Caucasus Country Risk Report

Published 29 April 2015 | Quarterly

  • 64 pages
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Caucasus Country Risk Report

Core Views

  • Political tensions in the South Caucasus will remain high over the coming years as increased Russian intervention in Georgia's breakaway territories fuels concerns that Russia will attempt to annex Abkhazia and South Ossetia. Meanwhile, Azerbaijani-Armenian relations will remain strained over the frozen conflict surrounding Nagorno-Karabakh.

  • Armenia's economy will continue to struggle during 2015-2016 primarily due to its trade and remittance flow links with ailing Russia. Beyond this we continue to see little means of diversifying its growth model away from one driven by private consumption underpinned by volatile remittance flows.

  • Georgian real GDP growth will slow over the next two years relative to the 5.5% average growth achieved between 2010 and 2014 due to exposure to Russia's economic crisis, which has been triggered by Western sanctions and magnified by a dramatic fall in global oil prices. We forecast the Russian economy to contract 5.2% in real terms this year.

  • Azerbaijan will continue to tread a fine line between siding with either Russia or the EU. Azerbaijan's economic interests can be better served by increasing trade and energy routes with the EU, while maintaining good relations with Moscow will likely assist in keeping the autocratic regime of President Ilham Aliyev in power.

Major Forecast Changes

  • We have revised down our forecasts for headline real GDP growth to 0.5% and 1.9% for 2015 and 2016, from 2.9% and 3.2% respectively. This sharp downward revision is primarily due to the worsening outlook for Armenia's main trading partner, Russia, which we forecast to experience a 5.2% economic contraction during 2015.

Key Risks To Outlook

  • Given the close links between the Armenian economy and Russia the selloff in the Russian rouble, the collapse in global oil prices and the ongoing Western sanctions on Russia will all serve to constrain Russian real GDP growth. This in turn will see Armenian growth remain subdued as...

