Brushing off both domestic and external shocks
Overview:
The imposition of a state of emergency following controversial presidential elections in March has tarnished Armenia's image abroad. Likewise, the conflict in Georgia (a key transit point for Armenian exports) has had both adverse economic consequences for Armenia and raised the perceived riskiness of investing in the region. While both issues are important in their own right, economic and financial data suggest that the economy has been impacted only modestly by either shock. The authorities continue their strong policy performance with respect to successive IMF programs, the level of foreign exchange reserves is stable and the currency strong. The new administration must, though, look to address remaining structural weaknesses and make the economy less reliant on massive worker remittance inflows.
Recommendation:
Economic growth appears resilient to a number of political and economic shocks experienced this year. The authorities will have to tighten policies further to bring inflation down to its medium-target. Interest rates are relatively low and domestic political risks are reasonably high. The currency has potential to appreciate in the medium-term but this will depend on broadening the economic boom and improving relations with Armenia's neighbours. We are neutral on local interest rates.