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Caucasus Country Risk Report Q2 2016

  • January 2016
  • -
  • Business Monitor International
  • -
  • 51 pages

Core Views

Political tensions in the South Caucasus will remain high overthe coming years as increased Russian intervention in Georgia’sbreakaway territories fuels concerns that Russia will attempt to annexAbkhazia and South Ossetia. Meanwhile, Azerbaijani-Armenianrelations will remain strained over the frozen conflict surroundingNagorno-Karabakh.Armenia’s economy will continue to struggle during 2015-2016 primarilydue to its trade and remittance flow links with ailing Russia.

Beyond this we continue to see little means of diversifying its growthmodel away from one driven by private consumption underpinnedby volatile remittance flows.Georgian real GDP growth will slow over the next two years relativeto the 5.5% average growth achieved between 2010 and 2014 dueto exposure to Russia’s economic crisis, which has been triggeredby Western sanctions and magnified by a dramatic fall in global oilprices. We forecast the Russian economy to contract 5.2% in realterms this year.Azerbaijan will continue to tread a fine line between siding with eitherRussia or the EU. Azerbaijan’s economic interests can be betterserved by increasing trade and energy routes with the EU, whilemaintaining good relations with Moscow will likely assist in keepingthe autocratic regime of President Ilham Aliyev in power.

Table Of Contents

Caucasus Country Risk Report Q2 2016
BMI Index League Tables9
Core Views11
Key Risks11
Chapter 11: Economic Outlook - Armenia 13
Economic Growth Outlook 13
Another Difficult Year Ahead13
The Armenian economy faces significant external headwinds in 2016 In particular, the country will suffer from continued weakness in
Russian economic activity, Armenia's main export partner and main source of remittances
GDP By Expenditure Outlook 13
TABLE: GDP GROWTH FORECASTS 13
TABLE: PRIVATE CONSUMPTION FORECASTS 14
TABLE: GOVERNMENT CONSUMPTION FORECASTS 14
TABLE: FIXED INVESTMENT FORECASTS 14
TABLE: NET EXPORTS FORECASTS 15
Chapter 12: 10-Year Forecast - Armenia 17
The Armenian Economy To 2025 17
Convergence To Stall17
Our relatively pessimistic medium-term view on the Armenian economy continues through our long-term forecast to 2024 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 6 % between 2018 and 2024
TABLE: LONG-TERM MACROECONOMIC FORECASTS 17
Chapter 13: Political Outlook - Armenia 19
Domestic Politics 19
Cementing One-Party Rule19
Armenian President Serzh Sarkisian will pass a constitutional amendment that will transform the country's political system from a
presidential to a parliamentary republic and enable him to run for Prime Minister in the 2017 parliamentary election
TABLE: POLITICAL OVERVIEW 19
TABLE: MAIN CONSTITUTIONAL AMENDMENTS 20
Long-Term Political Outlook 21
Mitigation Of Regional Tensions Key To Stability21
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 21: Economic Outlook - Azerbaijan 25
Economic Growth Outlook 25
Manat Devaluation To Stifle Growth25
The devaluation of the Azerbaijani manat on December 21 was a necessary adjustment to the new reality of lower oil prices The shift to
a free floating exchange rate regime will be painful for the economy and the banking sector in the near term and we therefore forecast
growth to reach 12% in 2016, compared to an 119% average between 2004 and 2014
TABLE: GDP GROWTH FORECASTS 26
TABLE: PRIVATE CONSUMPTION FORECASTS 26
TABLE: GOVERNMENT CONSUMPTION FORECASTS 26
TABLE: FIXED INVESTMENT FORECASTS 26
GDP By Expenditure Outlook 26
TABLE: NET EXPORTS FORECASTS 27
Chapter 22: 10-Year Forecast - Azerbaijan 29
The Azeri Economy To 2025 29
Trend Growth Bolstered During 2018-202529
Over our 10-year forecast period to 2025, 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 29
Chapter 23: Political Outlook - Azerbaijan 31
Domestic Politics 31
Neutrality Will Remain The Best Option31
Azerbaijan will avoid taking sides in the emerging war of words between Russia and Turkey, as doing so would pose risks to the ailing
Azerbaijani economy and undermine Baku's diplomatic links with Ankara and Moscow
TABLE: POLITICAL OVERVIEW 31
Long-Term Political Outlook 33
Everything Hinges On Nagorno-Karabakh33
Attempts to win back the Nagorno-Karabakh enclave will remain the defining issue of Azerbaijani foreign and domestic policy through
the medium term No quick resolution is likely and, therefore, heightened tensions with Armenia have the potential to result in further
small-scale armed clashes, with escalation not ruled out
Chapter 31: Economic Outlook - Georgia 37
Economic Growth Outlook 37
Growth To Pick Up Slowly37
Georgia's economic growth will accelerate from 2016, following a major slowdown in 2015 brought about by severe external shocks
An uptick in growth in Georgia's main economic partners will enable remittance inflows and exports to pick up, boosting headline
growth
Chapter 32: 10-Year Forecast - Georgia 39
The Georgian Economy To 2025 39
Foreign Investment Will Support Growth39
Over our 10-year forecast period, we project Georgian growth to remain relatively robust, averaging 39% per annum through
2019-2024
TABLE: LONG-TERM MACROECONOMIC FORECASTS 39
Chapter 33: Political Outlook - Georgia 41
Domestic Politics 41
No Favourite In The 2016 Legislative Election41
We do not see any favourite for Georgia's October 2016 parliamentary elections, given the incumbent coalition's growing unpopularity
on the back of a sharp economic slowdown, and the fragmentation of the main opposition party
TABLE: POLITICAL OVERVIEW 41
Long-Term Political Outlook 43
Pro-Western Path To Continue Despite Mounting Opposition43
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 4: BMI Global Macro Outlook 47
Global Macro Outlook 47
Unfinished Business In 201647
TABLE: GLOBAL ASSUMPTIONS 47
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 48
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 48
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 49
TABLE: ARMENIA - MACROECONOMIC DATA and FORECASTS 51
TABLE: AZERBAIJAN - MACROECONOMIC DATA and FORECASTS 51
TABLE: GEORGIA - MACROECONOMIC DATA and FORECASTS 51

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