Table of Contents

BMI - Index League Tables
9
Core Views
11
Major Forecast Changes
11
Key Risks To Outlook
11
Chapter 1
13
Domestic Politics
13
Dram Depreciation To Test Social Cohesion
13
The Armenian dram will continue to dep reciate over 2015 due to the country's exposure to the Russian economy, which will depress
The Armenian dram will continue to dep reciate over 2015 due to the country's exposure to the Russian economy, which will depress
household purchasing power and heighten social instability
Table: Political Overview
13
Long-Term Political Outlook
14
Mitigation Of Regional Tensions Key To Stability
14
Armenia will continue to have difficult relations with neighbours Turkey and Azerbaijan through the medium term, as a result of sensitive
Armenia will continue to have difficult relations with neighbours Turkey and Azerbaijan through the medium term, as a result of sensitive
historical grievances and strong domestic pressure groups on both sides
Nagorno-Karabakh will remain a particular potential flashpoint
given the high profile of the region and ongoing talks, which are set to test commitment to peace in both Yerevan and Baku
Chapter 1
19
Economic Activity
19
Subdued Growth Amid Exposure To Russia
19
Armenia's dependence on an increasingly weak Russia for trade and financial support will dampen growth potential over the next two
Armenia's dependence on an increasingly weak Russia for trade and financial support will dampen growth potential over the next two
years
Chapter 1
23
The Armenian Economy To 2024
23
Convergence To Stall
23
Our relatively pessimistic medium-term view on the Armenian economy continues through our long-term forecast to 2024
We believe
the lack of economic and political reforms enacted by the government and the pivot away from the EU will hinder long-term economic
the lack of economic and political reforms enacted by the government and the pivot away from the EU will hinder long-term economic
activity, and as such we forecast real GDP growth to average 3
Table: Long-Term Macroeconomic Forecasts
23
Chapter 2
25
Domestic Politics
25
Little Chance Of Democratic Reforms
25
Azerbaijan's media environment will remain severely curtailed over the coming years, despite growing pressure from the interna tional
Azerbaijan's media environment will remain severely curtailed over the coming years, despite growing pressure from the interna tional
community
Table: Political Overview
25
Long-Term Political Outlook
26
Everything Hinges On Nagorno-Karabakh
26
Attempts to win back the Nagorno-Karabakh enclave will remain the defining issue of Azerbaijani foreign and domestic policy through
Attempts to win back the Nagorno-Karabakh enclave will remain the defining issue of Azerbaijani foreign and domestic policy through
the medium term
No quick resolution is likely and, therefore, heightened tensions with Armenia have the potential to result in further
small-scale armed clashes, with escalation not ruled out
Chapter 2
31
Economic Activity
31
Declining Oil Revenues To Hit Growth
31
Falling global oil prices will hit Azerbaijani fiscal receipts and GDP growth over the next two years
However, the ongoing development
of the country's non-oil sector, combined with a strong household consumption outlook, will pro vide some insulation from the loss in oil
of the country's non-oil sector, combined with a strong household consumption outlook, will pro vide some insulation from the loss in oil
revenues
Table: GDP Contr ibut ion To Growth
31
hapter 2
35
The Azeri Economy To 2024
35
Trend Growth Bolstered During 2018-2023
35
Over our 10-year forecast period to 2024, we believe Azerbaijan's economy will remain on a positive trajectory
Undoubtedly, energy
exports will continue to be the key driver underpinning growth
In addition, we expect rising incomes and consumption to help keep
growth buoyed during our forecast horizon
Table: Long-Term Macroeconomic Forecasts
35
Chapter 2
37
Operational Risk
37
Table: Operational Risk
38
Availability Of Labour
38
Tab le: Eur ope - Availability Of Lab our
39
Tab le: Lab our Force Employment By Sector ('000), 2008-2012
40
Table: Azerbaijan's Top 10 Source Countries For Migrant Workers
41
Crime Risk
43
Table: Emerging Europe - Crime Risks
43
Table: Crime Statistics
44
Chapter 3
37
Domestic Politics
47
Russian-Abkhaz Agreement Sows Seeds Of Future Conflict
47
Russia's signing of an alliance pact with Abkhazia, a Georgian breakaway region, puts the two countries on a collision course
Georgia
will neither accept losing sovereignty over the territory, nor renege on its ambitions to join the EU and NATO, setting the stage for a
will neither accept losing sovereignty over the territory, nor renege on its ambitions to join the EU and NATO, setting the stage for a
political crisis in the region
Table: Political Overview
47
Long-Term Political Outlook
49
Pro-Western Path To Continue
49
We expect tensions between Georgia and Russia to remain frosty over the next 10 years as the Georgian government continues
We expect tensions between Georgia and Russia to remain frosty over the next 10 years as the Georgian government continues
to attempt deeper integration with the EU and highlight that the potential for social unrest in border areas will remain pronounced,
to attempt deeper integration with the EU and highlight that the potential for social unrest in border areas will remain pronounced,
especially in the aftermath of the Ukraine crisis and Georgia's shift towards the EU and NATO
Chapter 3
53
Economic Activity
53
Robust Growth Ahead
53
Georgia's deepening ties with the EU will help real GDP growth remain steady in 2015 and 2016 by boosting exports and inward fixed
Georgia's deepening ties with the EU will help real GDP growth remain steady in 2015 and 2016 by boosting exports and inward fixed
investment, despite the country's deteriorating relations with Russia
Chapter 3
55
The Georgian Economy To 2024
55
Foreign Investment Will Support Growth
55
Over our 10-year forecast period, we project Georgian growth to remain relatively robust, averaging 4
4% per annum through 2019-
2024
Georgia will continue to rely heavily on foreign direct investment as a key driver of growth over the long run, which will be
enhanced by continued economic and structural reforms
Table: Long-Term Macroeconomic Forecasts
55
Chapter 5: BMI Global Assumptions
57
Global Outlook
57
New Era For Oil
57
Table: Global Assumptions
57
Table: Developed States , Rea l GDP GrowtH, %
58
Table: BMI VERSUS BLOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
58
Table: Emerging Markets , Rea l GDP Growth , %
59

The Caucasus Country Risk Report helps businesses with market assessment, strategic planning and decision making to promote growth and profitability in Azerbaijan, Georgia, Armenia. It is an essential tool for CEOs, Chairmen, Finance Directors/CFOs, Managing Directors, Marketing/Sales Directors with commercial interests in this emerging market.

An influential new analysis of Azerbaijan, Georgia, Armenia's economic, political and financial prospects through end-2019, just published by award-winning forecasters, Business Monitor International (BMI).

