Armenia’s Conflicted Claim Clusters
Armenia joined the Caucasus queue immediately after the US Federal Reserve stayed the easy-money course with a $700 million, 7-year sovereign bond oversubscribed at a 6.25 percent yield. The foray came as an IMF extended credit facility expired and newly re-elected President Sargsyan pivoted from EU talks to enter the Russia-dominated Eurasian Economic Union, given longstanding natural gas and security ties to face off with Azerbaijan over disputed land. Visa passage discussions will continue with Brussels, as another arrangement may be sought with the Washington-based lender, which just recalculated both GDP growth and inflation at around 4 percent this year. Construction has revived but electricity prices have also risen, on 20 percent credit expansion in the 70 percent dollarized banking system. Food and metal exports have picked up but remittances remain crucial to offsetting the 10 percent of GDP current account deficit and steadying the currency. Donor funding along with international financial market access will help close the budget gap and private pension reform is underway with global asset managers applying for licenses. Efforts to improve in the World Bank’s Doing Business rankings have focused on infrastructure and regulatory modernization in the mold of neighboring Georgia, which was the first from the sub-region to be added to JP Morgan’s NEXGEM index. Eurobond issuance and non-resident deposits have lifted external liabilities to 100 percent of GDP there, according to the Fund’s latest Article IV update. President Saakashvili is preparing to leave office after the opposition led by a wealthy business executive took the prime minister’s post last year ushering in a political standoff. With one-third the population in poverty and 15 percent unemployment, the new team is following through on campaign spending promises such as national health insurance on slower 2.5 percent economic growth. The central bank has cut interest rates to 4 percent and spent hundreds of millions of dollars of reserves for currency support, as the government has strengthened labor protections and backed a $3 billion private equity fund for infrastructure investment. The Russian market may reopen soon after the post-war trade embargo, but agricultural output continues to lag.
In Central Asia Kazakhstan too plans a $1 billion Eurobond to set a company benchmark as banks still struggle with the 30 percent NPL hangover from the 2008 crisis, which has forced BTA to default twice on foreign debt. WTO accession is expected in the coming months as China’s bilateral natural resource and credit relationship has taken off in recent years. GDP growth and inflation are both at 5 percent, and hydrocarbon FDI and a current account surplus undergird external accounts, with central bank and sovereign wealth fund reserves combined at $95 billion. The exchange rate corridor will add the euro and ruble to the dollar, and all private pension funds will be consolidated in a single pool under official control with outside manager participation as the inherent conflict caused a 10 percent MSCI stock market drop.
