YEREVAN, May 13. /ARKA/. The economy of Armenia is experiencing difficult times because of the crisis caused by the coronavirus. Different experts give a wide variety of forecasts. What awaits the Armenian economy, what are the development forecasts, how productive are the measures taken by the government in quarantine? Manuk Hergnyan, head of EV Consulting, spoke about that in an interview with ARKA and News-Armenia under the special project #SaveBusiness.
Question – The situation and trends in world markets are rapidly changing amid the spread of the coronavirus. How do you think the world will change after the end of the coronavirus pandemic?
Hergnyan – First of all, it is not clear when the pandemic will end. I believe that a year or two will have to live and work in some kind of limited mode, with the understanding that the epidemic persists until vaccines, drug treatments or massive immunity are invented. Of course, I think that during this time the restrictions in the economic area will not be as severe as they are now. Everything will depend on the epidemiological situation. But the time period indicated by me will be characterized by an alternation of restrictions and mitigations.
Question – What will happen after coronavirus? How will the economy develop, and what trends should be expected?
Hergnyan – It is even more difficult to make assumptions here, but some trends can already be predicted. Firstly, I think that the fundamental concept of organizing both economic policy and business strategies will be the concept of sustainability (the ability to withstand external shocks). This will be due to the fact that, firstly, the globalization trend will stop. Instead, there will be a strong trend towards deglobalization, building local supply chains, sometimes even bypassing productivity. Value chains of a business also more will be guided by local deliveries. Secondly, the trend towards digitalization of all spheres of life will be accelerated. Digitalization trends, which began in a particular sphere and were relatively sluggish, will now gain momentum in all areas – from education to medicine and other industries.
Question – That is, the economy will gradually adapt to the new realities, switch more to the online mode?
Hergnyan – Not everyone will go online, but those trends that have been tuned in the last 10-15 years to digitalize various areas of activity, including economic, will accelerate. So many companies will make decisions on a radical digital transformation. The thing is that they simply will not have another choice.
Another strong trend will be towards new standards of behavior in everyday economic life. One of solutions would be to make physical contact restriction the norm. Many countries are already starting to experiment in this regard, starting from new requirements for the restaurant business, ending with new forms of operating aircraft and organizing international flights. New standards of physical distance will be needed, standards and norms that will limit the number of people who are simultaneously in one particular place, and this will apply to both production and all areas of service.
Those countries that very quickly move to new standards and norms, that will not rely solely on behavioral changes among the population, but will build such mandatory norms, will get wout from the situation with flying colors, since they can balance the preservation and care of the health of their population with economic expediency.
A strict quarantine policy can be implemented only in the short term. I think that many governments, after a maximum of two or three months of quarantine, will decide on a substantial mitigation of these measures, since the economic consequences will be devastating and it will be impossible to maintain such a regime for a long time. Therefore, success will depend on how countries find a balance, and also on what new behavioral norms will be successfully introduced in countries.
Question – How ready is the Armenian economy for the introduction of new standards – digitalization and distant work?
Hergnyan – Let’s just say that Armenia is heterogeneously prepared for new approaches. If, for example, you look at the education sphere, how quickly it switched to digital distance learning formats, then in general it can be noted that this was done quite successfully. But if you look at the rest, here we are not very successful, and norms are needed in behavioral consumption in many areas related to production and services. In this regard, government policy and new rules would be essential to stimulate new formats.
Question – How will all this impact the Armenian economy and its totals? Which spheres can recover and which spheres can increase their share in the structure of GDP?
Hergnyan – It is difficult to forecast a year ahead, but most likely we will close the year with a negative GDP indicator. By the way, the latest IMF forecast also reflects this, but here the question is the level of this indicator. In an optimistic scenario, we will be close to zero, and in a pessimistic development scenario, we will be close to minus 7-8%, and possibly more. Much will depend on the dynamics of the epidemic, and no one can predict this.
As for the sectors, it is clear that the tourism sector has suffered the most. Obviously, international tourism will not recover this year, but local tourism may recover. We see similar trends in China, where, after quarantine, crowds of local tourists went along popular tourist routes. There are even statistics that the occupancy rate of hotels in China has already reached 30%. In this area, similar development can be expected in Armenia.
In terms of the restaurant business, I think that the opening of restaurants is justified only if new standards for physical distance are introduced. Recovery will progress very slowly, because even if the rules of distance are respected, people themselves will be more cautious in visiting restaurants and cafes.
It is also very important to take into account the fact that we are heavily dependent on the dynamics of economic development of our trading and investment partners. In particular, the dynamics of our exports will very much depend on things in our export markets. Therefore, it is impossible to make forecasts only on the basis of our local developments, but we hope that a new balance will be found quickly enough.
Question – That is, in terms of economic recovery, should we hope for restoration of our trading partners’ economies?
