ArmInfo.Since June of this year, re-export of precious metals has ceased to play a significant role in the economy of Armenia, and the contribution of net exports to economic growth in the first half of the year has become negative. This is stated in the latest Macroeconomic Review of the Eurasian Development Bank (EDB) for October, published today.
According to the Bank's analysts, excluding re-export, the volumes of exports and imports of goods have also decreased compared to the same period of the previous year. The main driver of the Armenian economy is once again the services sector, with the exception of the IT sector, which has recorded a decline since the beginning of the year.
Thus, according to analysts - taking into account the above factors - a decrease in external demand, restrictions on export competitiveness due to the strengthening of the dram (by 105% from 2019 as of August 2024), the trend of resource flow to the non-industrial sector (the share of employment in low- productivity sectors reached 14% in June 2024), as well as the exhaustion of the influence of re-exports in the rest of the year - economic growth will slow down. Without additional impetus, growth rates will return to their stable values (4.5-5%).
Meanwhile, the review notes that in 2024, economic growth rates remain high, although they will slow down somewhat. This is primarily due to a decrease in external demand after high levels in 2022-2023. It is emphasized that the structure of economic growth changed at the end of 2023 and the first half of 2024 - the role of industrial production increased significantly, which provided 1 p.p. growth of 6.5% y/y in January-June against minus 0.3 p.p. in the same period last year. This is primarily due to the increase in production and foreign trade in precious metals.
The review notes that the growth indicators of the Armenian economy for the first eight months remained at a high level. Inflation slowed down in September and remains below target indicators. The Central Bank continues to adhere to the course of easing the monetary policy, having reduced the refinancing rate in September by 0.25 percentage points - to 7.5%.
In January-August, the economic activity indicator increased by 9.0% y/y (5.6% y/y in August). The main contribution to economic growth for the first eight months of the current year was made by the trade (20.4% y/y), services (5.2% y/y) and industry (13.7% y/y) sectors. At the same time, the dynamics of industry has been weakening since the end of the second quarter due to the slowdown in the growth of the manufacturing industries. If at the end of the first quarter they provided almost 40% of economic activity, then in the period from June to August the contribution of industry was small (0.4 percentage points, or about 7% y/y16). The slowdown in industry was offset in August by an acceleration in the trade (14.9% y/y) and services (9.5% y/y) sectors.
The persistently high growth rates of construction (16.2% y/y in January-August) continue to be supported by mortgage lending (26.2% y/y in August). Economic growth will slow somewhat by the end of the year - as the impact of the increase in production and export of precious metals and gold products at the end of last year and in the first half of this year is exhausted. At the same time, economic activity will be supported by domestic demand as a result of stable growth in household lending (22.4% y/y in August) and the implementation of planned government spending in Q4 2024.
At the beginning of the second half of the year, the services and trade sectors became the drivers of economic growth. At the same time, the growth of the manufacturing industry (by 3.8% y/y in August after 2.5% y/y in July) became less concentrated due to the recovery of dynamics in the main industries. The production of basic metals (including gold) increased 3.4 times y/y in January - August (54.2% y/y in August).
The acceleration of growth in the services sector was ensured by financial activities (8.2% y/y in August) and the entertainment and recreation sector (20.9% y/y in August). The foreign trade deficit decreased in January - August 2024 to $ 2.3 billion (in January - August 2023, it was $ 3 billion). According to the results of eight months, export deliveries increased 2.1 times against the background of an increase in the production and export of precious metals and gold products. They account for 67% of the structure of goods exports (an increase of 7 times y/y in January - August).
Together with supplies of mineral products, these items provided all the positive dynamics of exports. Imports in January-August grew by 59.3% y/y and were also provided mainly by the import of precious metals for processing and subsequent export (by 6.9 times y/y). The share of vehicles and mineral products in the import structure significantly decreased. Excluding trade in precious metals, the dynamics of both imports and exports in January-August were negative (minus 9% y/y and minus 11.9% y/y, respectively).
Inflation remains below the target range of the Central Bank of Armenia, having slowed down to 0.6% y/y in September after 1.3% y/y in August. This is due to the dynamics of prices in the food segment - food products fell in price by 1.0% y/y in September after growing by 1.0% y/y a month earlier. In September, the growth of prices for services continued to accelerate, amounting to 3.6% y/y after 3.3% y/y in August. At the same time, disinflation in the non-food segment intensified due to a decrease in prices for imported goods. Inflation remains below the target range of the Central Bank of Armenia. We forecast price growth at 1.5% y/y by the end of the year.
The Central Bank has reduced the refinancing rate for the sixth time this year. At the meeting on September 10, it was lowered by 0.25 p.p. - to 7.5%. The decision was made against the backdrop of weak inflation and declining inflation expectations. Since the beginning of the monetary policy easing cycle in the second half of 2023, the refinancing rate has decreased by a total of 3.25 percentage points. We expect that at the next meeting of the Central Bank of Armenia, it will lower the refinancing rate again against the backdrop of weak price dynamics.
The state budget balance was formed with a deficit of 0.9% of GDP17 in January-August 2024 (in the same period of 2023, the surplus was 0.8% of GDP). Tax revenues increased by 8.1% y/y, while expenditures - by 19.4% y/y. And this is 18% of the planned deficit for the current year in the amount of 4.8% of GDP (60% of planned revenues and 53% of expenditures), which creates an opportunity to increase government spending in the coming quarter. At the same time, there are risks of complications in the implementation of budget expenditure plans due to slower growth in tax revenues.
