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Caucasus Country Risk Report Q3 2017

Core Views

Political tensions in the South Caucasus will remain high over thecoming years as increased Russian intervention in Georgia's breakawayterritories fuels concerns that Russia will fully annex Abkhaziaand South Ossetia. Meanwhile, Azerbaijani-Armenian relations willremain strained over the conflict surrounding Nagorno-Karabakhafter the conflict escalated in April 2016.

The Armenian economy will recover in 2017 and 2018 primarily dueto recovering remittances inflows from Russia and rising commodityprices (copper and gold), the country's main export. A recoveringRussian economy will provide further tailwinds to Armenia's externalsector and foreign direct investment (FDI) inflows.

Georgian real GDP growth will accelerate in 2017 and 2018 mainly onaccount of numerous investment projects in the pipeline and tighterintegration with the EU, after gaining visa-free access to the singlemarket in early 2017. Furthermore, a recovering Russian economywill provide remittances inflows a boost, which will continue to bean integral part of the Georgian economy.

Azerbaijan will start to recover in 2017, mainly due to higher oilprices, after economic growth contracted in 2016, its first recessionin over 20 years. While energy trade with the EU and Turkey willcontinue to be in the economic interest of Azerbaijan, it will alsomaintain good relations with Moscow.


BMI Index League Tables
Core Views
Key Risks
Chapter 1.1: Economic Outlook – Armenia
Economic Growth Outlook
Growth To Rebound, But Structural Problems Remain
The Armenian economy will recover in 2017 and 2018, after GDP contracted in H216. Improving economic conditions in Russia, its
largest trading partner, and rebounding commodity prices will provide tailwinds to growth.
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 2026
Convergence To Stall
Our relatively pessimistic medium-term view on the Armenian economy continues through our long-term forecast to 2026. 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 3.0 % between 2017 and 2026.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 1.3: Political Outlook – Armenia
Domestic Politics
Republican Party Victory: President Sargsyan To Prolong Rule
Preliminary results suggest that the ruling Armenian Republican Party won a majority in the April 2 parliamentary election. This will
prolong President Serzh Sargsyan's rule over the country, who we believe will become the country's next prime minister, after a
constitutional referendum transformed Armenia from a presidential into a parliamentary republic.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Nagorno-Karabakh Conflict To Stay At Centre Stage
Armenia will continue to have difficult relations with neighbours Turkey and Azerbaijan, as a result of sensitive historical grievances and
strong domestic pressure groups on both sides.
Chapter 2.1: Economic Outlook – Azerbaijan
Economic Growth Outlook
Subdued Economic Recovery Ahead
Azerbaijan's economy will see positive growth in 2017 and 2018 after contracting in 2016. Tailwinds will come from recovering oil prices,
but banking sector instability and subdued government capital expenditure will continue to weigh on growth.
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 2.2: 10-Year Forecast – Azerbaijan
The Azeri Economy To 2026
Weak Growth Up To 2026
Over our 10-year forecast period to 2026, we believe Azerbaijan's economy will remain on a weak growth trajectory. Energy exports will
continue to be the key driver underpinning growth in the years ahead.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 2.3: Political Outlook – Azerbaijan
Domestic Politics
Dynastic Rule To Continue
President Ilham Aliyev will continue consolidat ng his powers and tighten his family's grip over Azerbaijan after extending his term to
2020 and appointing his wife as the country's first vice-president, paving the way for her to be his successor.
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 in the
years ahead.
Chapter 3.1: Economic Outlook – Georgia
Economic Growth Outlook
Improving Business Environment Supports Growth Outlook
Economic growth will accelerate in Georgia over the coming quarters, outperforming regional peers.
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 3.2: 10-Year Forecast – Georgia
The Georgian Economy To 2026
Foreign Investment To Support Growth
Over our 10-year forecast period, we project Georgian growth to remai relatively robust, averaging 4.0 % per annum through 2026.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3.3: Political Outlook – Georgia
Domestic Politics
Trump Presidency Clouds Security Environment
Under Donald Trump's presidency, the US may become more unilateralist, which will worsen Georgia's security concerns in the years
ahead. A reduced US commitment towards NATO would lessen Georgia's already limited chances of joining the military alliance.
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 seek
deeper integration with the EU.
Chapter 4: BMI Global Macro Outlook
Emerging Markets Recovery Still In Early Stages
TABLE: GLOBAL MACROECONOMIC FORECASTS
TABLE: DEVELOPED STATES – REAL GDP GROWTH (%)
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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