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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007
ARMENIAN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
Preparations for Armenia's next general
election, due by May 2007, and subsequent
presidential election, due in early 2008, will
shape the political scene. A realignment of
the party political scene has begun, and
leading players within the elite are beginning
to set out their positions-most notably, the
defense minister, Serzh Sarkisian, who has
formally joined the ruling Republican Party of
Armenia (RPA) with a view to contesting the
general election. In advance of the voting,
new political parties, financed mainly by
wealthy businessmen, will gather strength.
These parties will seek to persuade a
disillusioned electorate that they offer an
alternative to the current political
establishment.
Western pressure on Armenia's authorities to
ensure that the 2007 parliamentary election
is free and fair will intensify in the coming
months. A possible suspension of funding
under a newly concluded agreement with the
US Millennium Challenge Corporation (MCC)
could provide an incentive for the authorities
to avoid the fraudulent practices that have
characterized previous elections, although it
is unlikely that the MCC would go so far as
to terminate the program altogether.
A poverty reduction strategy paper and a
medium-term expenditure framework for
2007-09 will determine the government's
economic policy. Reform of the financial
sector will be a priority, aimed at improving
financial intermediation and strengthening
the banking system. More effective
mobilization of tax revenue will also be a
goal, with the aim of reducing dependence
on foreign grants and bringing revenue in
from the shadow economy. Although
investment in sectors such as construction
and industry has been increasing,
enterprises continue to cite the onerous tax
system and the weak enforcement of
legislation as constraints on business.
The ineffectiveness of procedures for settling
disputes will also deter foreign investors.
International Assumptions
Armenia's growth prospects will remain
closely linked to trends in global commodity
prices and to the performance of the Russian
economy. Russia is the country's largest
trading partner and is becoming an
increasingly important investor in leading
sectors such as energy and metals. With the
average price of dated Brent Blend crude oil
expected to remain close to US$ 70/barrel in
2006-07, Russia is likely to continue to lift
regional economic performance, owing to
relatively strong growth in import demand.
Global metals prices are expected to
continue to rise strongly in 2006, thereby
supporting Armenia's export revenue, before
falling in 2007.
Economic Performance
Real GDP growth has continued to exceed
expectations, coming in at nearly 12% in the
first half of 2006. Growth is being boosted by
a robust expansion in construction, partly as
a result of new investment in industrial subsectors
such as mining and energy, and
partly owing to a boom in residential and
office development in the capital, Yerevan.
Expanding output in the services sector is
also pushing growth upwards.
A loosening of the fiscal stance will be the
main source of inflationary pressure in the
short term, although compensation
payments for the savings lost during
hyperinflation of the early post-independence
years will also push the rate of price rises
upwards. The rapid expansion of monetary
aggregates will be a further factor, as will
higher import prices for wheat. The effect of
higher gas prices on the consumer price
basket is likely to be muted, owing to
government subsidies, but a 38% rise in
water tariffs in Yerevan, as of July 2006, will
exert upward pressure on the services
component. The annual average rate will
accelerate considerably in 2006, to close to
9%, before moderating in 2007.
The dram is expected to continue to
appreciate against the US dollar in both
nominal and real terms in 2006, owing to
further robust inflows of workers' remittances
and other private transfers. Weaker export
revenue will slow the pace of appreciation in
2007, although this effect will be partly offset
by the depreciation of the US dollar on world
markets. We forecast an average annual
exchange rate of Dram427.7:US$1 this year,
followed by a rate of Dram414.3:US$1 in
2007.
Heavy dependence on food imports and a
narrow manufacturing base will remain
structural weaknesses in Armenia's trade
sector. The government will therefore
continue its efforts to develop new export
industries-in particular, the metallurgy,
machine-building and mineral products
subsectors. New investment in these areas
will drive growth in export revenue in
2006-07 and reduce the share of diamondprocessing
within total exports.*
* The Economist Intelligence Unit Ltd, August 2006
Key Information Contacts
Central Bank of the Republic of Armenia www.cba.am
Central Depository of Armenia www.cda.am
2005-MAIN ORIGINS OF GROSS DOMESTIC PRODUCT (%)
2005-MAIN COMPONENTS OF GROSS DOMESTIC PRODUCT (%)
Construction Agriculture Industry
Trade Transport & communications
Other
Private consumption Government consumption Gross fixed investment
Change in stocks Net exports of goods & services Statistical discrepancy
18.8
21.7
18.7
10.5
24.7
5.6
80
70
60
50
40
30
20
10
0
-10
-20
76.0
10.6
29.3
0.4
-13.0
-3.3
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