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Caucasus Country Risk Report Q2 2016

Caucasus Country Risk Report Q2 2016

Core Views

Political tensions in the South Caucasus will remain high overthe coming years as increased Russian intervention in Georgia’sbreakaway territories fuels concerns that Russia will attempt to annexAbkhazia and South Ossetia. Meanwhile, Azerbaijani-Armenianrelations will remain strained over the frozen conflict surroundingNagorno-Karabakh.

Armenia’s economy will continue to struggle during 2015-2016 primarilydue to its trade and remittance flow links with ailing Russia.

Beyond this we continue to see little means of diversifying its growthmodel away from one driven by private consumption underpinnedby volatile remittance flows.

Georgian real GDP growth will slow over the next two years relativeto the 5.5% average growth achieved between 2010 and 2014 dueto exposure to Russia’s economic crisis, which has been triggeredby Western sanctions and magnified by a dramatic fall in global oilprices. We forecast the Russian economy to contract 5.2% in realterms this year.

Azerbaijan will continue to tread a fine line between siding with eitherRussia or the EU. Azerbaijan’s economic interests can be betterserved by increasing trade and energy routes with the EU, whilemaintaining good relations with Moscow will likely assist in keepingthe autocratic regime of President Ilham Aliyev in power.


BMI Index League Tables
Core Views
Key Risks
Chapter 1.1: Economic Outlook – Armenia
Economic Growth Outlook
Another Difficult Year Ahead
The Armenian economy faces significant external headwinds in 2016. In particular, the country will suffer from continued weakness in
Russian economic activity, Armenia’s main export partner and main source of remittances.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Chapter 1.2: 10-Year Forecast – Armenia
The Armenian Economy To 2025
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. 6 % between 2018 and 2024.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 1.3: Political Outlook – Armenia
Domestic Politics
Cementing One-Party Rule
Armenian President Serzh Sarkisian will pass a constitutional amendment that will transform the country’s political system from a
presidential to a parliamentary republic and enable him to run for Prime Minister in the 2017 parliamentary election.
TABLE: POLITICAL OVERVIEW
TABLE: MAIN CONSTITUTIONAL AMENDMENTS
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.
Chapter 2.1: Economic Outlook – Azerbaijan
Economic Growth Outlook
Manat Devaluation To Stifle Growth
The devaluation of the Azerbaijani manat on December 21 was a necessary adjustment to the new reality of lower oil prices. The shift to
a free floating exchange rate regime will be painful for the economy and the banking sector in the near term and we therefore forecast
growth to reach 1.2% in 2016, compared to an 11.9% average between 2004 and 2014.
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
GDP By Expenditure Outlook
TABLE: NET EXPORTS FORECASTS
Chapter 2.2: 10-Year Forecast – Azerbaijan
The Azeri Economy To 2025
Trend Growth Bolstered During 2018-2025
Over our 10-year forecast period to 2025, 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 2.3: Political Outlook – Azerbaijan
Domestic Politics
Neutrality Will Remain The Best Option
Azerbaijan will avoid taking sides in the emerging war of words between Russia and Turkey, as doing so would pose risks to the ailing
Azerbaijani economy and undermine Baku’s diplomatic links with Ankara and Moscow.
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 3.1: Economic Outlook – Georgia
Economic Growth Outlook
Growth To Pick Up Slowly
Georgia’s economic growth will accelerate from 2016, following a major slowdown in 2015 brought about by severe external shocks.
An uptick in growth in Georgia’s main economic partners will enable remittance inflows and exports to pick up, boosting headline
growth.
Chapter 3.2: 10-Year Forecast – Georgia
The Georgian Economy To 2025
Foreign Investment Will Support Growth
Over our 10-year forecast period, we project Georgian growth to remain relatively robust, averaging 3.9% per annum through
2019-2024.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3.3: Political Outlook – Georgia
Domestic Politics
No Favourite In The 2016 Legislative Election
We do not see any favourite for Georgia’s October 2016 parliamentary elections, given the incumbent coalition’s growing unpopularity
on the back of a sharp economic slowdown, and the fragmentation of the main opposition party.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Pro-Western Path To Continue Despite Mounting Opposition
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 4: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: ARMENIA – MACROECONOMIC DATA & FORECASTS
TABLE: AZERBAIJAN – MACROECONOMIC DATA & FORECASTS
TABLE: GEORGIA – MACROECONOMIC DATA & FORECASTS

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