While the Armenian authorities are lauding the macroeconomic indices of the previous year and are planning to give rosy promises closer to the pre-election period the Policy Forum Armenia Association warns of the possible economic disaster and requests to undertake steps to overcome it.
First, the authors of the report spoke about the economic indices of the past 2-3 years, which our government is so proud of. “After a deep contraction in 2009, the Armenian economy grew at an average rate of 3.3 percent in 2010-11, which is significantly lower than pre-crisis growth levels, and which still leaves GDP below its 2007 level. The weak recovery is supported by a rebound in agriculture, industry, and services sectors, while the stagnant construction sector has put brakes on the recovery. The outcome in the agriculture benefited from a base effect (i.e., poor weather conditions in 2010),” reads the report. All in all, the tradable sector has not grown fast enough in recent years, and the economy still relies on domestic demand fueled by foreign savings. In general, economic activity remained constrained by corruption and administrative harassment, weak contract enforcement, and an uneven playing field. The report highlights that these developments have taken place against the backdrop of dramatically worsening social conditions. Poverty has grown steadily since 2008: official statistics put 35.8 percent of population below the poverty line in 2010, compared to 27.6 in 2008. Declining global demand and commodity prices were not adequately reflected in Armenia’s inflation developments, while upward adjustments in the global commodity prices were quickly factored in. Towards the end of the year, the inflation rate notably accelerated, despite relatively low world prices and a widening output gap. This pattern is likely to seriously undermine the effectiveness of any existing anti-crisis macroeconomic policies: an attempt to stimulate the aggregate demand via monetary expansion will likely have more nominal rather than real effects. Back in the day, the Armenian Prime Minister was speaking about the lessons of the crisis, however, according to the authors of the report the lessons of 2009 were worn out. No essential change was registered in the political field, which could have made Armenia more prepared for the possible developments. In 2009, Armenia underwent one of the worst economic declines in the world following the 2007-08 global crisis. But while the outcome in 2009 was mainly a result of the global turmoil made worse by domestic problems, what is transpiring now is largely due to domestic problems, which will be amplified by external shocks. These home-grown problems—much of which are in the realm of political will, rather than lack of resources or geography—are the main focus of the report. In it, we point out that the economy has not adjusted to the global shocks of 2007-08 and that there are clear signs of more pain to come exacerbated by new headwinds from Europe. Conditions in Europe- those that have already been factored into the projections of analysts and international financial institutions, and those that could still surprise everyone by their scale and scope-will have serious implications for Armenia’s economy, both directly as well as indirectly through their impact on Russia, Armenia’s largest source of remittances. The authors of the report also had very noteworthy observation about the foreign debt of Armenia. More importantly, the foreign funding borrowed to finance this stimulus (and to replenish the central bank’s foreign reserves, see below) more than doubled Armenia’s public debt in 2009-10 and almost completely exhausted its borrowing capacity for years to come. This effectively imposed a ban on much-needed infrastructure projects (including the nuclear power plant) with the involvement of direct government borrowing or guarantees. Moreover, the authors of the report think that the structure of the debt of Armenia is very sensitive to shocks. Given the fact that almost 90 percent of Armenia’s debt is in foreign currency, the outlook will be much worse if the dram is abruptly devalued. In the case of 30 percent devaluation, Armenia’s debt-to-GDP ratio will reach 60 percent. A combined shock—with GDP decline and devaluation taken together (not shown on the chart)—will drive the debt-to-GDP ratio well over 70 percent. Although the Armenian authorities assure that the foreign debt of Armenia is in the allowable limits the PFA specialists assure that it reaches the default limit of the developing states. They remind that Finger and Mecagni (2007) show that most recent sovereign debt crisis took place with debt levels above 39 percent. Apart from the volume of sovereign debt, two additional issues are of major concern here. First, Armenia’s repayment profile is concentrated: in the next 3 years (2012-14), the country needs to repay its external creditors over $1 billion in principal and interest (see Fitch Ratings, 2011), of which $600 million is owed to the International Monetary Fund. In total, the CBA has lost $1.2 billion – or ѕ of its pre-crisis gross external reserves-in foreign exchange interventions since the onset of the crisis, of which around $0.5 billion was lost after the March 2009 devaluation. It should be noted that the CBA’s operations in foreign exchange markets are very asymmetric: it responds aggressively to devaluation pressures while allowing appreciation pressures of a largely seasonal nature to be reflected in the exchange rate. The evaluation of the banking system is somewhat interesting too. Despite the official claims about the health of the financial sector, the conditions are worrisome and risks are building up. While the officially reported NPLs have been rising, the true quality of banks’ loan portfolios is likely to be masked by the lax loan classification standards. While credit has been shrinking almost everywhere else in the world, Armenia’s banking sector has seen a massive credit growth since early 2008, much of which has been via borrowing from abroad, with banks having built sizable debt to creditors abroad. “Due to its rapid expansion, the quality of lending remains questionable,” states the report. The report also adverts to the shortcomings and issues of other sectors as well but we cannot analyze those because of the length of the report. Let us only suffice with the following statement included in the report. “The inability to deliver a meaningful external adjustment, which has left the economy much more vulnerable to external shocks than it was prior to the start of the global crisis—is the main policy shortcoming of recent years.” Nonetheless, besides speaking of the issues the PFA also offers solutions to the issues sector by sector. One of the key recommendations is, “The effective handling of challenges facing the country should begin by forming a legitimate authority to oversee the new policy course on behalf of the people of Armenia. The 2012 parliamentary election provides that window.” On our part, let us add that the PFA specialists have expressed an enviable optimism by calling the National Assembly elections of 2012 a window. Perhaps the reason is that the report was prepared prior to the election in Hrazdan (although it was released yesterday). And these elections have showed that this window has become more open and transparent from the outside but in fact turned into a small air hole, which is closed with a board. Only a small crack is left, which unfortunately today is used for giving away 5000 AMD to voters for their ballots.