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RR RUEHDBU RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHYE #0616/01 2461336
ZNR UUUUU ZZH
R 031336Z SEP 09
FM AMEMBASSY YEREVAN
TO RUEHC/SECSTATE WASHDC 9454
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC 0645
RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1818
RUEHIT/AMCONSUL ISTANBUL 0811
RHEHNSC/NSC WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC

UNCLAS SECTION 01 OF 04 YEREVAN 000616 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD AM
 
SUBJECT: ARMENIA - MACROECONOMIC OVERVIEW FOR FIRST HALF 2009 
 
REF: A) YEREVAN 151  B) YEREVAN 189 
 
YEREVAN 00000616  001.2 OF 004 
 
 
SUMMARY 
------- 
 
¶1. (SBU) Armenia's GDP declined by 16.3 percent in the first half of 
2009, and the decline is expected to exceed 10 percent for the full 
year, with the construction and mining sectors being hardest hit. 
Falling remittances and exports, together with rising unemployment, 
are depressing household incomes and causing poverty to rise. IMF 
projects modest economic growth in 2010, provided that the expected 
global recovery materializes.  While the GOAM attracted large 
amounts of donor financing this year to support the state budget and 
the economy, if the money is not spent efficiently, Armenia will 
soon end up with huge foreign debt.  End Summary. 
 
GDP DECLINES SHARPLY 
-------------------- 
 
¶2. (SBU) Armenia's economy has contracted sharply since the onset of 
the global economic crisis.  In the first half of 2009, GDP declined 
by 16.3 percent (in the second quarter of 2009 by 22.9 percent) to 
AMD 1,119 billion (USD 3 billion). The sectors hit hardest and 
contributing most to this decline include industry and construction 
-- 11.5 percent and 53.5 percent respectively.  According to revised 
forecasts by the Central Bank (CBA), the annual drop in GDP will be 
equal to 12-15 percent. Previously the CBA was projecting a 5-6 
percent decline.  The IMF projects a 10 percent contraction for 
¶2009.  Armenia's Ministry of Economy expects the national economy to 
start recovering in the second half of the year, with possible 
growth in 2010.  As global conditions approve, IMF expects GDP to 
rise in 2010 by about one percent. 
 
¶3. (SBU) Industry reported an 11.5 percent year-on-year decline, due 
primarily to shrinking production volumes in the mining and chemical 
sectors.  The mining sector declined by 9.3 percent, manufacturing 
by 12.6 percent, and energy by 9.4 percent, due to reduced demand 
from other industrial sectors.  Metallurgy was the only major 
industrial sector (comprising 18.4 percent of the total 
manufacturing sector) to grow, showing a 10.1 percent increase, due 
largely to growth in copper and aluminum foil production.  (Note: 
Copper prices began to recover in February, and GOAM loans helped 
keep several mining companies in operation during the worst part of 
the crisis. End Note).  Food processing declined 5.7 percent, and 
the chemical industry contracted by 50.4 percent, due to a decrease 
in volumes of synthetic rubber production.  Manufacturing of 
non-metallic mineral products declined by 31.8 percent, and jewelry 
production by 58.7 percent. 
 
¶4. (SBU) The construction sector, which grew more than five-fold in 
real terms since 2001 and began contracting last fall, declined by 
52 percent in the first half of 2009, due to decreased capital 
inflow and incomes. Construction volumes financed by households 
declined by around 70 percent, whereas construction financed by 
private companies declined by 20 percent. Construction volumes in 
June 2009 were double that of May; in an effort to boost the sector, 
the GOAM provided guarantees to developers -- about USD 54 million 
-- to help them attract loans from commercial banks and complete 
unfinished projects. 
 
¶5. (SBU) The agricultural sector reported a 2.5 percent year-on-year 
drop in the first half of 2009 due to reduced output both in plant 
cultivation and livestock sectors. In the livestock sector, milk 
production declined by about 10 percent and meat production by 4.6 
percent. On the other hand, egg production was up by 19.1 percent. 
Plant cultivation dropped by 1.9 percent. Agriculture, hunting, 
forestry and fishing contributed -0.2 percentage points to the 
overall drop of the economy. 
 
¶6.  (SBU) Services reported a slowed growth rate of 1.9 percent, 
largely because of around a five percent decline in trade.  This was 
due to a 49 percent reduction in car sales, no growth in retail 
trade turnover, and a five percent decline in wholesale trade. 
Other services increased by only 0.9 percent, due to a sharp decline 
in transportation (7.5 percent) and financial services (8.4 
percent), and slow growth in communications (4.7 percent). 
 
