ArmInfo.The Asian Development Bank (ADB), having revised its April forecast figures for Armenia's macroeconomy, recently raised its GDP forecast for 2024 from 5.7% to 6% and at the same time sharply reduced its forecast for average annual inflation from 3% to 0.8%. ArmInfo's economic observer asked Grigor Gyurjyan, senior economist at the ADB's Armenian mission, for clarification on the reasons for adjusting the figures in the latest issue of the Asian Development Outlook.
- When you wrote in your April forecast that aggregate demand in the country had begun to decline, few people paid attention to it at the time. For example, the Central Bank of Armenia only recently, when revising the key rate, stated this as a justification for reducing it to stimulate growth. And despite the obvious decline in the level of aggregate demand, you decided to adjust the GDP growth forecast figure upwards? Why? After all, many other financial institutions, on the contrary, their previous high forecasts to the same 6%.
- I accept the fact that our forecasts are somewhat more conservative than our colleagues. As you can see, we have increased our forecast for economic growth very insignificantly, by only 0.3 percentage points. We proceeded from the presence of new factors that supported the growth of the post-March indicators. They, of course, indicate a general trend of slowing growth rates, but more restrained. Both the monthly indicators of the economic activity index, and the data on inflation, or rather deflation, and the decisions to further reduce the key rate, and the situation with the current account, all this became the subject basis for such an insignificant adjustment of the forecast, its update. And this is despite the presence of such downward factors as a decrease in the volume of incoming transfers and the neutralization of the impact of the so-called "relocant environment" on the economy.
- Do you think there is a certain imbalance between the rather good, all things being equal, forecast economic growth of 6% and such a low forecast average annual inflation of only 0.8%? Be that as it may, but 6% is the figure at which, in my opinion, inflation close to zero is practically impossible, or even harmful for any economy of our type.
- Yes, but since the beginning of the current year we have been facing long-term deflation and therefore, taking into account all the accompanying macro factors, we believe that the revision to an average annual 0.8% is quite justified. There are 4 months left until the end of the year, and we do not see any significant inflationary factors and expectations. Quite the contrary, and that is why we have sharply reduced our inflation forecast.
- You certainly took into account the so-called global inflation background, including among Armenia's trading partners. And it remains quite high. This is also the forecast for Russia, although inflation is declining there, but it still remains at a noticeably high level, despite the Central Bank raising the key rate. The situation is the same in Europe. And in the US, despite the Federal Reserve's rate cut in order to stimulate the economy, the background remains quite high. And our Central Bank is lowering the rate in the hope of activating lending and supporting growth after a rather long and tough monetary policy...
- We still believe that external inflationary pressure on Armenia is mostly softening. This is our opinion, which underlies our forecasts. This is the reason why inflation is decreasing, although there is another factor that we have already mentioned - demand is falling due to a decrease in private and public consumption. This is the reason for the formation of a deflationary environment.
- In your forecast, do you see growth in the manufacturing industry? According to statistics, it has increased from 2.5% to 7.5%. Many believe that this is not about basic assets and their development, but only a situational trend associated with the so-called transit economy - transit export-import supplies of precious metals - gold and silver - with minimal processing. What do you think about this?
- I would like to remind you that it was for this reason that the government changed its forecast for the first quarter of this year, replacing the forecast growth rate from 9.6% to 6.1%. According to the forecast for the industrial sector, it was 6.5% for the first half of the year. We believe that this figure is not related to the story with precious metals, but reflects purely the growth of potential in the manufacturing industry. As a result, we neutralized this factor in our forecasts.
- In recent months, the rate of tax collection for the budget has been declining. Did you take this into account in the forecast? After all, the slowdown in this indicator, which was supported by many factors, including inflation, limits the possibilities of capital investments in the economy by the government, the investment activity of the state.
- You know, we mainly forecast two most important indicators: economic growth and inflation. As for budget collection, we rely on the data and justifications of the Ministry of Finance. We take into account the fact that the government, aimed at implementing the program of 6.5% economic growth this year, will do this, including through state investments. It seems to me that tax collection largely depends on the structure of the economy. If you look, the volume of construction continues to grow, but the tax mechanisms of this area are imperfect and weak. The issue of revising the turnover tax is also at issue. In our studies, of course, we consider all factors that are somehow related to macro trends, but we do not get into the intricacies of tax and budget policy. At one time, we studied the state of the current account, but today these trends are changing so quickly that we prefer not to forecast this area. In those countries where it is possible to do this, the bank does, where it is not, like in Armenia, the bank prefers to avoid it.
- In terms of the GDP structure, do you expect growth in the agricultural sector? According to statistics, it is 4.9% for 8 months against 2.3% last year.
- We proceed from the government's program for the development of the agricultural sector - expansion of intensive gardens, consolidation of farms, preferential lending and much more, which will increase the productivity of agriculture, put it on a modern track. Of course, both investments and technology are needed here. We believe that things are moving forward, and step by step the situation in the agricultural sector is improving.
- How do you assess the situation in the services sector. It has fallen almost twofold - from 14.7% last year to 7.5%?
- It is clear that the factor of neutralizing the impact of on the economy played its role here. The pace of development of the industry is slowing down. But there is another factor - the active introduction of artificial intelligence technologies - another revolution in the industry with all its advantages and costs.
In general, we consider the structure of GDP by 4 main components - agriculture, industry, construction and services. We combine the remaining areas into one folder. We see a slowdown in all of them. The main reason is a decrease in investment activity and a significant 30% drop in the volume of private transfers.
- Yes, you are right, and there is a tendency for the construction industry to slow down, and real estate prices are gradually sliding down.
- We think that we will see a slowdown in construction next year, given that government incentive programs are being seriously cut, primarily the tax deduction program. But we do not predict a crisis in the real estate market. We believe that the growth rate of the construction industry will still be high, given the volume of government investment in infrastructure. This is the planned large-scale construction of schools, medical facilities, other social infrastructure, etc. And construction will support GDP growth.
- Let's talk about ADB's work in Armenia. Having exited Ameriabank's capital in connection with the deal with BOGG PLC, you, in fact, like most other international institutional financial structures, do not have investments in the capital of Armenian companies. Even 10-15 years ago, this was a fairly common phenomenon. Are the risks unreasonably high?
- I think that this is due to the imperfection of the corporate governance system in Armenia. This circumstance, in my opinion, is a strong deterrent to the involvement of structures like us in the capital of companies. If the corporate governance mechanisms in Armenia worked, there would be many more opportunities. I think the main reason should be sought here - in the insufficient formation of a corporate governance culture.
- Armenia has become a member of the Asian Development Fund. Tell us a little about this.
- The Asian Development Bank classifies the countries where it operates into several groups. These are low-income, lower-middle-income, upper-middle-income, and high-income countries. And the bank has 2 financing mechanisms. The first is the Asian Development Fund and the second is Ordinary Capital Resources (OCR). When Armenia was not an upper-middle-income country, it had access to both funds, receiving fairly concessional loans. In 2018, the country entered the upper-middle-income group of countries both according to our classification and the World Bank, ceasing to use the Fund's highly concessional resources and receiving access only to OCR resources. Moreover, in 2023, Armenia decided to become a member of the Fund, contributing $1 million to it either as a participant in the donor pool or as technical grant assistance. Armenia has effectively joined the ranks of ADB donor countries.