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ARMENIA MAINTAINS ROBUST EXPORT-LED ECONOMIC GROWTH IN Q1
Global Insight
July 17, 2013
by Lilit Gevorgyan
Armenia's real GDP expanded by 7.5% year-on-year (y/y) in the first
quarter of 2013, compared to a 6.2% y/y increase in the last three
months of 2012. According to the final estimate by the National
Statistics Office of Armenia (NSO), the economic growth was mainly
driven by double-digit gains in exports, which was accompanied by a
strong positive impulse from industrial production.
Encouraging start to the year
Armenian real GDP posted robust growth in the first quarter of 2013.
According to the final estimate by the Armenian National Statistics
Office (NSO), the economy expanded by 7.5%y/y, compared to 6.2% y/y
and 9.1% y/y in the fourth and third quarters of 2012, respectively.
The breakdown of national accounts data reveals that net exports
and government spending, on the demand side, and strong industrial
sector performance, on the value-added, were the best performers
in the first quarter. Commenting on the news, the Armenian Prime
Minister Tigran Sargsyan was quoted as saying that the three-fold
growth of exports compared to imports, was partially a result of his
government's pursuit to develop an export-oriented industrial policy.
Exports and government spending drive Q1 growth
The breakdown of expenditure components of real GDP reveals that
the positive impulse came from all sectors, with exception of fixed
investments. Exports performed particularly well, posting double-digit
growth at 11.4% y/y in the first three months of 2013, following 7.9%
y/y and 3.4% y/y gains in the fourth and third quarters of 2012.
Conversely, imports continued to contract, down by 1.0% y/y compared
to losses of 0.8% y/y and 9.1% y/y in the fourth and third quarters
of 2012.
Both household and government spending spiked up in early 2013. As
expected, in the run-up to April's presidential election government
spending grew by 9.3% y/y, preceded by an 8.1% annual decline in the
fourth and gains of 8.0% y/y in the third quarter of 2012. Meanwhile,
private consumption continued on a strong but slowing upward trajectory
when it rose by 7.0 % y/y in the first quarter. This was preceded by
gains of 7.6% y/y at end-2012 and 12.6% y/y in the third quarter. A
closer look at the national accounts data also revealed that Armenian
consumers appeared to spend more robustly on services in the first
quarter, with retail sales growing by a more modest 3.3%y/y.
More cautious spending on goods could help to explain the surprising
drop in imports in the first quarter, but we suspect domestic producers
took greater advantage of the consumers' relatively healthy willingness
to spend.
Conversely and more worryingly, fixed investment fell significantly
by 5.4%, y/y in the first quarter of 2013, following a 2.8% y/y gain
in the last three months of 2012 and nearly matching a 5.5% y/y growth
in the third quarter of the year. A faltering fixed investment sector
could be an early signal of deteriorating confidence among Armenian
firms over the prospects of the economy in the coming months, as they
remain cautious about demand both at home and abroad. The drop in
investment also appeared to contribute to floundering import demand
in early 2013.
Value-added sectors deliver mixed message
Armenia's industrial production grew by 7.3% y/y during January-March
2013, providing a strong positive impulse to economic activity on the
supply side. In particular, the manufacturing sector grew by 6.7 y/y
in the first quarter, against 5.3% and 3.4% annual contraction in the
fourth and third quarters of 2012. Mining and quarrying also posted
a healthy 5.9% y/y gain, but this was lower than the double-digit
growth rates in the previous four quarters, particularly when compared
to 24.5% y/y expansion in the second quarter of 2012. The relative
decline in mining output highlights challenging demand conditions both
domestically and especially abroad for the sector. Agricultural sector,
a key value-added component for Armenia's economy, also contributed
to first-quarter growth, as it expanded by 2.3% y/y.
Meanwhile the construction sector reported a dramatic fall of 14.8%
y/y in the first quarter, the first decline following gains in the
previous four quarters. The slump in housing demand and high input
costs are the main reasons behind a sharp fall in the construction
sector. The slowdown in the sector does not come as a surprise,
as it follows years of rapid expansion.
Outlook and implications
Armenia had a good start to the year, but maintaining the economic
growth momentum will be a challenge. We continue to believe that the
government's 6.2% annual growth target for 2013 is optimistic and is
likely to average around 4%. The International Monetary Fund (IMF)
believes that the Armenian economy will grow by 5.1% in 2013; 5.3%
in 2014 and 5.5% in 2015-16. In its recent review of the Armenian
economy, the Fund commended Armenia's economic policies but also
warned of the country's vulnerability of external shocks as well
as the need to improve the business environment to attract more
investment. The government has pledged to continue with its efforts to
assist export-oriented industries by providing affordable credit and
tax breaks. Furthermore, a weaker dram is expected to boost exports
and curb imports. Still, Armenian exporters, especially from metal
industry, continue facing weak external demand.