UNEMPLOYMENT RISES 
------------------ 
 
¶7. (SBU) According to official statistics, the unemployment rate 
reached seven percent in June, a 0.7 percentage point increase 
compared to June 2008. As of June, the number of registered 
unemployed was 79,100, four thousand more than in January.  (Note: 
 
YEREVAN 00000616  002.2 OF 004 
 
 
The official unemployment figure reflects only those who have 
registered with the state unemployment agency.  The Household 
Survey, which the National Statistical Service carries out annually, 
showed an actual unemployment rate equal to 23.2 percent in 2008, 
compared to an official unemployment rate in 2008 of 6.3 percent. 
The 2009 survey has not yet been released. End Note). The number of 
unemployed persons who obtained aid from the state totaled 23,700 in 
June, with the average monthly state unemployment allowance equal to 
USD 45. 
 
¶8. (SBU) Despite slow economic activity and growth in labor supply 
due to a reduced outflow of migrant workers, the average wage 
increase in June compared to May was 4 percent, explained primarily 
by wage increases in the public sector.  In June, average monthly 
nominal wages were equal to USD 280. Compared to June 2008, nominal 
wages increased by 11.6 percent in AMD and decreased by 8.2 percent 
in USD. The CBA predicts average nominal wages in the economy will 
decrease by approximately 1.5 percent, due to a reduction of nominal 
wages in the private sector.  The CBA also predicts a 1.6 percentage 
point increase in the unemployment rate, due to a drop in aggregate 
demand. 
 
PRIVATE CONSUMPTION DOWN 
------------------------ 
 
¶9.  (SBU) According to CBA estimates, in the second quarter of 2009 
private expenditures in real terms dropped by around 19 percent, 
9-10 percent below its potential level.  This was due to reduced 
incomes from a decline in remittances, uncertainty about the 
investment climate and negative expectations.  During the first six 
months of the year, private expenditures have created deflationary 
pressures in the consumer market, reducing inflation by 2.7-3 
percentage points. 
 
MONETARY AND EXCHANGE RATE POLICES CONSISTENT 
--------------------------------------------- 
 
¶10.  (SBU) After depreciating by 22 percent on March 3 following the 
CBA's decision to stop supporting it (ref A), the Armenian dram 
(AMD) was stable during the second quarter of 2009.  It has held 
within a range of AMD 370-380 per USD, with minimal bid/ask spreads 
suggesting there is little anticipation of another major 
devaluation.  The CBA has intervened only a few times in the forex 
markets since March 3; mostly, it insists, to smooth excess 
volatility.  The CBA's forex intervention from September 2008 to 
March 2009 cost over USD 700 million, with the CBA spending up to 
USD 30 million on some days. 
 
¶11.  (SBU) Reduced concerns about the exchange rate have allowed the 
CBA to ease monetary policy to support economic activity. Since the 
beginning of April, the CBA has cut its refinancing rate several 
times -- by a cumulative 1.75 percentage points -- to six percent, 
after increasing it by one percentage point in March to avoid 
overshooting of the exchange rate and to maintain confidence in the 
AMD. Consistent with its primary objective of price stability and in 
line with low inflation forecasts for the year, the CBA will 
continue to ease monetary policy in the second half of the year. 
However, the economic crisis and increased dollarization of the 
economy have reduced the effectiveness of monetary policy. 
 
INFLATION LOW 
------------- 
 
¶12. (SBU) Year-on-year inflation was one percent in February and 
March, increasing to slightly over three percent in April, May and 
June.  This was driven primarily by increases in utility prices in 
April and the pass-through effects of the AMD devaluation, mostly 
through higher import prices.  Average import prices in June were up 
by 18.8 percent and export prices down by 14.2 percent compared to 
June 2008. 
 
¶13. (SBU) Compared to December 2008, foodstuff prices in June were 
up by 3.2 percent, while prices of non-foodstuffs and services 
increased by 9 percent and 7.3 percent, respectively, during that 
same period. In June, prices for gasoline and diesel fuel increased 
by 8.8 percent and 5.3 percent, respectively, compared to May. 
 
¶14.  (SBU) Due to declining domestic demand, the inflation rate is 
expected to remain low through the end of the year. IMF predicts 
year-end inflation to be at the lower end of the CBA's target range 
of 411.5 percent.  According to the latest CBA prediction, year-end 
inflation will be around 3.5 percent. 
 
