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ARMENIA: ECONOMY HAS NOTHING TO DO WITH THE BUDGET
by Emmanuil Lazarian
Tuesday, December 2, 12:56
Our country, which faces a number of fundamental uncertainties,
including the uncertainty of the impact of accession to the Eurasian
Economic Union on the country's economy, needs to determine a new
conceptual vision of development. Nothing of the kind is noticeable
yet. The impression is that the country's economy will keep staying
in turbulence, i.e. it will continue taking decisions a posteriori -
by means of band-aid approach.
Armenia has been experiencing a permanent sluggish crisis for years.
Now it is in an unusually complicated economic situation again due to
the strong foreign shocks connected with the situation in Russia. The
decline in private transfers from Russia may not only reduce the
aggregate demand in our country, whose economy is reasonably called
a transfer economy, but it may also considerably spoil the balance of
payments. The latter, along with the traditionally immense unfavorable
balance of foreign trade, already has a bad impact on the macroeconomic
stability, bearing various risks, including the risks of national
currency devaluation.
Today some of our economy functionaries are calming the population
by saying that the slight AMD devaluation is able to support the
export-oriented enterprises of the country by providing them with
better competitive possibilities. As far as we remember, in the
mid-2000s the AMD strengthened too much, and the same functionaries
were persuading us of the opposite, relying on a specific structure
of export-import orientation of economy, which would allegedly become
"a safe harbor" attracting huge investments. We all remember what that
"safe harbor" turned into in 2009 - it resulted in 18% decline in GDP.
But it is of little importance, because economic activity is a
statistical and to a certain extent conventional notion for a small
country with an extremely undiversified economic structure. The bad
thing is that it was in the second half of the 2000s that due to
"the competent economic policy" Armenia decided to reduce the economy
diversification by destroying one of the most important items of
its export production - the lapidary industry, which used to ensure
thousands of jobs for skilled specialists. The extremely "unfair"
(in terms of economic terminology) strengthening of AMD led to the
closure of not only small but also large lapidary enterprises such
Shoghakn and DCA. At that time, some representatives of economic
structures, together with the then minister of economy and amiable IMF
representative, displayed an extremely monetary approach and officially
stated that a fully flexible exchange rate was a "sacred cow" and if
any sectors were unable to survive in such unusual conditions, the
country simply did not need them! Each economic entity in the country
remembers how that policy ended up as soon as the global economic
crisis broke out. That policy ended up in currency depreciation,
decline in aggregate demand, certain problems in the banking sector,
reduction in budget revenues and sharp growth in tax administration,
which "swept clean" the accounts of thousands of enterprises to
fulfill the revenue item of the budget.
To all appearances, we are going to the other extreme today and the
result may be desperate again. Though the Central Bank of Armenia took
competent steps and prevented the exchange rate from collapsing within
an hour the way it happened on 6 March 2009, imbalance of the key
macroeconomic parameters is already being observed in the country. An
important component of this imbalance is the growing deficit of the
trade balance without increase in private transfers. So, the gradual
rise in the trade balance deficit connected with the prevalence
of export growth slowdown over the import growth rates can create
certain problems. According to the official statistics, the export of
commodities and services from the country considerably slowed down
in both monthly and annual dynamics: in October 2014 export dropped
by 1.1% (versus 21.3% growth in October 2013), and in the two-year
dynamics the export growth rates slowed down almost twofold - from
18% to 10.9%. It was these fundamental reasons that dictated the need
for balancing "the currency parity" through AMD devaluation.
If things go the way they are going now, this hard - but hopefully
not very long - transition will lead us to declining exports and
shrinking forex revenues. Our financial and economic authorities'
concept that weaker AMD can help exports could make sense were it not
for one big BUT: my skepticism would have no grounds if RUR were not
as weak as it is today. This weakening is forcing our exporters to
raise their prices, which, given low demand in Russia, can make our
goods less competitive there.
This is not the very problem tough: the key risk we may face is a
possible fall in ore and gold prices. These are our key export items.
So, we will hardly stand this challenge. In 2009 we were saved by a
500mln RUR stabilization loan from Russia. Now that the Russians are
also facing an economic recession, we can hardly hope for their help.
According to international sources, today the price of one troy ounce
has dropped to $1,130. One of the Barclays banks predicts that in 2015
the price will grow to $1,180. According to the Customs Service of
Armenia, some local gold recovery companies are already experiencing
problems. In Jan-Sept 2014 Armenia exported 2,771 kg of gold against
1,857 kg a year before. The customs value of the gold made up $59.9mln
against $54.4mln.
That is, despite quantitative growth, the earnings have dropped and
will be even lower by the end of this year due to further slide in
prices and pessimistic outlooks. Today Armenia must be very attentive
to such global economic factors as growing economy in the United States
and expected rise in interest rates, which is prompting investors to
move their money from gold to dollar. As a result, the costs of most
of global gold producers have exceeded the spot prices.
The companies have reacted by cutting their staffs and spending less
on new fields. The S&P/TSX Global Gold Sector index, embracing the
shares of 40 global gold producers, has already dropped by 16%.
According to Bloomberg, today 5 out of 19 gold producers in the US
are spending on their gold more than they can earn from it. The same
is true for copper. Today copper costs $3 per pound against $4.6 in
early 2011. The basic factors here are demand in China and concerns
for the future of the global economy. For the moment, the prices are
dropping and experts see no factors that can push them up in 2015.
