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Caucasus Business Forecast Report
January 1, 2013 Tuesday
Raising Our Longer-Term Growth Outlook
BMI View: Economic growth in Armenia will slow from 2011-2012 levels
as the favourable net export contribution to growth begin s to unwind.
We believe that robust economic growth is being driven by a sharp
decline in imports. However, as fixed investment begins to pick up
again, capital goods imports will unwind these favourable statistical
contributions to Armenia's economy. Over the longer term, we have
raised our growth forecast as the economy continues to emerge from a
very low base. Key will be whether major military hostilities with
Azerbaijan can be avoided over the next few years.
Economic growth in Armenia is set to adjust moderately lower over the
next couple of years, as a recovery in fixed capital investment
remains elusive and the robust net export contribution to headline
real GDP growth is set to unwind. Having said that, we have raised our
longer-term growth proje ctions for Armenia ' s economy in line with
our generally positive outlook on the country ' s external accounts.
Having previously raised our 2012 real GDP growth forecast to 4.3% (
see our online service, July 11, ' Major Risks Remain Despite Upward
Growth Revision ' ), we forecast economic growth to slow to 3.4% in
2013, and gradually return to 4.0% by 2016. Further ahead, we see
growth remaining comfortably above 4.0%, peaking at 5.1% in 2018 on
account of robust export growth, an improvement in household
consumption and crucially, gross fixed capital formation growth.
A significant divergence in the real growth of exports and imports of
goods and services in Armenia has helped to push overall GDP growth
firmly higher in recent quarters. Headline GDP growth was revised up
for the first quarter of 2012 from 4.7% year-on-year (y-o-y) to 5.6%,
and latest data from Armenia's statistical institute (Armstat) show
that growth jumped in the second quarter to 6.6% y-o-y. Primarily, the
latest surge in real GDP growth has been driven by average real export
growth of 17.4% y-o-y in the first two quarters of 2012, compared with
an average contraction in imports of 1.2% y-o-y for the same period.
Already, average real GDP growth in H112 on an annual basis, came in
substantially higher than during the equivalent period in 2011.
Headline GDP growth averaged 6.1% y-o-y in H112, up from 2.7% in H111,
placing upside risks to our full-year 4.3% economic growth projection.
Nevertheless, we currently forecast a gradual pick-up in import growth
in the second half of 2012, which should see headline growth come
within range of our full-year forecast.
Strong Growth Figures Are Misleading
The strong performance of the Armenian economy in recent quarters is
directly linked to the unabated decline in fixed investment levels,
which have substantially reduced local demand for capital goods
imports into the economy. Indeed, imports of goods and services
continued their recent decline, despite signs that final household
consumption growth has accelerated in recent quarters ( see chart).
Crucially, however, we observe that gross fixed capital formation
(GFCF) growth has remained firmly negative in real terms on a y-o-y
basis - with the exception of H110 - ever since the onset of the
global recession, during which Armenia's economy contracted by a
whopping 14.1% in 2009. Much of this ongoing decline in fixed
investment is down to the implosion of Armenia's construction sector,
which has shown few signs of a recovery thus far.
The volume of construction-related loans to the private sector have
remained mostly flat, measuring AMD100,402.9mn in August 2012, while
consumer loans, trade credit and loans to industry continued to expand
at a rapid pace since the economic contraction of 2009. This further
strengthens our long-held belief that the Armenian economy is
predominantly driven by goods exports to Russia, while household
consumption is firmly underpinned by remittance inflows. However, we
will be watching for a gradual resumption in construction-linked fixed
investment growth over the coming quarters.
For the time being, we forecast another year of negative gross fixed
capital formation growth (-5.0%), before fixed investment returns to
positive growth for the first time in five years at 4.0% in 2013. This
will coincide with a gradual pick-up in import growth to 4.0% from
zero growth in 2012 (in real terms), while we see exports of goods and
services growth declining to 6.0% in 2013, down from a projected 12.0%
in 2012.
Regional Tensions Biggest Risk To Outlook
We note that our outlook on Armenia's economy is predicated on
avoiding a resumption of military hostilities beyond the ongoing
border skirmishes with Azerbaijan over the coming years. For the time
being, we maintain that a war with Azerbaijan over the breakaway
Nagorno-Karabakh region, which Armenia has controlled since the war
ended in 1994, is not inevitable. However, tensions have been rising
and the risk of a miscalculated response that would eventually lead to
another war between both sides is at its highest since the ceasefire
was signed 18 years ago.
Both sides are better armed than during the collapse of the Soviet
Union and a full-blown military confrontation would have unforeseeable
economic and social consequences. As a result, we would have to
revisit the majority of our economic forecasts for Armenia in the
event of major military hostilities with Azerbaijan.
