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Caucasus Business Forecast Report Q1 2010

Published by: Business Monitor International

Published: Oct. 30, 2009 - 50 Pages


Table of Contents


BMI Ratings
BMI Risk Ratings - Armenia
BMI Risk Ratings - Azerbaijan
BMI Risk Ratings - Georgia
Emerging Europe - Ratings League Tables
Executive Summary
Divergent Outlook Within Region
Chapter 1.1: Political Outlook - Armenia
Domestic Politics
Turkish Relations To Move Ahead, But Risks Abound
We remain tentatively optimistic on the potential for Turkish-Armenian relations to improve over the medium term,
with support from both governments for the re-establishment of diplomatic relations seen as a particularly positive signal.
table: ARMENIA POLITICS TABLE
Chapter 1.2: Economic Outlook - Armenia
Economic Activity
Crisis To Be Short-Lived, But Risks To Persist
Armenia will continue to face a major macroeconomic crisis through H209 as falling remittances, investments and
export earnings result in a severe capital shortage.
table: ECONOMIC ACTIVITY
Chapter 1.3: 10-Year Forecast - Armenia
The Armenian Economy To 2019
Convergence To Continue
The Armenian government’s commitment to push ahead with economic and business reforms will leave the ground
well-prepared for economic growth to average 5.1% between 2015 and 2019.
table: ARMENIA Long-Term Macroeconomic Forecasts
Chapter 2.1: Political Outlook - Azerbaijan
Domestic Politics
Nagorno-Karabakh Resolution Expected
We expect Armenia and Azerbaijan to formally resolve their ‘frozen conflict’ over the separatist region of Nagorno-Karabakh
in Azerbaijan in the medium term.
table: AZERI POLITICS TABLE
table: NAGORNO-KARABAKH NEGOTIATIONS PROGRESS
Chapter 2.2: Economic Outlook - Azerbaijan
Economic Activity
Upside Risks To Our Growth Forecasts
While we hold to our view for the Azeri economy to expand by 3.8% and 9.0% in 2009 and 2010 respectively, we now
highlight upside risks to our core scenario.
table: AZERBAIJAN - ECONOMIC ACTIVITY
Chapter 2.3: 10-Year Forecast - Armenia
The Azeri Economy To 2019
Trend Growth Will Be Lower 2015-2019
Over our 10-year forecast period to 2019, we believe Azerbaijan’s economy will remain on a positive trajectory.
table: AZERBAIJAN Long-Term Macroeconomic Forecasts
Chapter 3.1: Political Outlook - Georgia
Domestic Politics
Crisis Risks Ease, But Ties To Remain Tense
The broadly peaceful passing of the first anniversary of the 2008 Russia-Georgia war bodes well for an abatement of
immediate crisis risks in the region, given the focus of sabre-rattling that the anniversary had become.
table: GEORGIA POLITICS TABLE
Chapter 3.2: Economic Outlook - Georgia
Economic Activity
After The Recession: Growth To Settle Near 5%
We forecast the Georgian economy to contract by 7.2% in 2009, before recovering to 3.2% growth in 2010.
table: GEORGIA - ECONOMIC ACTIVITY
Chapter 3.3: 10-Year Forecast - Georgia
The Georgian Economy To 2019
Foreign Investment Will Support Growth Over The Longer Term
Over our 10-year forecast period we project Georgian growth to remain relatively robust averaging 5.1% through 2015-2019.
table: GEORGIA Long-Term Macroeconomic Forecasts
Chapter 4: Special Report
The World’s Fiscal Conundrum
Bleeding Red Ink Across The Globe
Table: WORLD GOVERNMENT EXPENDITURE INDICATORS
Table: WORLD GOVERNMENT REVENUE INDICATORS
Table: WORLD FISCAL BALANCE INDICATORS
Chapter 5: BMI GLOBAL Assumptions
Global Assumptions
TABLE: GLOBAL ASSUMPTIONS
TABLE: GLOBAL & REGIONAL REAL GDP GROWTH
Table: COMMODITY PRICES

Abstract

We expect sharp differentiations in real GDP growth between the three Caucasus countries overthe medium term. Azerbaijan, which is expected to see substantial growth in oil and natural gasoutput beyond 2009 looks to be the best positioned economy, with a recovery to 9.0% growthforecast in 2010. On the other end, Armenia looks to be the weakest performer, with its relianceon foreign direct investment, remittances and commodities imports resulting in a staggering 16.5%contraction in 2009. Georgia is forecast to fall somewhere in the middle, with a 7 .2% fall in realGDP in 2009, followed by a 3.2% expansion in 2010. Over the long run though, we expect all threeeconomies to experience lower trend growth, with average annual economic expansion settling atleast several percentage points lower than the pre-crisis period.

We remain tentatively optimistic on the potential for Turkish-Armenian relations to improve overthe medium term, with support from both governments for the re-establishment of diplomatic relationsseen as a particularly positive signal. We caution though, that significant risks remain, withmajor opposition within Turkey and Armenia, as well as from Azerbaijan, likely to stall the bilateralpolitical process.

We expect Armenia and Azerbaijan to formally resolve their ‘frozen conflict’ over the separatistregion of Nagorno-Karabakh in Azerbaijan in the medium term. That said, we stress that thepeace process, now going for over a year, is likely to continue progressing at a slow pace. To besure, there are significant risks of major setbacks in diplomatic negotiations going forward and wemaintain that a permanent resolution is not expected in 2009.

Armenia will continue to face a major macroeconomic crisis through H209 as falling remittances,investments and export earnings result in a severe capital shortage. With the economy havingbecome heavily dependent on construction in recent years, the slowdown in foreign capital inflowswill weigh dramatically on gross fixed capital formation, which in turn will translate into a forecast16.5% real GDP contraction in 2009. While our core view is for economic growth to recover back intopositive territory in 2010, we stress that external conditions will not be conducive for a ‘V-shaped’recovery. We forecast trend growth beyond 2009 to settle below 6 .0%, well below the pre-crisislevel above 10.0%.

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