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.