REMITTANCES DECLINE 
 
YEREVAN 00000616  003.2 OF 004 
 
 
------------------- 
 
¶15. (SBU) A sharp drop in remittances in the first half of 2009 is 
one of the major factors behind the double-digit contraction of the 
Armenian economy.  From January to June 2009, net transfers to 
Armenia through the banking system declined by 36 percent compared 
to same period in 2008, totaling around USD 600 million.  This sharp 
decline is explained primarily by unfavorable economic conditions in 
Russia, the main source (about 80 percent) of remittances to 
Armenia.  Remittances had been growing steadily since 2000, before 
the financial and economic crisis broke out; from January to June 
2008, transfers to Armenia increased by 34 percent, comprising 
approximately 15 percent of Armenia's GDP. 
 
BUDGET REVENUES DOWN 
-------------------- 
 
¶16. (SBU) According to preliminary data from the Ministry of 
Finance, overall budget revenues in January to June 2009 declined by 
12.9 percent, compared to the same period in 2008, to AMD 300.4 
billion (USD 812 million).  This decline is explained mainly by an 
18.2 percent decline in collections of taxes and duties, which 
comprise 77.6 percent of total budget revenues (Note: The remainder 
comes from social security taxes (15.9 percent), other revenues (5.6 
percent) and official grants (less than one percent). End Note). 
 
¶17. (SBU) Budget expenditures for this period amounted to AMD 347.5 
billion (USD 939 million), a six percent increase, creating a budget 
deficit for the first half of 2009 equal to AMD 47 billion (USD 128 
million).  Budget revenues and expenditures for the first half of 
2009 amounted to 33.4 percent and 38.6 percent of the 2009 totals 
(AMD 905 billion and AMD 945 billion, respectively) projected by the 
State Budget Program adopted in November, 2008. 
 
¶18.  (SBU) VAT collections, the main source of financing for the 
state budget (44.9 percent of total revenues), were down by 26 
percent to AMD 104.8 billion (USD 283 million).  Corporate tax 
proceeds (19.4 percent of total from taxes and duties) fell by 2.7 
percent to AMD 45.3 billion (USD 122 million).  (Comment: While we 
would expect VAT revenues to decline due to the global financial 
crisis, Deputy Finance Minister Vardan Aramyan told us on August 28 
that due to the introduction of cash registers in many retail 
outlets during the past year, official retail turnover for the first 
seven months of 2009 was double that of the same period in 2008. 
This increase, however, is not reflected in official statistics. End 
Comment). 
 
¶19.  (SBU) In response to the toughening economic situation and 
severe shortfall in revenues, in March the GOAM revised its revenue 
and spending plans for 2009 (Ref B).  It reduced projected revenues 
by 8.1 percent and spending by 9.6 percent. For the first six months 
of 2009, the budget deficit (project financing from foreign sources 
not included) was equal to 4.2 percent of GDP.  Despite large 
inflows of donor financing (including from Russia), the Ministry of 
Finance predicts the annual fiscal deficit to equal 6.5 percent of 
GDP in 2009, though in a worst-case scenario it may exceed 7.5 
percent of GDP.  Between 2010-2013, the GOAM projects Armenia's 
external debt will grow to around 45 percent of GDP (up from 13 
percent in 2008). 
 
EXPORTS AND IMPORTS DOWN 
------------------------ 
 
¶20.  (SBU) Armenia's foreign trade turnover declined by 31.5 percent 
in the first half of 2009, amounting to USD 1.66 billion at current 
prices.  Exports registered a sharp decline of 45.1 percent compared 
to the same period in 2008, totaling USD 281.3 million.  Imports 
declined by 27.5 percent to USD 1.38 billion.  The negative trade 
balance in January-June totaled USD 1.1 billion, or 34 percent of 
GDP. (Note: Although the 20 percent devaluation of the AMD on March 
3 would have lowered the USD price of Armenian exports, the sector 
was also affected by falling demand resulting from the global 
crisis. End Note). 
 
¶21.  (SBU) Exports of base metals and mining products, Armenia's 
main export items, declined by 49.3 percent and 47.8 percent, 
respectively.  Exports of precious and semi-precious stones and 
metals fell by 47.7, of food products by 48.2 percent. 
 
¶22.  (SBU) Armenia's main trading partners remained Russia, Germany, 
China, Ukraine and the USA.  Trade with EU countries (accounting for 
30.2 percent of Armenia's total) declined by 46.2 percent.  Trade 
with CIS countries (33.4 percent of total trade) declined by 25.4 
percent. Exports to and imports from Russia, Armenia's main trading 
 
YEREVAN 00000616  004.2 OF 004 
 
 
partner, declined by 57.1 percent and 27 percent respectively. 
 
PENNINGTON