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 (%)
Agriculture
Industry
Construction
Trade
Transport & communications
15.5
19.1
11.2
6.0
22.6
PAGE 40
25.6
2004-MAIN COMPONENTS OF GROSS DOMESTIC PRODUCT (%)
Private consumption
Government consumption
Change in stocks
Net exports of goods & services
Other
90
80
70
60
50
40
30
20
10
0
-10
-20
83.8
22.7
10.7
1.3
-3.4
-15.1
Fixed investment
Statistical discrepancy