The government spending, another strong performing sector in the first
quarter of 2013, could slow down in the coming months. This is because
the spike in spending on public projects at the beginning of the year
was potentially linked to crucial presidential elections. With the
president sworn in for the second term and the political opposition
movement noticeably weak, the new Armenian government is under less
pressure to undertake popular spending programmes.
Another potential area for weaker economic growth is private
consumption, which is also likely to lose steam following domestic
gas and electricity tariff increase effective from 7 July. Armenia's
Public Services Regulatory Commission (PSRC) raised the tariffs by
18% for gas and 27% for electricity, following a 50% increase in
Russian natural gas import prices. The government has since decided
to subside 30% of the household gas tariff, to mitigate the impact
on households' real disposable income. However, even with the partial
transmission of the significant price increase by Russian- controlled
energy company Armrusgasprom, Armenian households are likely to avoid
major purchases in the coming months. We also expect the increase in
energy and gas prices to lead to higher inflation, which could worsen
due to poor harvest results, following bad weather conditions in the
April-May 2013. This could also further curtail consumer spending in
the coming months.
Meanwhile, the prospects of recovery in fixed investment remain
uncertain given that the presidential election failed to bring
any significant change in government policies in terms of improving
business environment. The Armenian economy remains dominated by mostly
government-linked large businesses, hampering the entry of independent
investors into the country. Finally, the construction sector's severe
underperformance is also worrying, indicating problems with access
to affordable credit, which is limiting demand for new housing in
particular.
Against this backdrop, we believe that Armenian economy is unlikely
to hit the government's 6.2% y/y growth target in 2013, especially if
external demand conditions worsen in the coming months. The Armenian
authorities need to continue with their efforts of diversifying
the economy to limit vulnerability to external market developments
but more importantly take earnest measures to remove corrupt and
nepotistic practices that crowd out small and medium size businesses,
which ultimately takes a toll on the country's economic activity.
From: Emil Lazarian | Ararat NewsPress
Global Insight
July 17, 2013
by Lilit Gevorgyan
Armenia's real GDP expanded by 7.5% year-on-year (y/y) in the first
quarter of 2013, compared to a 6.2% y/y increase in the last three
months of 2012. According to the final estimate by the National
Statistics Office of Armenia (NSO), the economic growth was mainly
driven by double-digit gains in exports, which was accompanied by a
strong positive impulse from industrial production.
Encouraging start to the year
Armenian real GDP posted robust growth in the first quarter of 2013.
According to the final estimate by the Armenian National Statistics
Office (NSO), the economy expanded by 7.5%y/y, compared to 6.2% y/y
and 9.1% y/y in the fourth and third quarters of 2012, respectively.
The breakdown of national accounts data reveals that net exports
and government spending, on the demand side, and strong industrial
sector performance, on the value-added, were the best performers
in the first quarter. Commenting on the news, the Armenian Prime
Minister Tigran Sargsyan was quoted as saying that the three-fold
growth of exports compared to imports, was partially a result of his
government's pursuit to develop an export-oriented industrial policy.
Exports and government spending drive Q1 growth
The breakdown of expenditure components of real GDP reveals that
the positive impulse came from all sectors, with exception of fixed
investments. Exports performed particularly well, posting double-digit
growth at 11.4% y/y in the first three months of 2013, following 7.9%
y/y and 3.4% y/y gains in the fourth and third quarters of 2012.
Conversely, imports continued to contract, down by 1.0% y/y compared
to losses of 0.8% y/y and 9.1% y/y in the fourth and third quarters
of 2012.
Both household and government spending spiked up in early 2013. As
expected, in the run-up to April's presidential election government
spending grew by 9.3% y/y, preceded by an 8.1% annual decline in the
fourth and gains of 8.0% y/y in the third quarter of 2012. Meanwhile,
private consumption continued on a strong but slowing upward trajectory
when it rose by 7.0 % y/y in the first quarter. This was preceded by
gains of 7.6% y/y at end-2012 and 12.6% y/y in the third quarter. A
closer look at the national accounts data also revealed that Armenian
consumers appeared to spend more robustly on services in the first
quarter, with retail sales growing by a more modest 3.3%y/y.
