We hold to our core view that the three Caucasus economies will experience very different levels of growth going forward. The Azerbaijani economy should grow 11.0% in 2010, following on from an impressive 9.3% outturn in 2009, on the back of rising oil production.
Armenia should recover from a hefty 14.4% contraction in 2009 to post 4.0% in 2010, with Russia’s projected 4.0% growth set to improve remittance inflows and demand for exports. We expect Georgia to fare worst, with weak domestic demand and ongoing political risk concerns set to limit growth to 1.7% in 2010.
We expect Azerbaijan’s economy to continue growing at a healthy rate over the medium term, and forecast an average 7.4% real GDP expansion over 2010-2014. That said, growth will remain heavily dependent on oil, with peak production in 2015 likely to presage lower trend growth over the long term. As a result, we see the potential for a greater diversification of the sources of economic growth going forward, with gas production and household consumption likely to increase their contribution to the headline number.
A tentative recovery is underway in the Georgian banking sector, with asset quality, profitability and lending all showing signs of improvement.
That said, we caution that non-performing loans will take a long time to work out of the system, which is likely to keep profitability hampered through the medium term. This will limit the flow of credit to the private sector, weighing on the country’s economic recovery.
We expect the Armenian current account deficit to narrow further to 6.8% of GDP in 2010, from an estimated 10.4% in 2009. This will come as a result of a sharp uptick in exports, due to the reopening of the Russia-Georgia border, and improved remittance inflows as the Russian economy recovers. Over the medium term we expect the current account shortfall to continue narrowing, reaching 1.5% of GDP by 2015.
Caucasus Business Forecast Report Q3 2010: http://www.companiesandmarkets.com/r.ashx?id=717O15M0R286057&prk=59e657c1840f6dfc30a6d2ee64d8577a
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