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RR RUEHDBU RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHYE #0380/01 1541353
ZNR UUUUU ZZH
R 031353Z JUN 09
FM AMEMBASSY YEREVAN
TO RUEHC/SECSTATE WASHDC 9134
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC 0642
RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1785
RUEHIT/AMCONSUL ISTANBUL 0796
RHEHNSC/NSC WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC

UNCLAS SECTION 01 OF 03 YEREVAN 000380 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD KTDB AM
 
SUBJECT: ARMENIA - MACROECONOMIC OVERVIEW FOR FIRST QUARTER 2009 
 
REF: A) Yerevan 151  B) Yerevan 281 
 
YEREVAN 00000380  001.2 OF 003 
 
 
SUMMARY 
------- 
 
¶1.  Armenia's GDP declined by 6.1 percent in the first quarter of 
2009 and 9.7 percent in the first four months.  All economic 
indicators for the first quarter indicate that the Armenian economy 
is suffering a deep contraction, with negative growth figures in 
almost all sectors.  Hardest hit have been the construction and 
mining sectors.  The IMF forecasts a five percent drop in GDP for 
2009, while the projections of the Ministry of Finance are more 
pessimistic, closer to 10 percent.  End Summary. 
 
GDP DECLINES 
------------ 
 
¶2.  The Armenian economy contracted by 6.1 percent in the first 
quarter of 2009 to AMD 465.5 billion (USD 1.3 billion) compared to 
the same period in 2008.  The main factors contributing to the 
drastic decline in GDP include a 21.9 percent decrease in 
construction and a 9.5 percent contraction in industrial output. The 
Central Bank of Armenia (CBA) forecasts that the Armenian economy 
will shrink 5.8 percent in 2009.  According to an official from the 
Ministry of Finance, their forecasts are more pessimistic, according 
to which the GDP will fall by around 10 percent (Note: On May 20 the 
GOAM announced that Armenia's GDP for the first four months of 2009 
declined by 9.7 percent.  The GOAM released only limited information 
about April. End Note). 
 
¶3. Armenia's industrial output fell by 9.5 percent in the first 
quarter compared to the same period in 2008. The mining industry 
declined by 11.4 percent, manufacturing by 8.8 percent, and energy 
sector declined by 10.6 percent, due to reduced demand for energy 
from other industrial sectors.  Food processing and metallurgy, the 
two largest manufacturing sectors, recorded a slight growth of 3.3 
percent and 2.1 percent respectively. Chemical production decreased 
by 61.9 percent, manufacturing of non-metallic mineral products by 
25.8 percent, jewelry production by 58 percent. 
 
¶4. The construction sector, which began contracting last fall, fell 
by 20.5 percent in the first quarter of 2009, due to reduced capital 
inflows and decreased private demand.  The downturn is particularly 
visible in Yerevan, where nearly all construction projects are on 
hold mainly due to lack of financing.  In an effort to boost the 
sector, the GOAM made a decision in May to provide USD 54 million in 
financing guarantees to encourage banks to lend to developers of 
projects that are at least 75 percent completed. 
 
¶5. The agricultural sector reported a five percent drop in the first 
quarter.  Expansion in the services sector slowed to 2.1 percent in 
the first quarter due to reduced trade volumes.  Trade of motor 
vehicles was down by about 50 percent.  Communication services 
reported a 3.4 percent growth, while the volume of freight forwarded 
declined by 11.1 percent.  The financial services sector contracted 
by 1.1, compared to 25.6 percent growth in the same period in 2008. 
 
 
 
INFLATION WITHIN THE TARGET RANGE 
--------------------------------- 
 
¶6. The Board of the Central Bank of Armenia (CBA) lowered the 
refinancing rate by 0.25 percentage points in April to 7.5 percent, 
based on March inflation which was equal to 1.4 percent (Note: On 
June 2 the CBA announced a reduction of the refinancing rate to 6.25 
percent, noting a 2.3 percent inflation rate for the first four 
months of 2009. End Note).  Despite sharp depreciation of the 
Armenian Dram in March, inflation has been lower than projected due 
to a persisting external deflationary environment and declining 
domestic demand. Compared to December 2008, foodstuff prices were up 
by 0.3 percent, while prices of non-foodstuffs and services 
increased by 1.4 percent and 1 percent respectively.  In March the 
prices for gasoline and diesel fuel increased by 9.1 percent and 5.7 
percent respectively compared to February.  Average import prices in 
March were up by 14.6 percent and export prices fell by 25.6 percent 
compared to December 2008. 
 
EXCHANGE RATE STABLE 
-------------------- 
 
¶8. After sharp depreciation of the Armenian Dram in March by around 
25 percent, from AMD 307 per dollar to AMD 380-390, after the CBA 
stopped intervening in the forex market (reftel), the exchange rate 
seems to have stabilized.  The AMD currently trades at approximately 
 
YEREVAN 00000380  002.2 OF 003 
 
 
375 per USD.  While speculation persists that that AMD is set for 
another major decline, there is no discernible movement in the 
exchange rates and the CBA consistently denies any forex 
intervention except to smooth large fluctuations. 
 
