Russia has been particularly exposed to the deterioration in market sentiments in the wake of the Asian financial crisis. There has been intense financial pressures following fiscal imbalances, significant short-term liabilities to foreign investors and delays in the implementation of structural reforms. On several occasions, Russia had to hike up interest rates to defend the rouble amid growing difficulties in rolling over short-term treasury bills held by non-residents, continuing capital flight and declining oil export revenues. Russia has also been unable to resolve its budget deficit and revenue collection problems. New policy commitments have been made and additional large scale financial support has been secured from the IMF. Despite this however, there has been no restoration of market confidence. The uncertainty surrounding the financial situation had adversely affected the growth performance and prospects for Russia. GDP growth for 1998 is projected to contract to 6% in 1998 (1997: 0.9%).


The current economic difficulties faced by Russia has also affected its consumer prices. The devaluation of the rouble led to immediate inflationary pressures. Inflation rose to 15% in August 1998 against 2% in July and for the year as a whole, is expected to reach 48% (1997: 15%). The situation has been further aggravated by monopolistic pricing practices in trade, increase in customs duty and value added tax (VAT) and the introduction of sales tax in certain regions.

Balance of Payments

Foreign trade account for only a small proportion of the national economy. Russian exports represent expected to remain the same at 3.9% in 1999 due to strong domestic demand the on-going economic reforms and improving conditions in the world economy. Hong Kong SAR's economy is expected to improve from negative growth to zero in 1999 as economic recovery begins to take effect in other Asian countries. External trade in both goods and services and domestic demand should gradually pick up. Property prices are also expected to stabilise with intensified building activity particularly in the public sector.

The prospects for other developing countries in 1999 remains optimistic with expectations of continued improvements in the Asian economies following the aftermath of the crisis and the general recovery in world growth. Economic growth for the Middle East is expected to improve to 2.7% in 1999. However the decline in oil prices will continue to have a dampening effect in a number of oil producing countries. Efforts to counter this decline is expected to be taken through revenue raising and expenditure reducing measures to ensure medium term external and fiscal sustainability. In Africa growth is expected to improve to 4.7% in 1999 due to improved agricultural production, the improvements of growth in Europe and the economic measures being put in place by a number of African countries. In Algeria the recovery in agricultural output in 1998 is expected to expand well into 1999. This also applies to Morocco. In Tunisia the expansion of manufacturing production driven by the recovery in import demand in European markets are expected to improve the growth rate for the country for 1999. 

The performance of the Asian countries and Russia is expected to have an impact on the growth prospects of the Latin American countries in 1999. Mexico is forecast to grow at 5% in 1999 with inflation rates declining further to 10% while in Argentina, growth is projected to slowdown to 4.5% with inflation rates increasing to 2.1. Brazil may witness an increase in growth to 3% in 1999 and a rise in inflation rates to 6%. In Venezuela, the structural reforms pursued vigorously are expected to accelerate growth to 3.8% in 1999 while reducing inflationary rates to 18%. Chile is projected to experience further slowdown in growth to 4% in 1998 and inflation is projected to be maintained at 4%.

In South Asia, growth is projected to improve to 6% in 1999 with India, Pakistan and Bangladesh expected to show improvements in the growth given anticipates signs of recovery in Asia.