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Armenia: A growing political instability in a complex
geopolitical environment
COFACE - 25/3/2016
Last Updated: January 2016
Low growth affected by the contraction of the Russian economy
Armenian economic growth fell in 2015, partly because of the Russian
recession. Russia is an important source of income for Armenians through
expatriate remittances and is the main market for Armenian exports. The
slowdown, however, was limited by the increase in production of
agricultural and mining sectors. Good harvests have indeed led to an
increase in activity in the agricultural sector while the mining sector was
boosted by the opening of a copper plant. The economy, however, still
suffers from major structural problems. The level of investment has been
halved since 2008 (46% of GDP to 23% in 2015) while the deficit of
infrastructure and competition in the domestic market, weak institutions,
high unemployment rates and persistent (around 18%) and the environment
degraded cases are among the most important sources of vulnerability. The
Extended Fund Facility approved by the IMF in 2014 and the loan granted by
the World Bank in 2015 to modernize the public sector is in this respect a
support vector for the economy and the implementation of structural reforms.
After an increase in 2015, inflation is expected to decline in 2016 as a
result of the stabilization of the Armenian dram and the grant by the
Government of the electricity price.
Fiscal balances and current remaining deficit
The budget deficit widened in 2015 because of the slowdown. Despite the
budgetary consolidation measures that will be implemented to control the
deficit including through the continuation of tax collection efforts, the
need to finance essential spending in infrastructure (especially roads) as
well as structural reforms maintain a significantly negative budgetary
balance in 2016. This should also be affected by the government's
commitment to subsidize the increase in electricity prices and weak demand
from neighboring countries of the Eurasian Economic Union that prevents
generate additional revenue for the government through tariffs. The
issuance of a Eurobond of $ 500 million in May 2015 and the disbursement of
$ 16.3 million from the IMF under the Extended Credit Facility program have
led to a sharp rise in public debt in 2015. It expected to remain at a high
level in 2016. the current account balance remained in deficit in 2015.
Despite the depreciation of the ruble reducing the value of imports, the
decline in exports to Russia coupled with a decline in remittances from
Russia had a significant impact on the balance. Furthermore, the Eurasian
Union penalty to provide real business opportunities and had little impact
on exports in 2015. In a context of still worse conditions in Russia, the
current account deficit will remain high in 2016.
Increasing political instability in a complex geopolitical environment
The second term of President S. Sargsyan reelected in 2013 is marked by
growing political instability, like the replacement of Prime Minister
Tigran Sargsyan under threats of demonstrations by the opposition parties
in April 2014. This policy instability results a slowdown in the
implementation of structural reforms and is likely to continue given the
discontent of citizens to the government's inability to meet their
expectations (unemployment, corruption, inequality). Thus, the series of
events in 2014 continued and intensified in 2015, especially through the
protests against the 16% increase in the electricity price. Finally, the
opposition organizes and calls for changes to lead the country, raising
fears the continuing protests and a deterioration in the social and
political situation. The referendum of December 6, 2015 transformed the
regime in parliamentary system and extended the presidential term from 5 to
7 years. It causes a reduction of presidential powers and suggests a
stabilization of the political situation from the next presidential
elections in 2018. Nevertheless, this apparent progress may reflect the
will of the current president (who may represent the next election) of
retain power by becoming prime minister in the next elections. It is for
this reason that the referendum results are strongly contested by the
opposition and international observers.
Regionally, the dispute with Azerbaijan over Nagorno-Karabakh territory has
few chances to evolve, leaving the situation in the state of latent
conflict. However, the risk of cross-border violence access can not be
excluded. Furthermore, diplomatic relations with Turkey are expected to
remain at a standstill since the ratification by the leaders of the peace
protocols is now subject to the withdrawal of Armenian armed forces of
Nagorno-Karabakh. Membership in the Eurasian Economic Union (UEEA) created
in 2015 and allowing the free movement of workers, goods and capital,
strengthens regional integration of Armenia. It also highlights the
influence of Russia on the member countries.