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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 ARMENIAN STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Economic and Political Environment Preparations for Armenia's next general election, due by May 2007, will shape the political scene over the coming year. Although the president, Robert Kocharian, and his government won a referendum on constitutional changes in November 2005, they did so in controversial circumstances, once again casting doubt on their commitment to free and fair elections. Armenia's opposition parties nevertheless proved unable to take advantage of the authorities' apparent malpractice in the conduct of the referendum, and their influence is likely to weaken steadily. In advance of the election, new political parties, financed mainly by wealthy businessmen, are expected to emerge. These will seek to persuade a disillusioned electorate that they offer an alternative to the current political establishment. A poverty reduction strategy paper (PRSP), a medium-term expenditure program (for 2005-08) and an anti-corruption strategy will determine the government's economic policy. The main policy priorities will include further reforms of the tax and customs administration, enhancing fiscal transparency (in particular, by improving expenditure management), and strengthening the financial sector and the judiciary. More effective mobilization of tax revenue will also be a goal, with a view to reducing dependence on foreign grants and bringing revenue in from the shadow economy. Although investment in certain sectors (including construction and industry) has been increasing, enterprises continue to cite the onerous tax system and the weak enforcement of legislation as constraints on business. 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 well above US$ 55/barrel throughout 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 rising 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 13.9% in 2005, matching the post-independence record of 2003. Growth was lifted 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. Favorable agricultural harvests and expanding output in the services sector were also important factors. Further development of these sectors is likely to support the economy in the 2006-07 forecast period, for which annual average real GDP growth is anticipated to be around 9%. Although rising utility prices will exert some inflationary pressure, stable prices for food (which makes up a much larger share of the consumer basket than energy), as well as declining world food prices (since Armenia imports about 50% of its food requirements), will keep inflation low. Furthermore, the continued appreciation of the dram, albeit at a much slower pace than in 2004-05, should dampen the inflationary pressure arising from large capital inflows. As a result, inflation is expected to remain well within the Central Bank's year-end target of 3% in 2006 and 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. From the second half of 2007 the rate of appreciation against the US dollar will slow, as the US currency begins to strengthen on world markets. In real effective terms the dram is likely to depreciate by around 6% by end-2007, owing to a slowdown in the rate of nominal appreciation against the currencies of Armenia's trading partners and a more moderate pace of inflation than in the historical period. New construction projects will sustain high levels of spending on imports of capital goods such as building materials, machinery and equipment. Moreover, strong inflows of transfers will support private consumption, drawing in imports of consumer goods. Surpluses on current transfers and income will only partly offset the growing trade and services deficits, although continued strong economic growth will keep the current account deficit stable as a share of GDP, at an annual average of about 4.1%.* * The Economist Intelligence Unit Ltd, May 2006 Key Information Contacts Central Bank of the Republic of Armenia www.cba.am Central Depository of Armenia www.cda.am 2004-MAIN ORIGINS OF GROSS DOMESTIC PRODUCT (%) 2004-MAIN COMPONENTS OF GROSS DOMESTIC PRODUCT (%) Agriculture Industry Construction Trade Transport & communications Other Private consumption Government consumption Fixed investment Change in stocks Net exports of goods & services Statistical discrepancy 22.6 19.1 15.5 11.2 25.6 6.0 90 80 70 60 50 40 30 20 10 0 -10 -20 83.8 10.7 22.7 1.3 -15.1 -3.4 PAGE 40
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 ARMENIAN STOCK EXCHANGE ARMENIAN ECONOMIC CHARTS AND TABLES 2001 (a) 2002 (a) 2003 (a) 2004 (a) 2005 (a) GDP at market prices (Dram billions) 1,175.9 1,362.5 1,624.6 1,896.4 2,289.1 GDP (US$ billions) 2.1 2.4 2.8 3.6 5.0 Real GDP growth (%) 9.6 13.2 13.9 10.1 13.9 Consumer price inflation (av; %) 2.8 -1.8 2.8 8.0 0.6 Population (millions) 3.1 3.1 3.0 3.0 3.0 (b) Exports of goods FOB (US$ millions) 353.1 513.8 696.1 738.3 981.4 Imports of goods FOB (US$ millions) 773.3 882.5 1,130.2 1,196.3 1,566.1 Current account balance (US$ millions) -199.6 -147.9 -189.5 -161.7 -204.2 Foreign exchange reserves excl gold (US$ millions) 320.8 425.0 510.2 575.9 755.0 Exchange rate (av) Dram:US$ 555.1 573.4 578.8 533.5 457.7 ECONOMIC FORECAST SUMMARY 2004 (a) 2005 (b) 2006 (b) Real GDP growth 10.1 10.5 8.0 Consumer price inflation 7.0 1.0 2.8 Current account balance (% of GDP) -4.5 -4.4 -5.1 Exchange rate (Dram:$) 533 455 430 2004-PRINCIPAL EXPORTS (FOB) (%) 2004-PRINCIPAL IMPORTS (CIF) (%) Precious or semi-precious stones & metals Mineral products Prepared foodstuffs Base metals Other Precious or semi-precious stones & metals Mineral products Machinery & equipment Prepared foodstuffs Other 19.5 16.2 11.7 9.7 22.5 10.1 7.0 42.5 16.6 44.2 2004-MAIN DESTINATIONS OF EXPORTS (%) 2004-MAIN ORIGINS OF IMPORTS (%) Belgium Israel Germany Russia Belgium Russia Other USA Israel Other 13.8 11.6 10.9 63.1 13.9 8.1 7.5 15.1 7.4 48.6 Source: Economist Intelligence Unit ViewsWire (a) Actual (b) Economist Intelligence Unit estimates PAGE 41
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