EDB forecasts 4.2% economic growth in Armenia and indicates a very  gradual movement of the economy towards its potential level 

ArmInfo. The EDB forecasts the growth of the  Armenian economy by 4.2% in 2021. This is stated in the  "Macroeconomic Forecast: The Return of Inflation: For How Long and  Should We Fear It'' prepared by the Eurasian Development Bank.

As noted in the document, in comparison with the previous forecast,  the score has been increased by 0.9 percentage points. The revision  is associated with a faster-than-expected pace of economic recovery  in the first half of the year. The improving forecast score is  conditioned by the improved estimates of Russia's economic growth,  the Eurozone and the United States for 2021, significant rates of  remittance inflows (both actual and expected), as well as higher  copper prices.

Consumer demand this year will remain restrained amid moderate growth  in household incomes and a slowdown in consumer lending in the second  half of the year. Investment activity will support the economy in  2021, but foreign investment will remain weak amid geopolitical  risks. Demand will be supported by a recovery in export earnings and  partly from tourism, as well as an increase in remittances from  abroad amid increased economic activity in Russia, Europe and the  United States and resumption of labor migration.

Economic growth by 4.7% in 2022-2023: Restrained investment activity  and the expected reduction in fiscal stimulus, together with the  completion of the recovery phase in the world, will limit the speed  of recovery of the Armenian economy to pre-crisis levels. The  negative output gap will approach zero at the end of 2023 alone,  which indicates a very gradual movement of the economy towards its  potential level.

Slowdown of inflation at the end of 2021 to 5.4%: EDB expects a  slowdown in prices growth in June- August this year and stabilization  of their y / y growth rates. Inflation will return to the target  interval (4 +/- 1.5%) by the end of 2021 - early 2022. This will be  facilitated by a decrease in the degree of monetary stimulus, as well  as the forecasted stabilization of the national currency and world  prices for goods and raw materials. 

Inflation close to 4% in 2022-2023: In the baseline forecast  scenario, inflation will form in the regulator's target band in the  medium term in the context of the stabilization of the national  currency rate and the increase in the refinancing rate to a neutral  level.

Monetary policy will remain soft to support the recovery in economic  activity: At the same time, due to increased inflation and  inflationary expectations, the size of the monetary stimulus will  gradually decrease.  The interbank loan rate, according to the  baseline scenario of the EDB forecast, will rise to 6.2% this year,  forming close to the refinancing rate. In the medium term, the  refinancing rate is expected to rise to 7% amid accelerating economic  growth.

The Armenian dram exchange rate against the dollar is projected at  517 on average for 2021: In the baseline forecast scenario, the  deficit of foreign trade in goods and services will continue to  improve in H2 2021 amid constrained domestic demand for imports,  increased external demand and exports. Fading devaluation  expectations, in turn, will support the Armenian currency. As a  result of these factors, the AMD / USD exchange rate will form close  to the current levels in 2021, and the undervaluation of the national  currency will decline by the end of 2021.

The dram exchange rate will revaluate next year amid strengthening of  external demand and recovery of remittances.

EDB specialists predict a reduction in the scale of the fiscal  impulse this year and a neutral policy in the medium term. According  to the law on the state budget of the Republic of Armenia for 2021, a  smooth fiscal consolidation is planned for the current year, implying  a decrease in public spending by 1.3 percentage points GDP and an  increase in income by 0.3 percentage points. A neutral fiscal policy  is planned for the medium term.

The increased uncertainty of the impact of geopolitical risks may  affect the country's investment potential.  With a steady decline in  foreign capital inflows and cautious domestic investment in long-term  projects, recovery of the economic growth potential in the long term  may be slow.

Uncertainty about the development of the situation with the pandemic  will slow down the economic recovery. In the event of difficulties  with mass vaccination and the emergence of new strains of  coronavirus, the global economic recovery will be slower, which will  also affect the Armenian economy, slowing down the growth rate by 1.1  p.p. compared to the baseline scenario.

At the same time, speaking about the current situation, EDB analysts  noted that economic activity in the Q2 2021 is increasing - growth  reached 10.9% y / y in May and 4.3% y / y in five months (minus 2, 6%  y / y in Jan-Apr 2021). The acceleration of the indicator is due to  both the low comparison base of the same period of the previous year  and the growth of business activity in general against the background  of expanding external demand and under the influence of the still  stimulating nature of monetary and fiscal policy. In April-May, the  recovery intensified due to strong dynamics in all sectors of the  economy, in particular - in services, trade and construction. In the  first half of the year, according to experts, economic activity may  grow by about 4.0% y / y.

