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Business Monitor Online
March 20, 2015 Friday
Weak Remittances To Stifle Household Spending
BMI View: Armenia's economy will continue to struggle during 2015-2016
primarily due to its trade and remittance flow links with ailing
Russia. Beyond this we continue to see little means of diversifying
its growth model away from one driven by private consumption
underpinned by volatile remittance flows .
Macro Backdrop
We have revised down our forecasts for headline real GDP growth to
0.5% and 1.9% for 2015 and 2016, from 2.9% and 3.2% respectively. This
sharp downward revision is primarily due to the worsening outlook for
Armenia's main trading partner, Russia, which we forecast to
experience a 5.2% economic contraction during 2015.
This will result in reduced demand for Armenia exports and
significantly lower remittance flows. Total remittances transferred
back to Armenia during 2013 were equal to roughly 17% of GDP. The
majority of remittances flows, typically around 80%, stem from Russia.
According to data released by the Central Bank of Russia remittances
to Armenia had already begun to fall as early as Q314. As the full
impact of Russia's economic hardship will be felt across 2015 we
expect to see remittances to Armenia sharply decline over the coming
quarters. Evidence of this is already apparent, as the Central Bank of
Armenia reported that remittance flows had declined 35% y-o-y in
January 2015.
Purchasing Power To Be Squeezed
Armenia - CPI, % chg y-o-y and Unemployment Level, % chg y-o-y
Private Consumption
We have revised down our forecasted GDP contribution from private
consumption from 2.9pp to 1.0pp in 2015. This is largely due to a
drastic reduction in remittance flows negatively affecting private
consumption. This has a particularly salient effect on the Armenian
economy given that from 2008-2013 private consumption has accounted
for around 85% of economic output. This makes the Armenian
particularly vulnerable to reduced remittance flows. Though Armenia's
inclusion in the Eurasian Economic Union (EEU) moderately increases
the likelihood of investment accounting more of GDP going forward, we
still expect that Armenia's growth will be primarily driven by private
consumption.
Though we maintain that households will see a slight boost to
disposable income from lower oil prices going forward we expect this
positive effect will be negated by reduced remittance flows. Similarly
consumer spending will be adversely affected by the combination high
inflation and high unemployment both of which we expect to rise during
2015 and then level off during 2016.
Falling Remittances Point To Stunted Growth
Armenia - Real GDP Growth and Remittances From Russia, % chg y-o-y
Government Consumption
We continue to expect modest contributions from government spending in
coming years. We currently forecast government consumption to
contribute 0.4pp to headline economic growth in 2015 and 2016.
Armenia's budget deficit increased slightly during 2014 to -2.0 of GDP
up from -1.6% in 2013. We expect the current economic downturn to
result in an increase to the deficit as fiscal revenue is adversely
affected. That being said we expect spending will remain constrained
as Armenia seeks to present a fiscally prudent image to potential
investors.
Armenia's eurobond debt is rated non-investment grade speculative by
Moody's and Fitch. In March 2015 it is expected to tap international
capital markets with a dollar denominated 10 year bond placement of
around USD500mn. The required yield to fill the allotment is expected
to be in the range 7.5-7.65%. While this is implies only a 100bps
yield increase on its previous issue in 2013, the spread over similar
maturity debt of the US has increased by roughly 20%. These
significantly increased borrowing costs will limit Armenia's ability
to increase government spending going forward.
Industrial Production Also Indicates Slowdown
Armenia - Industrial Production and Real GDP, % chg y-o-y
Gross Fixed Capital Formation
We continue to expect fixed investment in Armenia to return to growth
during 2015. GFCF in Armenia has declined every year since the Global
Financial Crisis. On the upside, we maintain the view that Armenian
involvement in the Eurasian Economic Union will be a boost to
investment going forward. In light of the economic downturn in Russia,
and the fiscal constraints its large corporations and government are
under, we have revised down our forecast for investment in Armenia. We
still see a return to growth however we now forecast a 0.1pp and 0.2pp
contribution to growth in 2015 and 2016, down from 0.2pp and 0.3pp
respectively.
Net Exports
Rouble depreciation against the Armenian dram will severely affect the
competitiveness of Armenia exports. Russia accounts for around 15-18%
of Armenian's import and export basket. Historically depreciations of
Armenia's currency, usually linked to significant depreciations in the
rouble and recessions in Russia, have resulted in significantly
reduced contributions from net exports. This highlights the degree of
interconnectedness between the two economies. As we feel the downturn
in the Russian economy is on par with that of 2008, certainly in terms
of currency depreciation, we expect to see very little growth in
exports while imports to Armenia will experience a temporary boost as
households and producers enjoy increased purchasing power, dragging on
real GDP growth. We expect net exports to subtract 1.1pp from real GDP
growth during 2015. As exports recover slightly in 2016 we see this
negative contribution falling to a 0.8pp subtraction in 2016.
