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.