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Caucasus Country Risk Report Q4 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 53 pages

Core Views

Political tensions in the South Caucasus will remain high over the coming years as increased Russian intervention in Georgia's breakaway territories fuels concerns that Russia will fully annex Abkhazia and South Ossetia. Meanwhile, Azerbaijani-Armenian relations will remain strained over the conflict surrounding Nagorno-Karabakh after it escalated in April 2016. Armenia's economy will recover in 2017 primarily due to recovering remittances inflows from Russia and rising copper prices, the country's main export. Nevertheless, being part of the Russian-led Eurasian Economic Union (EEU) will hurt growth over the years ahead. Georgian real GDP growth will slow over the next two years relative to the 5.9% average growth achieved between 2011 and 2015 due to exposure to Russia's economic crisis, which has been triggered by Western sanctions and magnified by a dramatic fall in global oil prices. We forecast the Russian economy to contract 1.0% in real terms 2016, following a 3.7% contraction in 2015. Azerbaijan will continue to tread a fine line between siding with either Russia or the European Union. Azerbaijan's economic interests can be better served by increasing trade and energy routes with the EU, while maintaining good relations with Moscow will likely assist in keeping the autocratic regime of President Ilham Aliyev in power.

Table Of Contents

Caucasus Country Risk Report Q4 2017
BMI Index League Tables...............................................................................................................................................................9
Core Views.....................................................................................................................................................................................11
Key Risks.......................................................................................................................................................................................11
Chapter 1.1: Economic Outlook - Armenia.......................................................................................... 13
Economic Growth Outlook...................................................................................................................................... 13
Growth Accelerating Despite Headwinds...................................................................................................................................13
Although GDP growth in Armenia is accelerating, the economy still faces several headwinds in the quarters ahead. The country's labour
market remains in a poor state, preventing household consumption from growing at a faster clip. Copper exports will be a bright spot in
the months to come, which will continue to be supported by a weak currency.
GDP By Expenditure Outlook.................................................................................................................................. 14
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................14
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................14
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................15
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................15
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................15
Chapter 1.2: 10-Year Forecast - Armenia............................................................................................. 17
The Armenian Economy To 2025............................................................................................................................ 15
Convergence To Stall....................................................................................................................................................................17
Our relatively pessimistic medium-term view on the Armenian economy continues through our long-term forecast to 2025. 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 3.4% between 2016 and 2025.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................17
Chapter 1.3: Political Outlook - Armenia.............................................................................................. 19
Domestic Politics..................................................................................................................................................... 19
President To Consolidate Powers Amid Unrest.........................................................................................................................19
Following weeks of social unrest, relative political stability has returned to Armenia, although tensions between the government and
demonstrators remain high. Nevertheless, President Serzh Sargsyan will continue to tighten his grip on the country in the run-up to the
parliamentary elections in 2017.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................19
Long-Term Political Outlook................................................................................................................................... 21
Nagorno-Karabakh Conflict To Stay At Centre Stage................................................................................................................21
Armenia will continue to have difficult relations with neighbours Turkey and Azerbaijan, as a result of sensitive historical grievances and
strong domestic pressure groups on both sides. Nagorno-Karabakh will remain a particular potential flashpoint given the high profile of
the region and ongoing talks, which are set to test commitment to peace in both Yerevan and Baku.
Chapter 2.1: Economic Outlook - Azerbaijan....................................................................................... 25
Economic Growth Outlook...................................................................................................................................... 25
Foreign Currency Shortages Pointing Towards Another Devaluation.....................................................................................25
Demand for foreign currency will continue to outstrip supply, increasing pressure on Azerbaijan's banking sector. With central bank
reserves declining rapidly and little appetite in the government to excessively burden Azerbaijan's sovereign wealth fund to support the
currency, another devaluation looks probable.
GDP By Expenditure Outlook.................................................................................................................................. 26
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................26
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................26
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................27
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................27
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................27
Chapter 2.2: 10-Year Forecast - Azerbaijan......................................................................................... 29
The Azeri Economy To 2025.................................................................................................................................... 29
Weak Growth Up To 2025.............................................................................................................................................................29
Over our 10-year forecast period to 2025, we believe Azerbaijan's economy will remain on a weak growth trajectory.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................29
Chapter 2.3: Political Outlook - Azerbaijan.......................................................................................... 31
Domestic Politics..................................................................................................................................................... 31
Constitutional Referendum: President Aliyev Tightening His Grip..........................................................................................31
Following a constitutional referendum on September 26, President Ilham Aliyev's powers will be further extended.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................31
Long-Term Political Outlook................................................................................................................................... 33
Everything Hinges On Nagorno-Karabakh..................................................................................................................................33
Attempts to win back the Nagorno-Karabakh enclave will remain the defining issue of Azerbaijani foreign and domestic policy in the
years ahead.
Chapter 3.1: Economic Outlook - Georgia........................................................................................... 37
Economic Growth Outlook...................................................................................................................................... 37
Consumer-Led Recovery On Its Way..........................................................................................................................................37
Georgian economic growth will accelerate in the quarters ahead, while the Caucasus region will continue to be plagued by a recession.
GDP By Expenditure Outlook.................................................................................................................................. 38
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................38
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................39
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................39
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................39
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................39
Chapter 3.2: 10-Year Forecast - Georgia.............................................................................................. 41
The Georgian Economy To 2025............................................................................................................................. 41
Foreign Investment To Support Growth......................................................................................................................................41
Over our 10-year forecast period, we project Georgian growth to remain relatively robust, averaging 4.2% per annum through 2025.
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.....................................................................................................................................41
Chapter 3.3: Political Outlook - Georgia............................................................................................... 43
Domestic Politics..................................................................................................................................................... 43
Parliamentary Election Results To Confirm Pro-Western Path................................................................................................43
Georgia ' s parliamentary elections on October 8 will confirm the country ' s pro-Western path o f economic and political reforms. The m
ost likely winner will be the ruling centre-left Georgian Dream government, which advocates European Union and NATO membership.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................43
Long-Term Political Outlook................................................................................................................................... 45
Pro-Western Path To Continue Despite Mounting Opposition.................................................................................................45
We expect tensions between Georgia and Russia to remain frosty over the next 10 years as the Georgian government continues to seek
deeper integration with the EU.
Chapter 4: BMI Global Macro Outlook................................................................................................... 49
Global Macro Outlook.............................................................................................................................................. 49
Broad Recovery But Three Notes Of Caution.............................................................................................................................49
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................49
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %....................................................................................................................................50
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...................................................................................................................................51
TABLE: ARMENIA - MACROECONOMIC DATA and FORECASTS..........................................................................................................................53
TABLE: AZERBAIJAN - MACROECONOMIC INDICATORS..................................................................................................................................53
TABLE: GEORGIA - MACROECONOMIC DATA and FORECASTS.........................................................................................................................53

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