From: Baghdasarian
March 20, 2015 Friday
Weak Remittances To Stifle Household Spending
BMI View: Armenia's economy will continue to struggle during 2015-2016
primarily due to its trade and remittance flow links with ailing
Russia. Beyond this we continue to see little means of diversifying
its growth model away from one driven by private consumption
underpinned by volatile remittance flows .
Macro Backdrop
We have revised down our forecasts for headline real GDP growth to
0.5% and 1.9% for 2015 and 2016, from 2.9% and 3.2% respectively. This
sharp downward revision is primarily due to the worsening outlook for
Armenia's main trading partner, Russia, which we forecast to
experience a 5.2% economic contraction during 2015.
This will result in reduced demand for Armenia exports and
significantly lower remittance flows. Total remittances transferred
back to Armenia during 2013 were equal to roughly 17% of GDP. The
majority of remittances flows, typically around 80%, stem from Russia.
According to data released by the Central Bank of Russia remittances
to Armenia had already begun to fall as early as Q314. As the full
impact of Russia's economic hardship will be felt across 2015 we
expect to see remittances to Armenia sharply decline over the coming
quarters. Evidence of this is already apparent, as the Central Bank of
Armenia reported that remittance flows had declined 35% y-o-y in
January 2015.
Purchasing Power To Be Squeezed
Armenia - CPI, % chg y-o-y and Unemployment Level, % chg y-o-y
Private Consumption
We have revised down our forecasted GDP contribution from private
consumption from 2.9pp to 1.0pp in 2015. This is largely due to a
drastic reduction in remittance flows negatively affecting private
consumption. This has a particularly salient effect on the Armenian
economy given that from 2008-2013 private consumption has accounted
for around 85% of economic output. This makes the Armenian
particularly vulnerable to reduced remittance flows. Though Armenia's
inclusion in the Eurasian Economic Union (EEU) moderately increases
the likelihood of investment accounting more of GDP going forward, we
still expect that Armenia's growth will be primarily driven by private
consumption.
Though we maintain that households will see a slight boost to
disposable income from lower oil prices going forward we expect this
positive effect will be negated by reduced remittance flows. Similarly
consumer spending will be adversely affected by the combination high
inflation and high unemployment both of which we expect to rise during
2015 and then level off during 2016.
Falling Remittances Point To Stunted Growth
Armenia - Real GDP Growth and Remittances From Russia, % chg y-o-y
Government Consumption
We continue to expect modest contributions from government spending in
coming years. We currently forecast government consumption to
contribute 0.4pp to headline economic growth in 2015 and 2016.
Armenia's budget deficit increased slightly during 2014 to -2.0 of GDP
up from -1.6% in 2013. We expect the current economic downturn to
result in an increase to the deficit as fiscal revenue is adversely
affected. That being said we expect spending will remain constrained
as Armenia seeks to present a fiscally prudent image to potential
investors.
Armenia's eurobond debt is rated non-investment grade speculative by
Moody's and Fitch. In March 2015 it is expected to tap international
capital markets with a dollar denominated 10 year bond placement of
around USD500mn. The required yield to fill the allotment is expected
to be in the range 7.5-7.65%. While this is implies only a 100bps
yield increase on its previous issue in 2013, the spread over similar
maturity debt of the US has increased by roughly 20%. These
significantly increased borrowing costs will limit Armenia's ability
to increase government spending going forward.
Industrial Production Also Indicates Slowdown
Armenia - Industrial Production and Real GDP, % chg y-o-y
Gross Fixed Capital Formation
We continue to expect fixed investment in Armenia to return to growth
during 2015. GFCF in Armenia has declined every year since the Global
Financial Crisis. On the upside, we maintain the view that Armenian
involvement in the Eurasian Economic Union will be a boost to
investment going forward. In light of the economic downturn in Russia,
and the fiscal constraints its large corporations and government are
under, we have revised down our forecast for investment in Armenia. We
still see a return to growth however we now forecast a 0.1pp and 0.2pp
contribution to growth in 2015 and 2016, down from 0.2pp and 0.3pp
respectively.
Net Exports
Rouble depreciation against the Armenian dram will severely affect the
competitiveness of Armenia exports. Russia accounts for around 15-18%
of Armenian's import and export basket. Historically depreciations of
Armenia's currency, usually linked to significant depreciations in the
rouble and recessions in Russia, have resulted in significantly
reduced contributions from net exports. This highlights the degree of
interconnectedness between the two economies. As we feel the downturn
in the Russian economy is on par with that of 2008, certainly in terms
of currency depreciation, we expect to see very little growth in
exports while imports to Armenia will experience a temporary boost as
households and producers enjoy increased purchasing power, dragging on
real GDP growth. We expect net exports to subtract 1.1pp from real GDP
growth during 2015. As exports recover slightly in 2016 we see this
negative contribution falling to a 0.8pp subtraction in 2016.
From: Baghdasarian