All these factors can affect our economy and finances and force
our authorities may go all lengths just to get revenues. This fiscal
pressing has long been shattering our business activity and may sooner
or later bring our economy to knees.
http://www.arminfo.am/index.cfm?objectid=7B144DA0-7A09-11E4-974D0EB7C0D21663&view=displaypageArticleWithCommen t
by Emmanuil Lazarian
Tuesday, December 2, 12:56
Our country, which faces a number of fundamental uncertainties,
including the uncertainty of the impact of accession to the Eurasian
Economic Union on the country's economy, needs to determine a new
conceptual vision of development. Nothing of the kind is noticeable
yet. The impression is that the country's economy will keep staying
in turbulence, i.e. it will continue taking decisions a posteriori -
by means of band-aid approach.
Armenia has been experiencing a permanent sluggish crisis for years.
Now it is in an unusually complicated economic situation again due to
the strong foreign shocks connected with the situation in Russia. The
decline in private transfers from Russia may not only reduce the
aggregate demand in our country, whose economy is reasonably called
a transfer economy, but it may also considerably spoil the balance of
payments. The latter, along with the traditionally immense unfavorable
balance of foreign trade, already has a bad impact on the macroeconomic
stability, bearing various risks, including the risks of national
currency devaluation.
Today some of our economy functionaries are calming the population
by saying that the slight AMD devaluation is able to support the
export-oriented enterprises of the country by providing them with
better competitive possibilities. As far as we remember, in the
mid-2000s the AMD strengthened too much, and the same functionaries
were persuading us of the opposite, relying on a specific structure
of export-import orientation of economy, which would allegedly become
"a safe harbor" attracting huge investments. We all remember what that
"safe harbor" turned into in 2009 - it resulted in 18% decline in GDP.
But it is of little importance, because economic activity is a
statistical and to a certain extent conventional notion for a small
country with an extremely undiversified economic structure. The bad
thing is that it was in the second half of the 2000s that due to
"the competent economic policy" Armenia decided to reduce the economy
diversification by destroying one of the most important items of
its export production - the lapidary industry, which used to ensure
thousands of jobs for skilled specialists. The extremely "unfair"
(in terms of economic terminology) strengthening of AMD led to the
closure of not only small but also large lapidary enterprises such
Shoghakn and DCA. At that time, some representatives of economic
structures, together with the then minister of economy and amiable IMF
representative, displayed an extremely monetary approach and officially
stated that a fully flexible exchange rate was a "sacred cow" and if
any sectors were unable to survive in such unusual conditions, the
country simply did not need them! Each economic entity in the country
remembers how that policy ended up as soon as the global economic
crisis broke out. That policy ended up in currency depreciation,
decline in aggregate demand, certain problems in the banking sector,
reduction in budget revenues and sharp growth in tax administration,
which "swept clean" the accounts of thousands of enterprises to
fulfill the revenue item of the budget.
To all appearances, we are going to the other extreme today and the
result may be desperate again. Though the Central Bank of Armenia took
competent steps and prevented the exchange rate from collapsing within
an hour the way it happened on 6 March 2009, imbalance of the key
macroeconomic parameters is already being observed in the country. An
important component of this imbalance is the growing deficit of the
trade balance without increase in private transfers. So, the gradual
rise in the trade balance deficit connected with the prevalence
of export growth slowdown over the import growth rates can create
certain problems. According to the official statistics, the export of
commodities and services from the country considerably slowed down
in both monthly and annual dynamics: in October 2014 export dropped
by 1.1% (versus 21.3% growth in October 2013), and in the two-year
dynamics the export growth rates slowed down almost twofold - from
18% to 10.9%. It was these fundamental reasons that dictated the need
for balancing "the currency parity" through AMD devaluation.
If things go the way they are going now, this hard - but hopefully
not very long - transition will lead us to declining exports and
shrinking forex revenues. Our financial and economic authorities'
concept that weaker AMD can help exports could make sense were it not
for one big BUT: my skepticism would have no grounds if RUR were not
as weak as it is today. This weakening is forcing our exporters to
raise their prices, which, given low demand in Russia, can make our
goods less competitive there.
This is not the very problem tough: the key risk we may face is a
possible fall in ore and gold prices. These are our key export items.
So, we will hardly stand this challenge. In 2009 we were saved by a
500mln RUR stabilization loan from Russia. Now that the Russians are
also facing an economic recession, we can hardly hope for their help.
According to international sources, today the price of one troy ounce
has dropped to $1,130. One of the Barclays banks predicts that in 2015
the price will grow to $1,180. According to the Customs Service of
Armenia, some local gold recovery companies are already experiencing
problems. In Jan-Sept 2014 Armenia exported 2,771 kg of gold against
1,857 kg a year before. The customs value of the gold made up $59.9mln
against $54.4mln.
That is, despite quantitative growth, the earnings have dropped and
will be even lower by the end of this year due to further slide in
prices and pessimistic outlooks. Today Armenia must be very attentive
to such global economic factors as growing economy in the United States
and expected rise in interest rates, which is prompting investors to
move their money from gold to dollar. As a result, the costs of most
of global gold producers have exceeded the spot prices.
The companies have reacted by cutting their staffs and spending less
on new fields. The S&P/TSX Global Gold Sector index, embracing the
shares of 40 global gold producers, has already dropped by 16%.
According to Bloomberg, today 5 out of 19 gold producers in the US
are spending on their gold more than they can earn from it. The same
is true for copper. Today copper costs $3 per pound against $4.6 in
early 2011. The basic factors here are demand in China and concerns
for the future of the global economy. For the moment, the prices are
dropping and experts see no factors that can push them up in 2015.
All these factors can affect our economy and finances and force
our authorities may go all lengths just to get revenues. This fiscal
pressing has long been shattering our business activity and may sooner
or later bring our economy to knees.
http://www.arminfo.am/index.cfm?objectid=7B144DA0-7A09-11E4-974D0EB7C0D21663&view=displaypageArticleWithCommen t