Core Views
Tensions between Azerbaijan and Armenia continue to rise, and increases in military spending and more incidents of isolated military skirmishes could place both sides on a trajectory of war. We maintain, however, that the costs of all-out conflict remain too high, and believe that recent rhetoric will remain just that.
With a recovery in household spending and fixed investment likely taking off this year, we are projecting real GDP growth of 6.1% for the Armenian economy in 2011. Signs that the central bank is winding down its monetary tightening measures should further help to stimulate investment and household consumption, with inflation showing signs of easing in April. A strong economic growth outlook and the enormous potential for capital investment growth in Azerbaijan over the coming years underpins our highly constructive long-term view of the country’s fast-growing banking sector. Well-capitalised banks and a growing deposit base pave the way for aggressive asset growth as the country confronts the increasing need to improve its infrastructure and build new capacity. The continuation of Georgia’s economic recovery in Q111 supports our view that the economy is finding its feet, despite our expectations for a more subdued growth rate this year, following the high base set in 2010. We nevertheless expect the economy to keep momentum into 2012, when the country’s strong business environment credentials will benefit fixed investment over the years to come.
Major Forecast Changes
We are encouraged by Georgia’s slightly stronger-than-expected headline growth rate (we previously estimated 6.1% growth in 2010), and have revised up our 2011 economic growth forecast from 5.3% to 5.5%. Though still marking a moderate slowdown in activity as base effects recede, we maintain a positive outlook for the Georgian economy, and see growth accelerating back to 6.3% in 2012 as household consumption picks up and gross fixed investment remains at elevated growth levels.
Key Risks To Outlook
Rising inflation and persisting structural shortcomings have spared a wave of public unrest across the Caucasus, particularly affecting Armenia and Georgia. Although inflationary pressures are starting to show early signs of cooling, we caution that renewed supply shocks
in global grain markets could keep social tensions elevated for some time to come.
Despite our view that Azerbaijan and Armenia will not engage in another full-out war over the disputed Nagorno-Karabakh breakaway region, the recent intensification of tensions and increasingly hostile rhetoric from diplomats on both sides means that an escalation of violence cannot be written off entirely. The slowdown in global demand, while widely viewed as a ‘soft patch’ in the recovery cycle, could have adverse effects on the recovery of the Caucasus economies. Even oil-rich Azerbaijan could be affected by weaker external demand for energy, should activity continue to cool. Not only would this derail our constructive growth outlook for the regional economies, but it would throw into question our assumptions that political stability will begin consolidating as unemployment rates come down.
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BMI Ratings 5
BMI Risk Ratings – Armenia6
BMI Risk Ratings – Azerbaijan7
BMI Risk Ratings – Georgia8
BMI Risk Ratings – Emerging Europe Tables10
Executive Summary 11
Chapter 11: Political Outlook - Armenia 13
Domestic Politics 13
Political Risk Profile Stabilising
A string of concessions towards Armenia’s opposition parties by President Serzh Sarkisian, as well as signs
of falling inflation, suggest that social tensions are easing
Long-Term Political Outlook 15
Mitigation Of Regional Tensions To Boost Stability
Armenia will continue to have difficult relations with neighbours Turkey and Azerbaijan through the medium term
as a result of sensitive historical grievances and strong domestic pressure groups on both sides
Table: political risk ratings 15
Chapter 12: Economic Outlook - Armenia 19
Economic Activity 19
Domestic Demand Ripe For Stronger Growth
With a recovery in household spending and fixed investment likely taking off this year, we are projecting real
GDP growth of 61% for the Armenian economy in 2011
Table: ARMENIA – ECONOMIC ACTIVITY 19
Monetary Policy 20
Monetary Policy: Economic Growth Coming Into Focus20
Halfway through 2011, we believe central banks have mostly responded appropriately to inflationary pressures,
paving the way for a shifting focus protecting economic recoveries
Chapter 13: 10-Year Forecast - Armenia 23
The Armenian Economy To 2020 23
Convergence To Continue
Our positive medium-term view on the Armenian economy continues through our long-term forecast to 2020
Table: ARMENIA Long-Term Macroeconomic Forecasts 23
Chapter 21: Political Outlook - Azerbaijan 25
Domestic Politics 25
No Outright Conflict Despite Rising Tensions
Tensions between Azerbaijan and Armenia continue to rise, and increases in military spending and rising incidents
of isolated military skirmishes could place both sides on a trajectory of war
Long-Term Political Outlook 27
Everything Hinges On Nagorno-Karabakh
Attempts to win back the Nagorno-Karabakh enclave will remain the defining issue of Azerbaijani foreign and
domestic policy through the medium term
Chapter 21: Economic Outlook - Azerbaijan 31
Economic Activity 31
A Promising Investment Outlook
Azerbaijan’s investment outlook holds a lot of promise, as the country’s resource wealth and stable banking sector
suggest considerable growth potential over the coming decade
Banking Sector 33
Chapter 23: 10-Year Forecast - Azerbaijan 33
The Azerbaijani Economy To 2020 35
Trend Growth Will Be Lower During 2015-2020
Over our 10-year forecast period to 2020, we believe Azerbaijan’s economy will remain on a positive trajectory
Table: AZER BAI JAN Long-Term Macroeconomic Forecasts 35
Chapter 31: Political Outlook - Georgia 37
Domestic Politics 37
Saakashvili’s Grip On Power Unlikely To Weaken
High unemployment and rising prices in Georgia suggest that social stability will remain fragile for some time to come
Long-Term Political Outlook 39
Pro-Western Path To Continue
We expect tensions between Georgia and Russia to gradually subside over the next 10 years but highlight that the
potential for social unrest in border areas will remain pronounced
Table: Regional Tension Remains 39
Table: Georgia Political Overview 42
Regional Political Outlook 42
Chapter 32: Economic Outlook - Georgia 47
Economic Activity 47
Economic Rebound To Power Ahead
The continuation of Georgia’s economic recovery in Q111 supports our view that the economy is finding its feet, despite
our expectations for a more subdued growth rate this year, following the high base set in 2010
Table: GEORGIA – ECONOMIC ACTIVITY 47
Chapter 33: 10-Year Forecast - Georgia 51
The Georgian Economy To 2020 49
Foreign Investment Will Support Growth
Over our 10-year forecast period, we project Georgian growth to remain relatively robust, averaging 50% over 2016-2020
Table: GEORGIA Long-Term Macroeconomic Forecasts 49
Business Environment Outlook 51
Table: BMI Business And Operation Risk Ratings 52
Table: BMI Legal Framework Rating 53
Table: Labour Force Quality 54
Table: Emerging Europe – Annual FDI Inflows 55
Table: Trade And Investment Ratings 57
TABLE: TOP EXPORT DESTINATIONS 58
Chapter 4: BMI Global Assumptions 59
Global Outlook 59
TABLE: GLOBAL ASSUMPTIONS 59
Table: EMERGING MARKETS AGGREGATE GROWTH 60
Table: DEVELOPED STATES REAL GDP GROWTH FORECAST 61
Table: REAL GDP GROWTH CONSENSUS FORECASTS 6
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