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Caucasus Business Forecast Report Q4 2014

  • August 2014
  • -
  • Business Monitor International
  • -
  • 58 pages

Core Views
Despite an escalation in violence along the border of the disputed Nagorno-Karabakh region in July/August 2014, it is not part of our core scenario to see the outbreak of a widespread military conflict between Armenia and Azerbaijan. While the leadership of each side espoused aggressive nationalist rhetoric in order to ensure domestic support, the key powers in the region (Armenia-supporting Russia and Azerbaijan-supporting Turkey) are unlikely to favour an outbreak of conflict on their southern and eastern flanks respectively.

Armenian real GDP growth will slow in 2015 on the back of declining export demand from Russia, as well as stagnating remittance growth, a key driver of private consumption. With Armenia set to join the Eurasian Economic Union on January 1 2015 we believe the economy will remain heavily reliant on Russian support over the coming years.

Major Forecast Changes
On the back of robust growth in H114 and positive leading indicators we have revised up our real GDP growth forecasts for Georgia in 2014 and 2015, from 3.4% and 4.1% to 4.4% and 4.2% respectively. We expect growth to slow in 2015 from 2014 as growth in exports to Russia slows on the back of Moscow discontinuing a free trade agreement in retribution for Georgia deepening its ties with the EU.

Table Of Contents

Caucasus Business Forecast Report Q4 2014
Core Views.11
Major Forecast Changes....11
Key Risks To Outlook...11
Chapter 1.1: Political Outlook - Armenia.... 13
Domestic Politics.... 13
Shift Towards Russia To Stoke Nagorno-Karabakh Tensions
The intensification of violence between Armenia and Azerbaijan over the disputed Nagorno-Karabakh region is not likely to escalate into
a ground war in 2014 or 2015, and our core scenario remains that of a prolonged ' frozen conflict '.
table: Political Overview..13
Long-Term Political Outlook. 15
Mitigation Of Regional Tensions Key To 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.
Chapter 1.2: Economic Outlook - Armenia 19
Economic Activity... 19
Remittance Stagnation To Hit Growth
Armenian real GDP growth will slow to 3.0% in 2015 from our forecast of 3.8% in 2014 as remittances decline and import demand from
Russia stagnates.
table: Economic Activity ...19
Chapter 1.3: 10-Year Forecast - Armenia... 23
The Armenian Economy To 2023.... 23
Convergence To Stall
Our relatively pessimistic medium-term view on the Armenian economy continues throughout our long-term forecast to 2023. We believe
the lack of economic and political reforms enacted by the government and the pivot away from the EU will hinder long-term economic
activity, and as such we forecast real GDP growth to average 3.5% between 2018 and 2023.
table: Long-Term Macroeconomic Forecasts..23
Chapter 2.1: Political Outlook - Azerbaijan 25
Domestic Politics.... 25
Not Drawn In By Geopolitical Struggle
Azerbaijan's government will refrain from committing to deeper integration with the EU or the Eurasian Economic Union, as it attempts to
play one off against the other in order to secure investment from both sides.
table: Political Overview .25
Long-Term Political Outlook. 26
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 2.2: Economic Outlook - Azerbaijan.. 26
Economic Activity... 31
Growth To Slow On Economic Rebalancing
Sustained production issues at key oil fields and a gradual rebalancing away from an oil-based economy will see Azerbaijan's contain
GDP growth in 2014 and 2015. However, in the longer term we believe this rebalancing will support economic activity, as the larger nonoil
sector is boosted by increased government and foreign investment.
table: Economic Activity....31
Chapter 2.3: 10-Year Forecast - Azerbaijan.... 33
The Azeri Economy To 2023.. 33
Trend Growth Bolstered During 2018-2023
Over our 10-year forecast period to 2023, we believe Azerbaijan's economy will remain on a positive trajectory. Undoubtedly, energy
exports will continue to be the key driver underpinning growth. In addition, we expect rising incomes and consumption to help keep
growth buoyed during our forecast horizon.
table: Long-Term Macroeconomic Forecasts..33
Chapter 3.1: Political Outlook - Georgia 35
Domestic Politics.... 35
Russian Sanctions Will Not Halt EU Integration
The likelihood of economic sanctions being imposed on Georgia by Russia following the signing of an EU Association Agreement will
not deter Tbilisi from pursing closer EU links.
table: Political Overview .35
Long-Term Political Outlook. 37
Pro-Western Path To Continue
We expect tensions between Georgia and Russia to remain frosty over the next 10 years as the Georgian government continues
to attempt deeper integration with the EU and highlight that the potential for social unrest in border areas will remain pronounced,
especially in the aftermath of the Ukraine crisis and Georgia's shift towards the EU and NATO.
Chapter 3.2: Economic Outlook - Georgia. 41
Economic Activity... 41
Russian Trade Sanctions To Have Little Lasting Impact
The end to a free trade agreement with Russia will see the rate of Georgian real GDP growth slow in H214 and 2015. However, on the
back of Georgia signing an EU Association Agreement in June, in the longer term we expect increased EU funding to support fixed
investment, and the elimination of trade barriers with EU member states to bolster export levels.
table: Economic Activity....41
Chapter 3.3: 10-Year Forecast - Georgia.... 45
The Georgian Economy To 2023 45
Foreign Investment Will Support Growth
Over our 10-year forecast period, we project Georgian growth to remain relatively robust, averaging 4.5% per annum through 2018-
2023. Georgia will continue to rely heavily on foreign direct investment as a key driver of growth over the long run, which will be
enhanced by continued economic and structural reforms.
table: Long-Term Macroeconomic Forecasts..45
Chapter 3.4: Business Environment - Georgia ... 47
Business Environment Outlook. 47
Institutions 47
Table: BMI Business And Operation Risk Ratings..47
Table: BMI Legal Framework Rating..48
Infrastructure. 49
Market Orientation... 51
Table: Labour Force Quality.51
Table: Emerging Europe - Annual FDI Inflows .52
Table: Trade And Investment Ratings....53
Operational Risk. 54
Chapter 4:BMI Global Assumptions.. 55
Global Outlook.... 55
US Revision Drags Down Forecast.55
Table: Global Assumptions....55
Table: Developed States, Real GDP GrowtH, %.57
Table: Emerging Markets, Real GDP Growth, %58

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