January 1, 2013 Tuesday
Raising Our Longer-Term Growth Outlook
BMI View: Economic growth in Armenia will slow from 2011-2012 levels
as the favourable net export contribution to growth begin s to unwind.
We believe that robust economic growth is being driven by a sharp
decline in imports. However, as fixed investment begins to pick up
again, capital goods imports will unwind these favourable statistical
contributions to Armenia's economy. Over the longer term, we have
raised our growth forecast as the economy continues to emerge from a
very low base. Key will be whether major military hostilities with
Azerbaijan can be avoided over the next few years.
Economic growth in Armenia is set to adjust moderately lower over the
next couple of years, as a recovery in fixed capital investment
remains elusive and the robust net export contribution to headline
real GDP growth is set to unwind. Having said that, we have raised our
longer-term growth proje ctions for Armenia ' s economy in line with
our generally positive outlook on the country ' s external accounts.
Having previously raised our 2012 real GDP growth forecast to 4.3% (
see our online service, July 11, ' Major Risks Remain Despite Upward
Growth Revision ' ), we forecast economic growth to slow to 3.4% in
2013, and gradually return to 4.0% by 2016. Further ahead, we see
growth remaining comfortably above 4.0%, peaking at 5.1% in 2018 on
account of robust export growth, an improvement in household
consumption and crucially, gross fixed capital formation growth.
A significant divergence in the real growth of exports and imports of
goods and services in Armenia has helped to push overall GDP growth
firmly higher in recent quarters. Headline GDP growth was revised up
for the first quarter of 2012 from 4.7% year-on-year (y-o-y) to 5.6%,
and latest data from Armenia's statistical institute (Armstat) show
that growth jumped in the second quarter to 6.6% y-o-y. Primarily, the
latest surge in real GDP growth has been driven by average real export
growth of 17.4% y-o-y in the first two quarters of 2012, compared with
an average contraction in imports of 1.2% y-o-y for the same period.
Already, average real GDP growth in H112 on an annual basis, came in
substantially higher than during the equivalent period in 2011.
Headline GDP growth averaged 6.1% y-o-y in H112, up from 2.7% in H111,
placing upside risks to our full-year 4.3% economic growth projection.
Nevertheless, we currently forecast a gradual pick-up in import growth
in the second half of 2012, which should see headline growth come
within range of our full-year forecast.
Strong Growth Figures Are Misleading
The strong performance of the Armenian economy in recent quarters is
directly linked to the unabated decline in fixed investment levels,
which have substantially reduced local demand for capital goods
imports into the economy. Indeed, imports of goods and services
continued their recent decline, despite signs that final household
consumption growth has accelerated in recent quarters ( see chart).
Crucially, however, we observe that gross fixed capital formation
(GFCF) growth has remained firmly negative in real terms on a y-o-y
basis - with the exception of H110 - ever since the onset of the
global recession, during which Armenia's economy contracted by a
whopping 14.1% in 2009. Much of this ongoing decline in fixed
investment is down to the implosion of Armenia's construction sector,
which has shown few signs of a recovery thus far.
The volume of construction-related loans to the private sector have
remained mostly flat, measuring AMD100,402.9mn in August 2012, while
consumer loans, trade credit and loans to industry continued to expand
at a rapid pace since the economic contraction of 2009. This further
strengthens our long-held belief that the Armenian economy is
predominantly driven by goods exports to Russia, while household
consumption is firmly underpinned by remittance inflows. However, we
will be watching for a gradual resumption in construction-linked fixed
investment growth over the coming quarters.
For the time being, we forecast another year of negative gross fixed
capital formation growth (-5.0%), before fixed investment returns to
positive growth for the first time in five years at 4.0% in 2013. This
will coincide with a gradual pick-up in import growth to 4.0% from
zero growth in 2012 (in real terms), while we see exports of goods and
services growth declining to 6.0% in 2013, down from a projected 12.0%
in 2012.
Regional Tensions Biggest Risk To Outlook
We note that our outlook on Armenia's economy is predicated on
avoiding a resumption of military hostilities beyond the ongoing
border skirmishes with Azerbaijan over the coming years. For the time
being, we maintain that a war with Azerbaijan over the breakaway
Nagorno-Karabakh region, which Armenia has controlled since the war
ended in 1994, is not inevitable. However, tensions have been rising
and the risk of a miscalculated response that would eventually lead to
another war between both sides is at its highest since the ceasefire
was signed 18 years ago.
Both sides are better armed than during the collapse of the Soviet
Union and a full-blown military confrontation would have unforeseeable
economic and social consequences. As a result, we would have to
revisit the majority of our economic forecasts for Armenia in the
event of major military hostilities with Azerbaijan.