Karina Melikyan. The World Bank has updated the outlook for Armenia's foreign trade in 2018, accelerating import growth to 16.9% and slowing export growth to 9.1%, from previously projected 10.3% and 10.1%, respectively. This is noted in the October report of the WB "Macroeconomic Development of Armenia". For 2019, the World Bank forecasts the growth of exports by 8% in Armenia's foreign trade, while imports will grow by 11.8%, against the previously forecasted 9.8% and 9.5%, respectively. For 2020, the World Bank predicts export growth by 7.9%, and imports – by 9.2%.

The share of net foreign direct investment (FDI) in GDP, according to the new forecast of the World Bank, in 2018 will be 3% (against the previous 4.4%), in 2019 – 3.5% (against the previous 4.5%), and in 2020 – 3.9%. The ratio of the current account deficit to GDP in 2018 and 2019 will remain at the level of 3.8% (versus the previously forecasted 2.9% and 3.5%, respectively), with a decrease in 2020 to 3.7%. The deficit of the state budget of Armenia in GDP, according to the new forecast of the World Bank, from 2.6% in 2018 will decrease to 2.4% in 2019, with a further decrease to 2.2% in 2020. The poverty level (at purchasing power parity – PPP – $ 5.5), according to the new forecast of the World Bank, can reach 38% in 2018 with a decrease to 35.9% in 2019 and 34.9% in 2020, and in PPP $ 3.2 poverty may decrease in 2018- 2019 from 9.8% to 8.6% with a further decrease in 2020 to 7.6%. The previous forecast of the World Bank provided for higher rates: the level of poverty (with PPP of $ 5.5) in 2018 – 38.2% with a decrease to 36.8% in 2019, and in expectation of PPP of $ 3.2 by the level of poverty in 2018-2019 from 10.1% to 9.1%.

The growth of private consumption, according to the updated World Bank report, will amount to 6.7% in 2018, with a slowdown in 2019-2020 from 6% to 4.6%, against the previously forecasted 5% in 2018 and 4.7% in 2019. In gross investment in fixed assets, the new WB forecast provides for an increase in 2018 by 15.2%, with a slowdown in 2019 to 14% and in 2020 to 9.9%.

Armenia's economic outlook remains generally positive. Prudent macroeconomic policies, low inflation, and favorable terms of trade will continue to support economic expansion. Real GDP growth is expected to moderate to 5.3 percent in 2018, reflecting strengthening headwinds in Armenia's main trading partners. Inflation will edge up but remain within the CBA target range, while the current account deficit will widen on account of a higher import bill. Subject to robust structural reforms- which the new government has committed to undertake to create a fair and competitive business environment- growth in the medium term is projected to average 4.5 percent, with investment providing a major contribution. Commitment to the fiscal rule, which puts a cap on debt at 60 percent of GDP but also introduces operational rules at lower public debt levels, will result in a smaller fiscal deficit. Consequently, public debt (including CBA debt) is projected to fall from 58.9 percent of GDP at end-2017 to 55 percent by 2020. As the economy continues to expand and create income generation opportunities, especially in sectors that employ low-skilled workers (such as agriculture), poverty will continue to recede. The expected growth of the Russian economy in the coming years, albeit modest, should help sustain the flow of remittances to Armenia, pushing poverty rates down further. Current projections have the absolute LMIC poverty rate reaching 7.6 percent in 2020; when the international poverty rate (IPL) is forecast to fall below 1 percent.

Growing regional and global risks could undermine Armenia's medium-term growth prospects. These risks include a stronger-than-forecast economic slowdown in Armenia's key trading partners (primarily Russia and the Islamic Republic of Iran) and a decline in global copper prices in response to rising global trade tensions, which would highlight Armenia's limited diversification and crimp growth. Domestically, political risks remain high, reflecting growing tensions as the policy initiatives of the new administration are challenged by the opposition. Uncertainty also surrounds the date and format for the snap parliamentary elections announced by the new government. Failure to produce tangible results in a reasonable timeframe that address widespread socio-economic problems- such as limited job opportunities and the perception of a lack of rule of law and rampant corruption-potentially risks reactivating domestic tensions. The materialization of any of these risks will negatively impact Armenia's ability to implement the bold structural reforms that are essential for sustainable and inclusive economic growth. However, the peaceful revolution of April-May 2018 did not disrupt the positive trends in Armenia's macroeconomic indicators. Although political developments in 2018 put some pressure on the exchange rate, a quick resolution and prompt central bank reaction maintained stability. So far, spillovers from the turmoil in the Russian Federation and Turkey have been contained. The banking sector indicators point to a high system-wide Capital Adequacy Ratio (18.2 percent at end-June 2018), manageable levels of non-performing loans (6.3 percent in June, unchanged from a year earlier) and recovering profitability, but also vulnerability to external shocks. Driven by dram-denominated lending and supported by falling bank lending rates, credit growth accelerated to 18 percent y/y at end-July. Deposit growth expanded by 7 percent y/y, also driven by dramdenominated deposits. Dollarization ratios remain high at around 60 percent.

To note, in 2017, Armenia's GDP grew by 7.5%, while the agricultural sector was in a 4% decline, the industrial sector showed an 8% growth, and the services sector – a 10.5% growth. Private consumption has grown by 8.8%. Gross fixed investment increased by 7.3%. Exports showed an increase of 23.2%, while imports – by 24%. Y-o-y inflation was 1%. The ratio of the current account deficit to GDP was 1.7%, the share of net foreign direct investment (FDI) in GDP was 4.1%, the deficit of the state budget of Armenia in GDP was 4.7%, and the share of state debt in GDP was 58.8%. The poverty level in 2017 was 39.9%, having decreased from 43.5% in 2016.