Tuesday, December 2 2014

Our country, which faces a number of
fundamental uncertainties, including the uncertainty of the impact of accession
to the Eurasian Economic Union on the country’s economy, needs to determine a
new conceptual vision of development. Nothing of the kind is noticeable yet.
The impression is that the country’s economy will keep staying in turbulence,
i.e. it will continue taking decisions a posteriori – by means of band-aid
approach.        

Armenia has been experiencing a
permanent sluggish crisis for years. Now it is in an unusually complicated
economic situation again due to the strong foreign shocks connected with the
situation in Russia. The decline in private transfers from Russia may not only
reduce the aggregate demand in our country, whose economy is reasonably called
a transfer economy, but it may also considerably spoil the balance of payments.
The latter, along with the traditionally immense unfavorable balance of foreign
trade, already has a bad impact on the macroeconomic stability, bearing various
risks, including the risks of national currency devaluation.   

Today some of our economy
functionaries are calming the population by saying that the slight AMD
devaluation is able to support the export-oriented enterprises of the country
by providing them with better competitive possibilities. As far as we remember,
in the mid-2000s the AMD strengthened too much, and the same functionaries were
persuading us of the opposite, relying on a specific structure of export-import
orientation of economy, which would allegedly become “a safe harbor” attracting
huge investments. We all remember what that “safe harbor” turned into in 2009 –
it resulted in 18% decline in GDP. But it is of little importance, because
economic activity is a statistical and to a certain extent conventional notion
for a small country with an extremely undiversified economic structure. The bad
thing is that it was in the second half of the 2000s that due to “the competent
economic policy” Armenia decided to reduce the economy diversification by
destroying one of the most important items of its export production – the
lapidary industry, which used to ensure thousands of jobs for skilled
specialists.  The extremely “unfair” (in
terms of economic terminology) strengthening of AMD led to the closure of not
only small but also large lapidary enterprises such Shoghakn and DCA. At that
time, some representatives of economic structures, together with the then
minister of economy and amiable IMF representative, displayed an extremely
monetary approach and officially stated that a fully flexible exchange rate was
a “sacred cow” and if any sectors were unable to survive in such unusual
conditions, the country simply did not need them! Each economic entity in the
country remembers how that policy ended up as soon as the global economic
crisis broke out. That policy ended up in currency depreciation, decline in
aggregate demand, certain problems in the banking sector, reduction in budget
revenues and sharp growth in tax administration, which “swept clean” the
accounts of thousands of enterprises to fulfill the revenue item of the budget.

To all appearances, we are going to
the other extreme today and the result may be desperate again. Though the
Central Bank of Armenia took competent steps and prevented the exchange rate
from collapsing within an hour the way it happened on 6 March 2009, imbalance
of the key macroeconomic parameters is already being observed in the country.
An important component of this imbalance is the growing deficit of the trade
balance without increase in private transfers. So, the gradual rise in the
trade balance deficit connected with the prevalence of export growth slowdown
over the import growth rates can create certain problems. According to the
official statistics, the export of commodities and services from the country
considerably slowed down in both monthly and annual dynamics: in October 2014
export dropped by 1.1% (versus 21.3% growth in October 2013), and in the
two-year dynamics the export growth rates slowed down almost twofold - from 18%
to 10.9%. It was these fundamental reasons that dictated the need for balancing
"the currency parity" through AMD devaluation.

If
things go the way they are going now, this hard - but hopefully not very long -
transition will lead us to declining exports and shrinking forex revenues. Our
financial and economic authorities’ concept that weaker AMD can help exports
could make sense were it not for one big BUT: my skepticism would have no grounds
if RUR were not as weak as it is today. This weakening is forcing our exporters
to raise their prices, which, given low demand in Russia, can make our goods
less competitive there.

This is not the very problem tough:
the key risk we may face is a possible fall in ore and gold prices. These are
our key export items. So, we will hardly stand this challenge. In 2009 we were
saved by a 500mln RUR stabilization loan from Russia. Now that the Russians are
also facing an economic recession, we can hardly hope for their help.

According to international sources,
today the price of one troy ounce has dropped to $1,130. One of the Barclays
banks predicts that in 2015 the price will grow to $1,180. According to the
Customs Service of Armenia, some local gold recovery companies are already
experiencing problems. In Jan-Sept 2014 Armenia exported 2,771 kg of gold
against 1,857 kg a year before. The customs value of the gold made up $59.9mln
against $54.4mln.

That is, despite quantitative
growth, the earnings have dropped and will be even lower by the end of this
year due to further slide in prices and pessimistic outlooks. Today Armenia
must be very attentive to such global economic factors as growing economy in
the United States and expected rise in interest rates, which is prompting
investors to move their money from gold to dollar. As a result, the costs of
most of global gold producers have exceeded the spot prices.

The companies have reacted by
cutting their staffs and spending less on new fields. The S&P/TSX Global
Gold Sector index, embracing the shares of 40 global gold producers, has
already dropped by 16%. According to Bloomberg, today 5 out of 19 gold
producers in the US are spending on their gold more than they can earn from it.
The same is true for copper. Today copper costs $3 per pound against $4.6 in
early 2011. The basic factors here are demand in China and concerns for the
future of the global economy. For the moment, the prices are dropping and
experts see no factors that can push them up in 2015.

 All these factors can affect
our economy and finances and force our authorities may go all lengths just to
get revenues. This fiscal pressing has long been shattering our business
activity and may sooner or later bring our economy to knees.