"US tariffs pose limited direct effect but indirect risks for Central Asia and Caucasus region banks and corporates", APA reports, citing the international rating agency Moody’s.
The tariffs' direct economic impact on countries in the region will be limited. Along with the tariffs being moderate, the US accounts for only a small fraction of the countries' total exports, most of which will avoid the new tariffs. For instance, according to Kazakhstan’s Trade Ministry, more than 90% of the country’s exports to the US comprise crude oil, uranium, silver and other raw materials, which are exempt from tariffs.
Nonetheless, an escalating trade war between large economies would pose broader economic challenges for banks and corporates in the region through three main risk channels: trade; weakening confidence and macroeconomic conditions; and financial markets. In particular, low prices for oil and other commodities, potential trade disruptions, currency volatility, reduced investment inflows, inflationary pressures,tighter credit conditions and sector-specific effects would weaken the performance of certain companies. This would hinder local banks' loan growth, weaken asset quality and strain their profitability.
Conversely, the shift in global trade flows could create regional opportunities, such as more favourable pricing on local markets for some goods such as various equipment, metals and building materials, that may be redirected from the US market. A global trade war ignited by the sweeping US import tariffs could also push affected countries to seek new trading partners, potentially increasing interest in the resource-rich Central Asia and Caucasus region. The region also has significant transport and logistics potential, as a link between north and south, and east and west. In particular, the cargo rail sectors in Kazakhstan and Azerbaijan could get a boost from rail transit operations between Asia and Europe. The boost could drive up investment and the need for new bank lending in attractive and rapidly growing sectors. However, risks remain high amid the heightened economic uncertainty and volatility.
Low oil prices primarily affect the oil and gas sectors in Azerbaijan and Kazakhstan by reducing revenues and profitability, as well as investment in new projects and exploration. While local banks are not directly exposed to large state-owned oil companies, the slowdown in the oil sector could affect the broader non-oil economy, hitting banks that have become increasingly exposed to small and medium-sized enterprises, and the retail sector.
In recent years, however, both countries have made substantial progress in diversifying their economies and bolstering their reserve buffers. These initiatives are vital for reducing their dependence on primary commodities and enhancing their economic resilience. Both countries proved such resilience through the pandemic shock, when the average oil price fell to $40 a barrel in 2020.
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