YEREVAN, October 7 , /ARKA/. Fitch forecasts that the Armenian economy will contract by 6.2% this year, below the ‘B’ median of a 4.8% decline, and following average growth of 6.8% in 2017-2019. This is a sharp downward revision to the 0.5% GDP growth we forecast at our previous review.
The economic activity index fell by 6.4% (provisional data) in 8M20, dragged down by a fall in investment and tourism, and the impact of lockdown measures and weaker confidence on private consumption. A positive contribution from net exports, a fiscal stimulus package, and the 125bp of cuts in the policy interest rate to 4.25% provide some offset in our 2020 forecast.
‘We forecast GDP to grow 3.2% next year, a downward revision of 2.3pp since our previous review as we now expect a weaker recovery in external demand, including in tourism, alongside the moderate drag from unwinding of fiscal measures. We forecast GDP growth to improve modestly to 4.0% in 2022 helped by firmer consumer and investor confidence and stronger tourism, and reflecting a negative output gap. In line with our global macro-economic forecasts, the pace of recovery will be highly dependent on the path of the health crisis, and a further spike in infections and potential re-introduction of lockdown measures represents a key risk to Armenia’s economic outlook and our forecasts.’
Fitch forecasts the general government deficit to widen to 7.6% of GDP this year, from 0.8% last year, driven by higher expenditure. The on-budget fiscal package amounts to close to 4% of GDP in 2020, and focuses on labor subsidies, direct social transfers, corporate income tax deferrals, and higher health spending. In addition, 1.4% of GDP is available for on-lending, the largest component of which is private sector projects through the Investment Fund, which we anticipate will not be fully spent this year.
Fitch forecasts the deficit to narrow to 4.9% of GDP in 2021, with only limited new support measures extended under the “economic recovery” phase of the government’s plan, followed by 3.8% in 2022. The government has activated the escape clause in its Fiscal Rule, which falls away on dissipation of the economic shock, and is planning compliance with the requirement to bring debt/GDP below 60% of GDP within five years. However, Fitch considers there is sizable uncertainty around the capacity for implementation of a fiscal consolidation program, and the potential for additional fiscal measures to support weaker than expected GDP outturns represents a key downside risk to our revised fiscal forecasts.
General government debt is forecast to rise from 53.5% of GDP at end-2019 to 63.9% at end-2020, above the ‘B’ median of 58.1%. We forecast that government debt will continue to rise to 65.6% of GDP in 2021 (9.6pp above our previous forecast) and to remain elevated over the medium term, reflecting a combination of weaker growth impacted by economic damage from the health crisis and further spending pressures from fiscal measures to support the economy. 76% of government debt is foreign-currency-denominated, compared to the ‘B’ median of 61%, giving rise to exchange rate vulnerability. -0-