ARMENIAN CURRENT-ACCOUNT DEFICIT DEEPENS FURTHER IN Q1
Venla Sipila

World Markets Research Centre
Global Insight
July 7, 2008

According to the newest data from the Armenian National Statistical
Service, the country’s current-account deficit amounted to $296US.2
million in the first quarter of 2008, ARKA News reports. This level
indicates widening of nearly 55% compared with the current-account
gap posted in the same period a year ago. As a percentage of GDP,
the deficit measured 18.9%, against 16.4% of GDP in the first quarter
of 2007. As expected, the overall deficit was mainly brought about
by a deep imbalance especially in goods trade.

Indeed, the trade deficit in balance-of-payments terms measured some
$478US.2 million in January-March, compared with $312US.1 million
in the same period a year ago. In particular, exports only edged
up by 1.5% year-on-year (y/y), totalling $236US.2 million, while
imports soared by 31.3% y/y reaching $714US.4 million. The deficit
on the service balance widened to $52US.1 million after totalling
some $35US.0 million a year ago. Meanwhile, the current transfers
account posted a surplus of $189US.3 million in the first quarter, the
positive balance growing by around one-quarter in annual comparison,
and the surplus on the income balance grew to $41US.8 million from
$6US.4 million a year ago. Further, it was reported that the financial
account registered a surplus of $274US.1 million, marking an increase
of $102US.6 million in annual terms. In particular, the FDI balance
registered a surplus of just under $117US million.

Significance:The wide deficit on the current account leaves
Armenia vulnerable to external shocks, especially taken into
account the country’s reliance on private transfers and workers’
remittances. Investment to Armenia remains restricted by, for
example, geopolitical risks. On the other hand, despite only forming
a relatively modest part of total foreign investment, FDI inflows
finance a large part of the deep external deficit, reducing the
need to increase foreign borrowing. Armenia’s relatively good reform
progress also gives it unproblematic access to soft loans. Thus, debt
servicing is not likely to pose any difficulties for the sovereign in
the medium term. However, in order to achieve continued improvement
in its sovereign creditworthiness in the medium-to-long term, Armenia
needs to progress further in economic restructuring to diversify its
economy in order to strengthen its export earnings capacity.