UNEMPLOYMENT ON THE RISE 
------------------------ 
 
¶9. According to official statistics, Armenia's unemployment rate 
reached 6.7 percent in March, a 0.3 percentage point increase 
compared to March 2008. Over the past 12 months the number of 
registered unemployed has increased by 2.9 thousand reaching 76.1 
thousand.  The actual unemployment rate, however, is likely much 
higher.  Household surveys regularly estimate unemployment at closer 
to 25 percent, not including those working abroad.  While the 
Armenian Migration Agency does not have a precise number of returned 
migrant workers, the decline of Russia as a foreign work destination 
has resulted in an estimated thirty to forty thousand persons who 
will be obliged to stay in Armenia. 
 
REAL WAGES AND INCOMES AFFECTED 
------------------------------- 
 
¶10. According to official statistics in March, nominal wages 
increased by 16.5 percent in AMD and decreased by 1.7 percent in USD 
compared to March 2008.  Despite the moderate inflation figures and 
increase in nominal wages reported in the official statistics, real 
wages and incomes of the population have deteriorated, due to the 
sharp depreciation of the AMD in March, higher prices for imported 
goods (15-30 percent, for selected products) and reduced 
remittances. 
 
REMITTANCES 
----------- 
 
¶11. Armenia's economy is highly dependent on remittances from 
abroad, which have been steadily increasing since 2000. In the first 
quarter of 2009, non-commercial transfers to Armenia (through the 
banking system) declined by 32.1 percent compared to same period in 
¶2008.  The sharp decline in remittances, which constituted around 15 
percent of the GDP in 2008, is explained primarily by unfavorable 
developments in the Russian economy, the main source of Armenian 
remittances (around 80 percent of total remittances).  (Note: In 
recent meetings around the country, we have been told that 
remittances have declined by up to 80 percent compared to last year. 
End Note). 
 
FOREIGN TRADE TURNOVER DOWN 
--------------------------- 
 
¶12. Armenia's foreign trade turnover declined by 27.7 percent in the 
first quarter of 2009, amounting to USD 781.9 million at current 
prices.  Exports registered a sharp decline of 47.3 percent compared 
to the same period in 2008, totaling USD 123.4 million.  Imports 
declined by 22.2 percent to USD 658.5 million.  The CBA expects a 
30-35 percent decline in imports in 2009, mainly determined by real 
exchange rate revision and reduction of incomes in the domestic 
economy.  Exports are projected to decline 25-30 percent, due 
primarily to reduced export prices.  The decrease of real volumes of 
export of goods and services is projected to be 1-3 percent. 
 
¶13. Armenia's main trading partners remained Russia, Germany, China, 
and Ukraine.  Trade with EU countries (accounting for 30 percent of 
Armenia's total trade) declined by 43.8 percent.  Trade with CIS 
countries (34.8 percent of total trade) declined by 23.9 percent. 
Exports and imports to Russia, Armenia's main trading partner, 
declined by 58.2 percent and 18.3 percent respectively.  Exports of 
base metals, Armenia's main export item (37 percent of total 
exports), declined by 47.8 percent.  Exports of precious and 
semi-precious stones and metals (20 percent of total exports) fell 
by 33.7 percent. Exports prepared food and mining products also 
declined by 50.9 percent and 55.8 percent respectively. 
 
BUDGET REVENUES 
--------------- 
 
¶14. Overall budget revenues declined by 9.7 percent--to AMD 139.8 
billion (USD 378 million)--in January to March.  Tax proceeds, which 
comprise around 74 percent of total budget revenues, fell by 16.7 
percent.  VAT collections, the main source of financing for the 
Armenian budget, were down by 20.1 percent to AMD 51 billion (USD 
138 million) and corporate tax proceeds fell by 20.8 percent to AMD 
15.9 billion (USD 43 million).  Budget expenditures for this period 
amounted to AMD 153.5 billion (USD 415 million), a 10.4 percent 
increase compared to the first quarter of 2008, which drove the 
 
YEREVAN 00000380  003.2 OF 003 
 
 
budget deficit to AMD 13.6 billion (USD 36.8 million).  To ease the 
pressure on the budget in the face of decreased revenues, the GOAM 
made a decision to defer expenditures of AMD 93 billion (USD 250 
million) to the fourth quarter, or possibly eliminate them 
entirely.(Ref B) 
 
COMMENT 
------- 
 
¶15. The global financial crisis is taking a serious toll on Armenia, 
and with each month it appears to be deepening.  We expect the 
second quarter performance to be worse than the first.  The GOAM has 
attempted a number of countercyclical anti-crisis measures, and has 
borrowed over USD 1 billion from the World Bank, IMF and Russia in 
order to close budget gaps and engage in stimulus spending.  While 
the GOAM must undertake some fiscal and monetary policy measures to 
counter the crisis, if it does not use this assistance prudently, 
Armenia will end up with much higher foreign debt and the economy in 
deep contraction. END COMMENT. 
 
YOVANOVITCH