More cautious spending on goods could help to explain the surprising
drop in imports in the first quarter, but we suspect domestic producers
took greater advantage of the consumers' relatively healthy willingness
to spend.
Conversely and more worryingly, fixed investment fell significantly
by 5.4%, y/y in the first quarter of 2013, following a 2.8% y/y gain
in the last three months of 2012 and nearly matching a 5.5% y/y growth
in the third quarter of the year. A faltering fixed investment sector
could be an early signal of deteriorating confidence among Armenian
firms over the prospects of the economy in the coming months, as they
remain cautious about demand both at home and abroad. The drop in
investment also appeared to contribute to floundering import demand
in early 2013.
Value-added sectors deliver mixed message
Armenia's industrial production grew by 7.3% y/y during January-March
2013, providing a strong positive impulse to economic activity on the
supply side. In particular, the manufacturing sector grew by 6.7 y/y
in the first quarter, against 5.3% and 3.4% annual contraction in the
fourth and third quarters of 2012. Mining and quarrying also posted
a healthy 5.9% y/y gain, but this was lower than the double-digit
growth rates in the previous four quarters, particularly when compared
to 24.5% y/y expansion in the second quarter of 2012. The relative
decline in mining output highlights challenging demand conditions both
domestically and especially abroad for the sector. Agricultural sector,
a key value-added component for Armenia's economy, also contributed
to first-quarter growth, as it expanded by 2.3% y/y.
Meanwhile the construction sector reported a dramatic fall of 14.8%
y/y in the first quarter, the first decline following gains in the
previous four quarters. The slump in housing demand and high input
costs are the main reasons behind a sharp fall in the construction
sector. The slowdown in the sector does not come as a surprise,
as it follows years of rapid expansion.
Outlook and implications
Armenia had a good start to the year, but maintaining the economic
growth momentum will be a challenge. We continue to believe that the
government's 6.2% annual growth target for 2013 is optimistic and is
likely to average around 4%. The International Monetary Fund (IMF)
believes that the Armenian economy will grow by 5.1% in 2013; 5.3%
in 2014 and 5.5% in 2015-16. In its recent review of the Armenian
economy, the Fund commended Armenia's economic policies but also
warned of the country's vulnerability of external shocks as well
as the need to improve the business environment to attract more
investment. The government has pledged to continue with its efforts to
assist export-oriented industries by providing affordable credit and
tax breaks. Furthermore, a weaker dram is expected to boost exports
and curb imports. Still, Armenian exporters, especially from metal
industry, continue facing weak external demand.
The government spending, another strong performing sector in the first
quarter of 2013, could slow down in the coming months. This is because
the spike in spending on public projects at the beginning of the year
was potentially linked to crucial presidential elections. With the
president sworn in for the second term and the political opposition
movement noticeably weak, the new Armenian government is under less
pressure to undertake popular spending programmes.
Another potential area for weaker economic growth is private
consumption, which is also likely to lose steam following domestic
gas and electricity tariff increase effective from 7 July. Armenia's
Public Services Regulatory Commission (PSRC) raised the tariffs by
18% for gas and 27% for electricity, following a 50% increase in
Russian natural gas import prices. The government has since decided
to subside 30% of the household gas tariff, to mitigate the impact
on households' real disposable income. However, even with the partial
transmission of the significant price increase by Russian- controlled
energy company Armrusgasprom, Armenian households are likely to avoid
major purchases in the coming months. We also expect the increase in
energy and gas prices to lead to higher inflation, which could worsen
due to poor harvest results, following bad weather conditions in the
April-May 2013. This could also further curtail consumer spending in
the coming months.
Meanwhile, the prospects of recovery in fixed investment remain
uncertain given that the presidential election failed to bring
any significant change in government policies in terms of improving
business environment. The Armenian economy remains dominated by mostly
government-linked large businesses, hampering the entry of independent
investors into the country. Finally, the construction sector's severe
underperformance is also worrying, indicating problems with access
to affordable credit, which is limiting demand for new housing in
particular.
Against this backdrop, we believe that Armenian economy is unlikely
to hit the government's 6.2% y/y growth target in 2013, especially if
external demand conditions worsen in the coming months. The Armenian
authorities need to continue with their efforts of diversifying
the economy to limit vulnerability to external market developments
but more importantly take earnest measures to remove corrupt and
nepotistic practices that crowd out small and medium size businesses,
which ultimately takes a toll on the country's economic activity.
From: Emil Lazarian | Ararat NewsPress