The three small economies of the South Caucasus – those of Azerbaijan, Georgia and Armenia – are expected to post growth of just 0.1% this year, the World Bank said in the June edition of its Global Economic Prospects report. In the January edition of the report, the World Bank was forecasting South Caucasus growth of 2.1%.

The slower-than-anticipated economic recovery of oil-rich Azerbaijan is the main reason for the sluggish regional growth, it said. As the third largest oil and gas exporter of the former Soviet Union, behind Russia and Kazakhstan, Azerbaijan has been affected by a perfect storm of low commodity prices, monetary depreciation, low public spending and a banking sector crisis. As a result, the Azerbaijani economy contracted by 3.8% in 2016 and it is set to contract by a further 1.4% in 2017, the World Bank predicts.

In comparison to its January forecast, the multilateral lender downgraded Azerbaijan's growth forecast by 2.6 percentage points for 2017 and by 1.7pp to 0.6% for 2018.

Meanwhile, the smaller but more dynamic economies of Armenia and Georgia are expected by the World Bank to post growth rates of 2.7% and 3.5% this year respectively, with the rates projected to accelerate to 3.1% and 4.0% next year.

Structural reforms, particularly in the finance sector, are needed across the three South Caucasian economies, though most acutely so in Azerbaijan. Across the region, banks’ highly dollarised balance sheets pose an ongoing threat to macroeconomic stability; low levels of asset quality are of particular concern in Azerbaijan, where problem loans constitute 30% of lenders’ portfolios, according to Moody’s.

Meanwhile, Georgia’s dependence on external funding could pose a risk looking ahead, the Global Economic Prospects report concludes.