Monday, October 21 2019 14:53

ArmInfo. Economic activity remains robust. The Economic Activity Index (EAI) grew by 7.6 percent year-over-year (yoy) in August, following 8.3 percent growth in July.  Industry still maintains the fastest expansion (17 percent),  supported also by reactivation of mining operations, this is stated  in ''Armenia Monthly Economic Update-October 2019'' published by  World Bank.  According to the document, services (excluding trade)  grew by 15 percent, while trade turnover increased by 9 percent. 

Construction growth remains modest, at 4.4 percent y- o-y.  According  to WB experts, on the demand side, consumption remains the main  driver of growth, supported by a 4 percent growth in real wages and a  32 percent increase in consumer loans, while net exports continued to  improve. The Ministry of Finance recently upgraded the 2019 GDP  growth projection to 6.3 percent (from 5.4 percent) while keeping the  2020 growth at 4.9 percent.

The real estate market continues to be dynamic. In August 2019, 15.5  thousand real estate transactions were registered (two thirds of it  outside of Yerevan). The price of apartments in the center of Yerevan  recorded double digit growth (13 percent in August, yoy), on top of  20 percent increase in August of last year. 

Inflation continued to diverge from the lower band of the inflation  target. Prices in September 2019 were only 0.5 percent higher yoy,  well below the lower band of the CBA target range (4+/-1.5 percent)  and bringing the average annual inflation rate down to 1.6 percent.  While clothing had the highest price increase (9 percent in August,  yoy), food prices registered a 1.4 percent deflation in the same  period. In response to these developments, the CBA Board, in its  September 10, 2019 meeting, cut the policy rate by 25 basis points,  bringing it down to 5.5 percent, its lowest level since 2010.

While the trade balance registered an improvement, a higher deficit  in the service account and lower surplus in income accounts kept the  deficit at around 9 percent of GDP. The service balance deteriorated  mostly due to a 22 percent increase in outgoing travels. On the  income accounts, remittances increased slightly (by 2 percent, yoy),  which only partly offset the higher interest payment.

The trade balance continued to improve in August. Exports grew by 14  percent yoy in August, bringing the cumulative export growth in the  first eight months of 2019 to 4.6 percent, (compared to negative  growth in the first five months of 2019). Exports of precious stones  was the main contributor to this growth, accompanied with high  increase in export of food products (grew by 36 and 14 percent,  respectively). Imports contracted by 3 percent yoy in August, slowing  down the cumulative growth rate to only 0.7 percent yoy. The 44  percent increase in import of transport means in the eight months of  2019 was offset by lower import of capital goods and textile  products.

The authors of the report also note that the underperformance on  capital spending continues to weigh on budget execution, while  revenue collection overperforms. In August, the budget registered a  deficit of only AMD 7 billion, bringing the cumulative surplus  year-to-date to AMD100 billion (1.5 percent of GDP), compared to an  annual deficit target of 2.3 percent of GDP.

 Tax collection grew by 21 percent, yoy, partly due to one-time  collection related to the high imports of cars in advance of the  increase in import duties in 2020. 

The 2020 draft Budget includes an ambitious spending plan, both in  current and capital.  The deficit is projected at 2.6 percent of GDP  making way for capital spending of 5 percent of GDP (though the track  record on implementation is weak). It envisages 22.6 percent Tax to  GDP ratio (0.3 percentage point higher than that in 2019 revised  budget). 

Credit growth remains robust at 15 percent, yoy and largely in AMD.  Credit denominated in AMD grew by 32 percent yoy in August, largely  due to higher consumer and mortgage credits. Still, deposits grew  faster (by 19 percent yoy), largely due to increase in FX deposits by  non-residents, but also by 24 percent increase in time deposits of  residents.  Financial stability indicators remain generally adequate,  the report notes.