Hergnyan – I do not think that in terms of economic development we should rely only on our neighbors and trading partners. I think that the trend of deglobalization will be very strong. It is necessary to think about the level and stimulation of domestic demand. In particular, this can be done through large capital expenditures via publicly funded areas – construction and other areas that can spur domestic demand.
Question – In the Eurasian Economic Union countries, it was decided to maintain zero customs duty rates for partners. How much can this play into the hands of Armenia? Can we occupy new export niches in partner states?
Hergnyan – This is a positive moment, but not the fundamental factor that will change the dynamics of economic development. As for the opportunity to occupy free niches, then, in principle, a crisis always gives rise to new opportunities – if something is destroyed, then something new is created. But the problem is what is being created in such niche areas that you can occupy or if you can quickly develop the relevant competencies. However, it is unlikely to be able to quickly rebuild, because this is a complex process, and it cannot happen in one day, although you can work in this direction. Globally, the economic situation will be very difficult, and therefore we can’t say now that this is a good chance for the Armenian economy, and it will radically transform into some new structure in a very short period.
Question – You have already talked about the difficulties that businesses face. But, in general, the government also runs numerous assistance programs to counter the coronavirus, supporting SMEs, the agricultural sector and other areas. Can this stimulate capital investment in various areas?
Hergnyan – All the stimulus packages adopted by the Armenian government under the conditions of the coronavirus are mainly aimed at smoothing out the shock that occurred from the beginning of March. They are not aimed at strategic development. Most likely, development-oriented packages will be presented after this. The programs adopted by the government aimed at smoothing out shocking effects, of course, will have some influence, but, according to my estimates, the need for such resources can reach 10% of GDP to smooth out the shock. In addition, the question arises of the targets of some measures. These measures, in principle, should be aimed at targeting the categories of the population that have suffered as a result of this particular situation, and not just at reducing social stress or stimulating business.
I will give an example – the package number one, which aims to provide credit resources to creditworthy companies. Firstly, the volume of resources will not change the dynamics in the economy, since they are very small compared to the total volume of lending in the economy. These are not substantial resources. Second, loans are provided through banks, and, on the basis of the parameters presented, they can be obtained only by the most creditworthy companies, which are able to attract loans also without this all. In this situation, the emphasis should be put on those companies that have faced problems in attracting loans precisely because of the situation with coronavirus.
Question – And what development programs would you suggest to the government, and on which sector specia emphasize should be put to ensure at least zero GDP growth?
Hergnyan – This is mainly the stimulation of capital construction and large infrastructural projects that will require large capital investments. Along with that, large-scale public work should be started, such as cleaning the country’s landscape of debris, mass planting of trees (such a program has been started, but its scale needs to be substantially increased), etc.
Question – But construction in recent years, judging by the data of the National Statistics Committee, does not show good results, and the real estate market is quite expensive for the average consumer, despite various programs. Prices are not falling, but only rising. In such circumstances, capital construction has prospects?
Hergnyan – I think it has prospects, and emphasis on social incentive is also needed here – for example, to make the incentive system stronger both in terms of mortgages and the provision of certain benefits for builders. Plus, public-private partnership programs, where a private investor invests, and the government acts as a co-investor in certain projects. As for infrastructure projects, the government should be the main player here. In the current situation, it is simply necessary to build up capital expenditures a great deal, also in infrastructure – roads, bridges, water reservoirs and military facilities.
Question – Many businessmen now have problems, also with the payment of tax liabilities, and not everyone can be conscientious taxpayer. Do you consider it possible in such circumstances to provide them with tax holidays that will allow them to pay off their liabilities in the long run in order to survive in this difficult period?
Hergnyan – In general, a mechanism such as tax breaks is used by many governments. But I believe that this is a less effective tool in this situation. Tax holidays can be used to mitigate the effects in those sectors that have suffered the most in the current situation, where demand has completely reset to zero, for example, in areas such as tourism. But, in general, the question remains of maintaining the discipline of tax payments, so I find it wrong to make so many exceptions here.
Question – Many international organizations have expressed their readiness to increase budget assistance. Is it reasonable for Armenia to attract these resources at this stage?
Hergnyan – I believe that the funds that are now offered on good terms should be taken. Now is not the time when it is necessary to take an excessively conservative stance on increasing public debt. Now we need to really quickly increase it so that we have resources for long-term support programs for the economy.
Question – And to what level can we increase the public debt?
Hergnyan – Here you can speculate about the limit. But I think that even 70% of GDP can be reached. We need to take only long-term loans from international organizations that offer funds on fairly favorable terms. We should now borrow from future generations. Otherwise, there will be such a disruption in the economy that it will be very difficult for us to restore it later, no matter what resources we invest. -0—