of a ceasefire, since demand for rent will remain high, and a significant outflow of migrants is not expected.