South Caucasus economies to expand by average of 2.2% in 2015, predicts ADB

By bne IntelliNews March 26, 2015

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In 2015 the South Caucasus economies will continue to feel the heat of Russia’s slowdown and low oil prices, with regional geopolitical developments leaving the outlook highly uncertain, the Asian Development Bank (ADB) stated in its “Asian Development Outlook 2015”. Average growth in the region is forecast at 2.2% in 2015.

The weak economy in the Russian Federation, crunched by sanctions over the conflict in Eastern Ukraine and low oil prices, will further curb export and remittance flows, hitting Armenia and Georgia, while slowdown in the petroleum sector will hit Azerbaijan’s economy. The impact is expected to ease in 2016 and growth will pick up slowly, averaging 2.5% in the region.


Armenia had remarkable economic growth and poverty reduction in the pre-2008 financial crisis years, enjoying the effects of the umbilical cord with Russia’s booming economy and Moscow’s role as vital guarantor of regional security as well as a regular stream of money sent home by an army of Armenians working in the Russian Federation.

However, since 2009 growth has slowed and the economy remains vulnerable to new setbacks, starting from a sharp drop in remittances - as money transfers from Russia have dwindled, the country’s growth has suffered.

Private transfers provide a key economic lifeline to the country: in 2013 amounted to $1.8bn, about 17.3% of the country’s GDP, according to the Central Bank of Armenia (CBA). In 2014 private monetary transfers dropped by 7.5% y/y to $1.72bn. Russia  represented the bulk of the transfers at 82.9% of the total, but the $1.4bn sent from there last year was 10.7% lower than in 2013. Private transfers to Russia on the other hand grew by 12.6% to $203.2mn.

Developing the private sector and seeking higher capital investment in infrastructure are the way ahead to downplay the impact of the ally’s downturn and to leverage the benefits of the Eurasian Economic Union (EEU) membership. Focus on rural development and agriculture is key as the sector provides 35% of the country’s jobs, 20% of its GDP and 30% of its exports, but it is in dire need of investment.

The outlook for 2015 is slower growth, forecast at 1.6%, higher inflation, up to 4.6%, and a weaker external position.


Following 20 years of fixed exchange rate policy, Azerbaijanis woke up on February 21 to find their national currency, the manat, devaluated by 33.4% to the greenback and pegged to a double dollar-euro basket. The move is expected to hit the economy in the short term but to benefit it in the medium to long term by saving international reserves both at the central bank and the State Oil Fund of the Azerbaijan Republic (SOFAZ). 

President Ilham Aliyev has been courted by the West as an alternative to Russia as an energy supplier but lower oil prices will impact economic growth while development outside the booming capital Baku remains low.

As the oil sector contracted by 2.9%, in 2014 Azerbaijan’s economic growth halved to 2.8% from 5.8% a year earlier. ADB considers that higher public spending in 2015 will marginally lift growth to 3% before reverting to 2.8% in 2016 as public investments will slow. Inflation is likely to hike up to 6% in 2015 and 5.5% in 2016.

Planned investment in infrastructure and major international events should offset declines in the oil sector, aiding non-oil growth in 2015 and 2016.

Services are forecast to grow by 8% in 2015 and 6.5% in 2016, driven largely by trade and tourism as Azerbaijan hosts the First European Games in 2015 and the Baku European Grand Prix, a Formula 1 race, in 2016.

Large infrastructure projects, including road rehabilitation and the reconstruction of water supply, sanitation, and energy facilities, should boost construction in 2015 and 2016.  In addition, subsidised lending to farmers should help agriculture grow by 4% in 2015 and 5% in 2016.

On the flipside, if oil prices decline further and transfers from the State Oil Fund of Azerbaijan (Sofaz) fall short of current projections, infrastructure spending could be trimmed, cutting growth.


In 2014 Georgia’s economy recovered to 4.7% from 3.3% in 2013, though the current account deficit widened to 9.5% of its gross domestic product (GDP). The depressed economies of major trading partners will halve growth to 2% in 2015 but allow some recovery in 2016 as the external outlook improves slightly. Currency depreciation could raise inflation to 5% in 2015 and 2016, in part because of further lari depreciation. Falling exports and remittances could expand the current account deficit to 12% of GDP before narrowing somewhat in 2016.

The latest figures on remittances and exports depict a grim picture. In January, individual money transfers from abroad amounted to $75.5mn, down by 23.3% y/y. Georgia's foreign trade turnover stood at $694mn, down by 9% year on year, with exports diving by 30% y/y to $156mn.

In July 2014, Georgia entered into a 3-year standby arrangement with the International Monetary Fund (IMF) that provides a $155mn cushion against external shocks and sets a framework to discipline macro-fiscal policies.

Growth is expected to slow to 2% in 2015 in tandem with slowdowns in the European Union (EU) and neighboring Azerbaijan and a projected recession in the Russian Federation. Some recovery in growth, to 2.5%, is forecast in 2016 as manufacturing strengthens and services pick up. The EU Association Agreement with Georgia includes provisions for a Deep and Comprehensive Free Trade Area (DCFTA) that, along with expected improvement in the global environment, should support exports and remittances during 2016 while boosting foreign direct investment from Europe.

After three years of successive elections, in 2015 Georgian citizens will not go to the polls, before gearing up to return to the ballot box in 2016 to appoint a new parliament. A stable political situation, coupled with higher public spending, would then strengthen consumer and investor confidence and drive growth.

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