Armenia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Major mining resources (molybdenum, zinc, copper, gold)
- Significant financial support from international organizations and the diaspora
- Comfortable foreign exchange reserves and relative flexibility of the dram’s exchange rate
- Member of the Eurasian Economic Union (EAEU) and partnership agreement with the EU
- Geographical isolation aggravated by a lack of infrastructure
- Highly dependent on Russia (trade: 20% of exports and 30% of imports, FDI, credit, migrant remittances)
- Highly dollarized economy (60% of bank deposits)
- Persistently high level of unemployment
- 30% of the population below the poverty line
- Conflict with Azerbaijan over Nagorno-Karabakh and an uneasy calm on the border with the Azeri enclave of Nakhchivan
Brisk Growth but Dependent on External Factors
Armenia’s Velvet Revolution had little impact on growth in 2018. Despite low agricultural yields (16% of GDP), which depressed activity, domestic demand continued to be strong. Investment, as well as consumption, which benefited from expatriate remittances, remained buoyant. Exports were lifted by the increase in copper prices (28% of exports in 2017). Although still robust, activity is expected to decelerate in 2019. The stabilization of the political situation and the central bank's continued accommodative monetary policy should encourage private investment. Despite the reassuring signals sent by the new government to promote foreign investment, particularly in the mining sector (50% of exports and nearly 10% of GDP, with copper accounting for one half of the total), the campaign by environmental protection groups since June 2018 to shut down the Amulsar gold mine could constrain FDI inflows.
Armenia also remains dependent on Russia, both for exports (a quarter go to Russia) and for expatriate remittances (more than 15% of GDP, including 70% from Russia). Accordingly, even modest growth in Russia, combined with favorable terms of trade, should boost exports and encourage household consumption. Despite the increase in wages, however, the impact of higher disposable income is expected to be mitigated by the unemployment rate, which remains close to the level reached at the time of the 2009 crisis (18.5%), as well as by rising inflation driven by higher food and energy prices.
Further Fiscal Consolidation; Current Deficit Maintained
The new government is set to continue the fiscal consolidation efforts undertaken since 2016. Budgetary revenues are expected to continue to benefit from a favorable economic environment and improved tax collection following the implementation of the new Tax Code in 2018. The code has already boosted tax revenues by around 0.7 percentage points of GDP and may eventually raise revenues by the equivalent of 2 percentage points of GDP. The fight against tax evasion, which is one of new government’s priorities, and the 38.5% reduction in the budget allocated to the Presidency of the Republic in 2019, should also help to narrow the deficit. However, public spending is expected to go up by 12% in 2019, mainly due to the increase in the military budget, which is expected to rise by 25% to reach a quarter of total expenditure. The increase will also go towards financing civil servants’ salaries, major structural reforms and the coverage of losses associated with certain state-owned companies in the energy (electricity) and water sectors.
The current account deficit is expected to remain in place in 2019. Increased imports linked to sustained domestic demand and continued high oil prices will be offset by higher export revenues and expatriate remittances. The deficit is financed by FDI, government debt and FDI-related borrowing. Given its largely concessional nature, servicing the public external debt (half of total external debt estimated at 90% of GDP) does not represent a heavy burden.
The Velvet Revolution Gets Electoral Confirmation
Massive peaceful demonstrations in April and May 2018 forced Prime Minister Serge Sarkissian to relinquish the power he had held since 2008. People were unhappy that he had circumvented the two-term limit on presidential terms of office by taking advantage of the switch from a presidential regime to a parliamentary system, which was adopted at the end of 2015 after a referendum, to hold onto power by running for the post of Prime Minister. Following the “Velvet Revolution”, in June, the leader of the protests, former journalist Nikol Pachinian, was placed at the head of a new government comprising representatives of the opposition and qualified individuals. After he resigned in order to trigger snap parliamentary elections, his “My Step” coalition, which includes the Civil Contract Party that he leads, won an overwhelming victory, taking 70% of the votes and allowing Mr Pachinian to secure a sufficiently large majority in Parliament (88 out of 132 deputies) to make constitutional changes. The coalition’s programme focuses on fighting corruption and the informal economy, addressing the porous boundaries between the business world and politics, and ending the monopolies controlled by people close to the former leader. Mr Pachinian has secured the benign neutrality of Russia, which has a military presence in the country (on the Turkish and Iranian borders) as well as an economic presence, by providing assurance that foreign policy will stay unchanged. He will have to manage an expectant population that is impatient for change. This is especially true among young people, for whom the unemployment rate is four times higher in urban areas than in rural areas and whose overall employment rate is twice as high as that of the rest of the population.
On the geopolitical level, the armed conflict with Azerbaijan persists over the self-proclaimed independent enclave of Nagorno-Karabakh, which is officially Azeri but overwhelmingly populated by Armenians, and the adjacent Azeri territories occupied by Armenian-backed independence fighters. The ceasefire on the border with the Azeri enclave of Nakhichevan is fragile, with security in the region primarily dependent on the balance between the combatants maintained by Russia, and, to a lesser extent, Turkey and Iran.