Armenia: Risk Assessment
Country Risk Rating
|E||The highest-risk political and economic situation and the most difficult business environment. Corporate default is likely.|
Business Climate Rating
|C||The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.|
Falling growth affected by the Russian economic situation
Armenian economic growth, which was relatively weak in 2014, is falling in 2015 and is likely to be negative for the year as a whole. This fall is mainly explained by the slowdown in Russian growth, which is an important source of income for the Armenians, thanks to transfers from expatriates. Russia is also the main market for Armenian exports. In addition, the economy is still suffering from structural problems that must be solved to return to the growth levels seen at the beginning of the decade. The investment level has halved since 2008 (from 46% of GDP to 23% forecast for 2015). The shortfall in infrastructure and the lack of competition in the domestic market, the fragile institutional environment, the high and persistent unemployment rate (around 18%) as well as the business environment are among the greatest sources of vulnerability. In this respect, the Extended Fund Facility approved by the IMF in 2014 will be a support factor for the economy and for the implementation of structural reforms. After the slowdown in 2014, is expected to pick up again in 2015 as a result of the depreciation of the Armenian dram as well as the rise in electricity prices.
Slow reduction in the budget and current account deficits
The budget deficit is likely to increase in 2015, despite the continued efforts to collect taxes, because of the slowdown in activity. Despite the efforts to control the deficit, the financing of essential spending on infrastructure (particularly for the road system) as well as structural reforms will probably continue and keep the budget balance markedly negative. It will also be affected by the weak demand from the neighboring countries of the Eurasian Economic Union, which probably means that no additional revenues can be generated for the government via customs tariffs. That is why the public debt can be expected to continue to grow in 2015 and 2016.
The current account balance should remain negative in 2015. The fall in exports to Russia and Germany combined with a fall in transfers from Russia are likely to have a significant impact on the balance. Furthermore, the Eurasian Economic Union offers few real trade opportunities and will probably have only a muted impact on exports in 2015. Lastly, Armenia’s external position remains highly dependent on the global economic environment, in particular the hike in US interest rates and the reduction in Russian capital inflows (imports, credit, investment, transfers from migrants).
Unstable political situation in a complex geopolitical environment
The second term of President Serzh Sargsyan, who was re-elected in 2013, is marked by growing political instability, as illustrated by the replacement of Prime Minister Tigran Sargsyan following threats of demonstrations by the opposition parties in April 2014. This political instability will result in a slowdown in the implementation of structural reforms and may continue, given the popular discontent resulting from the government’s inability to meet the population’s expectations (unemployment, corruption, inequalities). So the series of demonstrations in 2014 (in April against the pension reform plan, in August against the increase in electricity prices) has continued and intensified in 2015. Thousands of people blocked the capital, Erevan, in June 2015 to protest against the 16% price increase in electricity prices (25 wounded, 240 arrested). Lastly, the opposition gets organized and is demanding changes to the country's leadership, whilst threatening further protests and a deterioration in the social and political situation.
From a regional viewpoint, the dispute with Azerbaijan over the Nagorno-Karabakh territory is unlikely to evolve, leaving the situation at a stalemate. However, the risk of cross-border outbreaks of violence cannot be ruled out. Furthermore, diplomatic relations with Turkey are, and are likely to remain, at a standstill given the ratification of the peace protocols by the leaders is now subject to the withdrawal of the Armenian armed forces from Nagorno-Karabakh.