Tensions with Azerbaijan will remain high due to the conflict surroundingNagorno-Karabakh. Fighting escalated in April 2016 andsporadic flare-ups involving heavy weaponry rose sharply in 2017,highlighting how instable the region remains. Although we do notexpect an all-out war to break out, Armenia's relations are unlikelyto improve in the years ahead.
A deteriorating security environment underpins Armenia's low Short-Term Political Risk Index score and will deter foreign firms fromentering the country.
The recovery of the Armenian economy will be modest in 2017 and2018, as weak growth in the Russian economy will result in subduedremittances inflows, and relatively low commodity prices (in particularcopper and gold) will weigh on Armenia's external sector.
Armenia's current account deficit will widen over the coming yearson the back of relatively weak export growth, but will remain wellbelow historic averages of over 15% of GDP in 2008-2014.Armenia's fiscal deficit will remain elevated over the coming years,resulting in the debt burden rising above 60.0% of GDP by 2018,and raising external financing risks.
A constitutional referendum in 2015 (which transformed Armenia intoa parliamentary republic) and the incumbent Armenian RepublicanParty (ARP) winning an absolute majority in the April parliamentaryelections both pave the way for President Serzh Sargsyan to takeover the premiership when his second presidential term ends in2018. This will turn Armenia increasingly authoritarian and align itcloser with Russia.