EBRD forecasts highest GDP growth in Armenia in Caucasus 

ArmInfo. According to the EBRD-prepared report "Regional Economic Prospects in the EBRD  Regions", in 2023, economies in Eastern Europe and the Caucasus have been adjusting to the extreme shock to their economies caused by the war on Ukraine. 

The Ukrainian economy is likely to show modest growth in 2023,  subject to high uncertainty related to the war's intensity. Moldova  is struggling to leave recession behind in the face of multiple  structural challenges. 

In the Caucasus, growth decelerated in 2023, from the extraordinary  levels observed in 2022, to rates closer to long-term potential.  Inflation has slowed down considerably throughout the region, though  at a different pace in different countries. 

In Armenia and Georgia, inflation is already below the target level,  but it remains in high single-digits in Ukraine, Moldova and  Azerbaijan. In all economies, the war on Ukraine remains a major risk  to the economic outlook.

Specifically, Armenia's economy continued its exceptionally strong  performance in 2023, but the first signs of a slowdown are already  visible. GDP growth reached 10.4 per cent year on year in the period  from 27 January to July 2023, driven by the strong performance of  service industries in particular.

Net inflows of money transfers, which have been driving demand for  services, declined by 10 per cent year on year in the first half of  2023, but the growth rates of exports and imports of goods remained  robust. The exchange rate and foreign reserves have been broadly  stable since the beginning of 2023. At the same time, the inflation  rate fell below zero in July 2023, contributing to the reversal of  the real effective exchange rate appreciation seen in the past two  and a half years. The Central Bank of Armenia has started a gradual  reduction in the policy rate, with two 25-basis point cuts in June  and August 2023, bringing the policy rate to 10.25 per cent. Growth  is likely to moderate in the second half of the year, as the  temporary factors that contributed to Armenia's double-digit growth  are dissipating. Therefore, GDP is expected to grow by 6.5 per cent  in 2023 and 4.5 per cent in 2024. Geopolitical developments remain an  important source of downside risks. The isolation of Russia, a major  trading partner for Armenia, from western markets could have negative  long-term consequences for the Armenian economy. Further escalation  of the conflict with Azerbaijan is another major risk to economic  prospects. On the upside, progress in re-opening the land border with  Turkiye could yield economic benefits in the medium term.

After two strong years, Azerbaijan's GDP growth decelerated to 0.7  per cent year on year between January and July 2023. Growth in the  non-oil sector slowed to 3.4 per cent from 9.0 per cent in 2022,  mainly due to weaker growth of disposable incomes. The oil and gas  sector continued to decline, by 2.2 per cent year on year over the  same period.

Nevertheless, export and fiscal revenues remained robust amid an oil  price above the prewar level and rising demand for Azerbaijan's gas.

In mid-2023, the government amended the budget to increase public  sector wages and public investment, providing fiscal stimulus to the  sluggish economy. Domestic demand also benefited from the strong  increase in loans to households by 25.8 per cent (year on year)  between January and July 2023. However, demand pressures have kept  inflation relatively high at 9.4 per cent in July 2023 and the  Central Bank responded by increasing its policy rate to 9.0 per cent  in May 2023. High energy export revenues are likely to support GDP  growth in the short term. Therefore, GDP is forecast to increase  by  1.5 per cent in 2023, with growth strengthening to 2.5 per cent in  2024. The forecast is highly dependent on developments in the oil and  gas markets.

Georgia's economy grew at a robust rate of 7.6 per cent year on year  in the period from January to July 2023. Financial services, tourism,  construction, and trade were the main drivers of growth, while the  manufacturing and mining sectors registered declines. Income  generated by foreign travelers increased by 57.9 per cent year on  year in the first half of 2023 and tourism revenues are now well  above pre-pandemic levels. Net money inflows continued growing at  29.4 per cent year on year in the first half of 2023, playing a  crucial role in covering a significant part of the trade deficit and  helping to bring down the current account deficit. Annual inflation  fell to 0.9 per cent in August 2023, well below the National Bank of  Georgia's (NBG) 3 per cent target. However, as domestic demand and  cash inflows from migrants remain strong, the NBG has been cautious  about rate cuts. It reduced its policy rate by 50 basis points in May  2023 and by a further 25 basis points in August, to 10.25 per cent.  Given the continued strength of the economy in the first half of 2023  and the expected slowdown in the second half of the year, GDP is  projected to grow by 6.0 per cent in 2023 and 4.5 per cent in 2024.  The main downside risks stem from geopolitical developments. On the  upside, the possibility of gaining EU candidate status could give a  new impetus to structural reforms enabling growth and promoting  economic stability.

The full report is available here:  file:///D:/txt/EBRD_RegionalEconomicProspects_Sept2023_report.pdf

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