Country Report Armenia November 2009

Outlook for 2010-11

Armenia's political scene will remain volatile. The president, Serzh Sargsyan, will face opposition to Armenia's rapprochement with Turkey. Despite the signing of two protocols in October 2009 between the two countries, a further improvement of ties will be hampered by Armenia's unresolved dispute over Nagorny Karabakh with Azerbaijan, an important Turkish ally. The risk of social unrest in the earlier part of the forecast period is elevated, owing to the recent increase in unemployment and lower remittance inflows. After contracting by an estimated 15.2% in 2009, real GDP growth will resume in 2010, rising to 3.3% in 2011 as the external environment improves.

The political scene

Relations with Turkey improved further in August-October, when the two countries signed protocols aimed at reopening their borders and re-establishing diplomatic links. However, the protocols need to be ratified by the parliaments of both countries, which could be subject to lengthy delays, especially as the main disputes—including recognition of the mass killings of Armenians during the first world war as "genocide", and the dispute with Azerbaijan over Nagorny Karabakh—have not been resolved.

Economic policy

The state budget deficit widened to almost 4.5% of GDP in January-August 2009. State expenditure rose by 5.4% year on year as the government used anti-crisis loans from multilateral and bilateral lenders to support social spending. Revenue fell by 14% year on year during this period. Although value-added tax (VAT) revenue fell by 24.5% year on year, revenue from corporate profit tax fell by only 4.7%, owing to a government crackdown on tax evasion by local firms.

The domestic economy

Real GDP fell by 18.4% year on year in January-August. The steepest decline was seen in the construction sector, which shrank by 52.6% year on year. Weak external and domestic demand resulted in a fall in industrial production of almost 12% year on year in the first eight months. The IMF has lowered its real GDP estimate for 2009 to a year-on-year contraction of 15.6%.

Foreign trade and payments

Imports decreased by 27% year on year in January-August, to US$1.95bn. A sharper fall was seen in exports, which totalled US$409m, 41% below the level reached in the same period of 2008. Despite the rally in international prices for metals since the second quarter of 2009, a 40% fall was recorded in exports of base metals, Armenia's primary export. The trade deficit totalled US$1.54bn in January-August and was equivalent to almost 31% of GDP.

This report covers the following industry codes:
SIC Code: 48;1
NAICS Code: 517;11