Industrial production is increasing due to the expansion of demand  abroad and domestically. The positive dynamics will be stable  throughout the year against the backdrop of stronger external demand  and a gradual recovery in domestic consumption. Strong industrial  growth - by 7.9% y / y in May this year (2.3% y / y in January-May)  is primarily due to the recovery in manufacturing output and an  increase in the production of mining industries. An increase in  processing by 21.9% y / y in April was driven by the production of  alcoholic beverages, tobacco products, clothing and building  materials. This was facilitated by the strengthening of external  demand and the recovery of domestic demand. The mining industry (up  11% y / y in April) was supported by the export of metal ores amid  strong external demand and high copper prices.

Consumer demand has been recovering over the four months, but will  remain moderate this year. In April, the turnover of retail trade (by  49.5% y / y) and services sectors related to public catering and  transport increased ( 6-fold and by 38.7% y / y, respectively).  Strong dynamics is largely due to the low comparison base of last  year. The slowdown in household lending growth (to 6.6% y / y  compared to 24.3% y / y in May of the previous year) amid weak demand  for borrowed funds from the population, as well as moderate wage  growth will restrain consumer demand this year. Demand will be  supported during the year by the inflow of remittances from abroad  amid the recovery of labor migration.

Construction continues to support the economy, revitalizing  investment demand in Q. The volume of construction work increased by  0.5% y / y in May (in January-May - by 14.3% y / y). The sources of  their financing were the funds of the government and the population,  as well as the restoration of financing by means of enterprises.  Construction volumes were concentrated mainly in the areas of real  estate, transport and electricity supplies (38.6, 15.7 and 15.2% y /  y in April this year, respectively). Meanwhile, the dynamics of  construction, financed by foreign investments, remains negative since  the beginning of the year. This may indicate that the country risk is  perceived as high by private investors.

Investment demand was also supported by high rates of lending to  enterprises in almost all sectors of the economy - an increase of  14.1% y / y in April (11.1% y / y in the previous year). Inflation  slowed down in May to 5.9% y / y (6.2% y / y in April). This was  influenced by the cheaper foodstuffs, including agricultural  products, and the rather stable dynamics of the dram exchange rate in  May. Higher prices in international markets continue to put pressure  on inflation in Armenia. As noted in previous issues of analytical  materials from the EDB, analysts expected a slowdown in price growth  from the second quarter of this year and predict the stabilization of  y / y growth rates in the second half of the year.

The Central Bank of the Republic of Armenia increased the refinancing  rate by 0.5 pp. to 6.5% in June 2021. The regulator reduced the scope  of economic stimulus amid higher prices and a faster-than-expected  recovery in economic activity.

The deficit of foreign trade in goods continues to decline compared  to the same period last year - to $ 695 million in January-April 2021  ($ 766 million a year earlier). The reason is the weak growth in the  value of imports amid a strong expansion of exports (+ 6.7% and 20.8%  y / y, respectively). Such dynamics of imports is due to the  persistence of restrained consumer and private investment demand  within the country.  Strong exports were driven by an increase in  supplies abroad of mineral products (by 25.3% y / y in Jan- Apr),  textile products (by 41.4% y / y) and base metals (by 18.3% y / y).  Exports were supported by an increase in international prices for  metals, an increase in the economic activity of the countries -  trading partners of Armenia, as well as a weakening of the AMD  exchange rate during the first half of 2021. The state budget of the  Republic of Armenia was executed with a deficit of 4.1% of GDP in  January-April 2021 (surplus 1.4% a year earlier).

Budget expenditures increased by 16% y / y in January-April.  Operating costs increased by 10% y / y, while capital costs doubled,  due to the implementation of unfinished programs planned from last  year (RA Ministry of Finance, 2021). In Q1 this year, the government  continued funding programs to counter the consequences of the 2020  shocks. In these conditions, the impact of the fiscal stimulus on  domestic demand is estimated to be positive in the first quarter, but  its size will gradually decrease during the year.

Government debt has increased by 6.3 percentage points since the  beginning of the year and reached 73.6% of GDP at the beginning of  May 2021. The increase in the debt burden is explained by the  increase in both external liabilities and government bonds to  residents. At the beginning of May, almost 77% of government debt was  denominated in foreign currency.

In March, Fitch Ratings confirmed Armenia's long-term sovereign  credit rating at B + with a "stable" outlook. The B + rating reflects  the country's high level of external debt and geopolitical tensions  in the region. The factors for maintaining the rating were: a high  level of per capita income, ease of doing business, stability of the  macroeconomic environment and fiscal policy.