World Markets Research Centre
Global Insight
March 25 2010

Signs of Armenian Recovery Supported by February GDP and Trade Results

BYLINE: Venla Sipila

The Armenian economy reached an annual growth rate of 3.1% in
January-February, according to ARKA News quoting Gagik Minasian, the
Chairman of the committee on financial and budget issues in the
country’s parliament. Further, it was reported that industrial growth,
including electric energy, reached 9.4% year-on-year (y/y) for the two
first months of the year, according to data from the National
Statistical Service. These figures signal acceleration of annual
growth in February, given that January GDP and industrial growth rates
had been reported at 2.4% y/y and 6.5% y/y, respectively. Meanwhile,
agricultural production increased by 2.7% y/y in January-February,
while the construction sector contracted by 3% y/y. In a separate
report, ARKA News also cites figures from the Statistical Service on
foreign trade, showing that exports in January-February amounted to
US$121.4 million, rising by 53.5% y/y, whereas imports gained 16.8%
y/y and totalled US$503.8 million. This produced a trade deficit of
US$382.4 million for the first two months of the year. In February
alone, exports rose by 25.2% month-on-month (m/m), while imports edged
up by 0.3% m/m.

Significance:Minasian was eager to interpret the January-February
growth data as testament to successful economic diversification, but
this conclusion seems premature. While naturally positive news, the
relatively positive output and export results to a large degree owe to
favourable base effects. Over 2009, the economy contracted by 14.4%,
but started to show some signs for recovery towards the end of the
year (seeArmenia: 26 January 2010:).The global downturn led to sharply
weakened remittance inflows, while the export demand weakened thanks
to the global recession. However, the competitiveness of the economy
is very weak in any case, and thus, reform challenges remain vast. The
government’s official growth forecast for this year stands at 1.2%,
and at present we believe this to be attainable by some margin.
Nevertheless, growth rates are unlikely to keep accelerating
comparably for the remainder of the year; instead, the recovery is
likely be relatively muted and gradual. Moreover, it is starting from
a very weak base. Structural reforms are necessary in order to boost
growth potential and export earnings capacity in the longer term.
Meanwhile, in the near term, the recovery of remittance and investment
inflows plays a leading role in determining the country’s economic
success. Given the very wide trade deficit, exchange rate adjustment
may be necessary in order to guide external balances to a more
sustainable trajectory. Indeed, a further ARKA report also suggests
that the Central Bank of Armenia has recently refrained from
interventions seeking to curb dram depreciation.