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Armenia surpasses 2012 growth target, near-term outlook fairly posit

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  • Armenia surpasses 2012 growth target, near-term outlook fairly posit

    Global Insight
    March 6, 2013


    Armenia surpasses 2012 growth target, near-term outlook fairly positive

    by Lilit Gevorgyan

    Armenian economic activity posted relatively strong growth of 7.2% in
    2012, exceeding the government's 6.3% target for the year.


    Another year for exceeded growth targets

    The Armenian National Statistical Service reported that the real GDP
    (at market prices) increased by 7.2% in 2012 as a whole, an
    improvement from gains of 4.7% in 2011 and 2.2% in 2010. With the GDP
    deflator falling by 1.6% in 2012, nominal GDP expanded by 5.6% in
    2012, down from rises of 8.9% in 2011 and 10% in 2010.

    Moreover, this result exceeds most expectations, coming above our
    latest forecast (4.5%) and the consensus forecast (4.4%), as well as
    the official target rate set by the government (6.3%).

    Armenia's robust economic performance in 2012 was a result of
    continuing strong growth in agricultural and industrial sectors,
    further supported by increased domestic trade volumes. Favourable
    weather conditions, as well as the government's decision to allow use
    of water at minimal and in some cases, no cost, appear to have
    contributed to good harvests. Conversely, expanding mining of metal
    ores production driven by strong external demand was another major
    contributor to Armenia's better than expected economic performance in
    2012. In terms of export profile, good harvest has lessened the need
    for food imports; while the increase in external demand for Armenia's
    metal ores have aided to narrow the trade balance.

    Agriculture and industry drive growth, construction falls again

    A breakdown by sector shows that the important agricultural sector was
    a major contributor to economic growth in 2012, with output from the
    sector rising by 8.6% year-on-year (y/y) in the January-November
    period when compared to a year earlier. As a result of the
    exceptionally good harvest agricultural produce (excluding husbandry)
    grew by impressive 12.2% in the January-November period.

    The volume of industrial production also increased by 9.8% in 2012 as
    a whole compared to 14.1% rise in the previous year. Specifically,
    mining of metal ores output grew by 14.7% in 2012, while the other key
    sectors, namely base metals and processed food production expanded by
    9.2% and 4.6%, respectively. Meanwhile, construction activity fell for
    a fourth consecutive year when it fell by 1.9% in 2012. It was
    preceded by falls of 10% in 2011, 0.1% in 2010, and 27.3% in 2009. The
    financial crisis of 2008/9 exposed and then burst a housing market
    bubble, leaving an oversupply of high-value properties that continues
    to weigh down on construction activity.

    Persisting deep trade deficit

    Armenia's customs-basis merchandise trade shortfall remained
    relatively stable in 2012, with the trade deficit standing at USD2.8
    billion. Exports grew by 7% in 2012, totalling USD1.4 billion, helped
    by a surge in agricultural exports to Russia and other CIS countries,
    as well as stronger base metal exports. Meanwhile imports grew by 2.9%
    y/y, reaching USD4.3 billion. Encouragingly, Armenian export volumes
    have continued to grow since 2010, but lingering trade imbalances
    remain a concern. On a positive note, access to concessional lending
    is likely to mitigate external financing requirements in the medium
    term.

    Outlook and implications

    Economic activity should continue to grow at a fairly robust rate in
    the coming quarters, supported by a considerably strengthened
    agricultural sector assuming good weather conditions hold, while the
    mining sector has benefited from high international metal prices.
    Nevertheless, annual growth is moderating again, as we expected. The
    following months and quarters are likely to see growth somewhat
    moderate, even if annual GDP expansion of around 4% in 2013 should be
    achievable, which sits lower the official growth target of 6.3% set
    out the approved 2013 budget plan. Our assumption of softer growth
    performance in 2013 is a result of weaker export gains due a less
    conducive environment for the country's base metal exports while
    growth in agricultural products is unlikely to match last year's
    results.

    However, Armenia's economic performance over the next 12 months will
    depend on external factors, namely the level of inflow of workers'
    remittances, as well as financial risks due to continuing European
    sovereign debt crisis. That said, considering that relatively stable
    economic conditions in Russia, were most of the guest workers seek
    employment, no major disruptions of remittances are projected for
    2013. The eased global commodity prices will provide less of a boost
    for output value growth in the industrial sector, further suppressing
    metal export values. The weakened dram will continue suppressing
    imports, while it also gives some support for export competitiveness.
    The instability of the external environment poses major risks to the
    outlook.

    Armenia's access to international lenders such as the International
    Monetary Fund (IMF) is unlikely to change in 2013, mitigating the
    risks to overall economic performance. However, the country needs
    deeper structural reforms, including dismantling existing monopolistic
    structures, to unlock its economic potential in the coming years. With
    the strengthening of opposition movement in recent months the public
    spotlight will be on the country's economic performance, particularly
    on issues of competitiveness. It is hoped that the public involvement
    and scrutiny will improve business environment and increase economic
    opportunities in Armenia and ultimately contribute to its economy's
    better performance.




    From: A. Papazian
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