Without additional impetus, economic growth rates in Armenia will  return to their stable values - EDB

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.