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Caucasus Country Risk Reports Q2 2015

BMI – Index League Tables
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1.1: Political Outlook – Armenia
Domestic Politics
Dram Depreciation To Test Social Cohesion
The Armenian dram will continue to dep reciate over 2015 due to the country's exposure to the Russian economy, which will depress
household purchasing power and heighten social instability.
Table: Political Overview
Long-Term Political Outlook
Mitigation Of Regional Tensions Key To Stability
Armenia will continue to have difficult relations with neighbours Turkey and Azerbaijan through the medium term, as a result of sensitive
historical grievances and strong domestic pressure groups on both sides. Nagorno-Karabakh will remain a particular potential flashpoint
given the high profile of the region and ongoing talks, which are set to test commitment to peace in both Yerevan and Baku.
Chapter 1.2: Economic Outlook – Armenia
Economic Activity
Subdued Growth Amid Exposure To Russia
Armenia's dependence on an increasingly weak Russia for trade and financial support will dampen growth potential over the next two
years.
Chapter 1.3: 10-Year Forecast – Armenia
The Armenian Economy To 2024
Convergence To Stall
Our relatively pessimistic medium-term view on the Armenian economy continues through our long-term forecast to 2024. We believe
the lack of economic and political reforms enacted by the government and the pivot away from the EU will hinder long-term economic
activity, and as such we forecast real GDP growth to average 3. 3% between 2018 and 202 4.
Table: Long-Term Macroeconomic Forecasts
Chapter 2.1: Political Outlook – Azerbaijan
Domestic Politics
Little Chance Of Democratic Reforms
Azerbaijan's media environment will remain severely curtailed over the coming years, despite growing pressure from the interna tional
community.
Table: Political Overview
Long-Term Political Outlook
Everything Hinges On Nagorno-Karabakh
Attempts to win back the Nagorno-Karabakh enclave will remain the defining issue of Azerbaijani foreign and domestic policy through
the medium term. No quick resolution is likely and, therefore, heightened tensions with Armenia have the potential to result in further
small-scale armed clashes, with escalation not ruled out.
Chapter 2.2: Economic Outlook – Azerbaijan
Economic Activity
Declining Oil Revenues To Hit Growth
Falling global oil prices will hit Azerbaijani fiscal receipts and GDP growth over the next two years. However, the ongoing development
of the country's non-oil sector, combined with a strong household consumption outlook, will pro vide some insulation from the loss in oil
revenues.
Table: GDP Contr ibut ion To Growth
Chapter 2.3: 10-Year Forecast – Azerbaijan
The Azeri Economy To 2024
Trend Growth Bolstered During 2018-2023
Over our 10-year forecast period to 2024, we believe Azerbaijan's economy will remain on a positive trajectory. Undoubtedly, energy
exports will continue to be the key driver underpinning growth. In addition, we expect rising incomes and consumption to help keep
growth buoyed during our forecast horizon.
Table: Long-Term Macroeconomic Forecasts
Chapter 2.4: Operational Risk – Azerbaijan
Operational Risk
Table: Operational Risk
Availability Of Labour
Table: Europe – Availability Of Labour
Table: Lab our Force Employment By Sector ('000), 2008-2012
Table: Azerbaijan's Top 10 Source Countries For Migrant Workers
Crime Risk
Table: Emerging Europe – Crime Risks
Table: Crime Statistics
Chapter 3.1: Political Outlook – Georgia
Domestic Politics
Russian-Abkhaz Agreement Sows Seeds Of Future Conflict
Russia's signing of an alliance pact with Abkhazia, a Georgian breakaway region, puts the two countries on a collision course. Georgia
will neither accept losing sovereignty over the territory, nor renege on its ambitions to join the EU and NATO, setting the stage for a
political crisis in the region.
Table: Political Overview
Long-Term Political Outlook
Pro-Western Path To Continue
We expect tensions between Georgia and Russia to remain frosty over the next 10 years as the Georgian government continues
to attempt deeper integration with the EU and highlight that the potential for social unrest in border areas will remain pronounced,
especially in the aftermath of the Ukraine crisis and Georgia's shift towards the EU and NATO.
Chapter 3.2: Economic Outlook – Georgia
Economic Activity
Robust Growth Ahead
Georgia's deepening ties with the EU will help real GDP growth remain steady in 2015 and 2016 by boosting exports and inward fixed
investment, despite the country's deteriorating relations with Russia.
Chapter 3.3: 10-Year Forecast – Georgia
The Georgian Economy To 2024
Foreign Investment Will Support Growth
Over our 10-year forecast period, we project Georgian growth to remain relatively robust, averaging 4.4% per annum through 2019-
2024. Georgia will continue to rely heavily on foreign direct investment as a key driver of growth over the long run, which will be
enhanced by continued economic and structural reforms.
Table: Long-Term Macroeconomic Forecasts
Chapter 5: BMI Global Assumptions
Global Outlook
New Era For Oil
Table: Global Assumptions
Table: Developed States , Rea l GDP GrowtH, %
Table: BMI VERSUS BLOMBERG CONSENSUS REAL GDP GROW TH FORECASTS, %
Table: Emerging Markets , Rea l GDP Growth , %

Caucasus Country Risk Reports Q2 2015

Core Views

Political tensions in the South Caucasus will remain high over the coming years as increased Russian intervention in Georgia's breakaway territories fuels concerns that Russia will attempt to annex Abkhazia and South Ossetia. Meanwhile, Azerbaijani-Armenian relations will remain strained over the frozen conflict surrounding Nagorno-Karabakh.

The Armenian economy is likely to receive a short-term boost from its accession to the Eurasian Economic Union (EEU) in January 2015. Membership of the EEU will facilitate trade and investment flows from Armenia's primary export destination and source of FDI, Russia. Nevertheless, in the long term we believe EEU membership will hold back Armenia's economic growth potential as the economy remains reliant on Russian demand.

Georgian real GDP growth will remain relatively robust over the coming quarters as the finalising of an Association Agreement and Deep and Comprehensive Free Trade Agreement opens up the EU market for exporters. There is the risk that less inhibited trade with the EU sees the increase in imports outweigh the rise in exports, but in the long term we hold to our view that deeper integration with the EU will benefit the Georgian economy as European FDI flows increase.

While Georgia has signed a number of agreements with the EU, fostering closer links between Tbilisi and Brussels, and Armenia is on course to join the EEU, tying the country into Russia's sphere of influence, we believe Azerbaijan will continue to tread a fine line between siding with either Russia or the EU. Azerbaijan's economic interests can be better served by increasing trade and energy routes with the EU, while maintaining good relations with Moscow will likely assist in keeping the autocratic regime of President Ilham Aliyev in power.

Major Forecast Changes

We have revised up our forecasts for real GDP growth in Georgia to 4.8% in 2015 and 4.6% in 2016, from 4.2% and 4.0% previously.

The deals signed with the EU will assist in boosting exports and fixed investment, while the threat of a trade embargo imposed by Russia on Georgia has reduced significantly.


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