Key Uses

  • Forecast the pace and stability of Azerbaijan, Georgia, Armenia's economic and industry growth through end-2019.
  • Identify and evaluate adverse political and economic trends, to facilitate risk mitigation.
  • Assess the critical shortcomings of the operating environment that pose hidden barriers and costs to corporate profitability.
  • Contextualise Azerbaijan, Georgia, Armenia's country risks against regional peers using BMI's country comparative Risk Index system.
  • Evaluate external threats to doing business in Azerbaijan, Georgia, Armenia, including currency volatility, the commodity price boom and protectionist policies.

The Caucasus Country Risk Report by Business Monitor International (BMI) includes two major sections: Economic Outlook and Political Outlook.

Economic Outlook:

How will the Azerbaijan, Georgia, Armenia' economic policy-making and performance impact on corporate profitability over 2015-2019?

BMI provides our fully independent 5-year forecasts for Azerbaijan, Georgia, Armenia through end-2019 for more than 50 economic and key industry indicators. We evaluate growth, and also forecast the impact of economic management.

Economic Outlook Contents

The Caucasus Country Risk Report features BMI's forecasts with supporting analysis for 2015 through to end-2019, set against government views and BMI's evaluation of global and regional prospects.

Key Areas Covered:

Data:

  • Full 10-year forecasts with data - for key macroeconomic variables including GDP (real growth and per capita), population, inflation, current account balance and the exchange rate.
  • BMI's comprehensive Risk Index system - rates each country worldwide for economic and political risk, and rates the business environment, within a global and regional context.

Written Analysis:

  • Economic Activity - real GDP growth, employment, inflation, consumption (retail sales and confidence).
  • Balance of Payments - trade and investment, current and capital account.
  • Monetary Policy - interest rate trends (bank lending and deposit rates) and inflation (producer price and consumer price).
  • Exchange Rate Policy - currency controls, foreign investment flows, exchange rates and foreign exchange reserves.
  • Fiscal Policy - macroeconomic strategy and policies, government finance and tax reforms.
  • Foreign Direct Investment - approvals, inflows and climate.
  • External Debt - debt profile (short and long-term plus public and private sector obligations).
  • Global Assumptions - forecasts for each year to end-2019 covering: major commodities, growth in key regions, inflation, and interest and exchange rates, in the United States, Japan, China and the eurozone.

Key Benefits

  • Rely upon BMI's 100% independent forecast scenarios for Azerbaijan, Georgia, Armenia and underlying assumptions - we take no advertising and are privately-owned.
  • Exploit the benefits of BMI's comprehensive and reliable macroeconomic database on Azerbaijan, Georgia, Armenia, sourced and fully maintained by BMI from an extensive network of private sector, government and multilateral contacts.
  • Gain key insights into the current and future direction of government economic policy, which could significantly affect your company's business prospects, from BMI's team of analysts and economists.

Political Outlook:

What are the political risks to doing business in Azerbaijan, Georgia, Armenia over the next 5-years?

BMI's Azerbaijan, Georgia, Armenia country Risk Index evaluates the short- and medium-term threats to political stability.

Political Outlook Contents

  • SWOT Analysis for the Azerbaijan, Georgia, Armenia Market - Political Strengths, Weaknesses, Opportunities and Threats facing Azerbaijan, Georgia, Armenia.
  • Political Stability and Risk Assessment - BMI's Risk Index assesses explicit short- and long-term risks to political stability; latest positioning and trends for Azerbaijan, Georgia, Armenia's risk are compared with regional and global averages.
  • Current Administration and Policy-making BMI assesses the threats to the continuity of economic policy, and likely changes to the business operating environment.
  • Long-Term Political Outlook BMI examines the structural risks to the stability of Azerbaijan, Georgia, Armenia’s political system and the dominant public policy issues likely to affect decision-makers, and outlines scenarios for how the state could evolve in the medium to long term.

Key Benefits

  • Benchmark Azerbaijan, Georgia, Armenia's risk profile against its neighbours, the global and regional average, allowing easy comparison of risks between key business markets.
  • Identify, evaluate and anticipate political and security risks to the business environment, and to your company's current operations and future plans.
  • Gain valuable insights into government and policy-making, through BMI's specialist team of analysts and economists, and their network of private and public sector sources.

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Testimonials

The sections that I find most interesting and useful are the macroeconomic data and forecasts for the country, top export destinations and economic activity. The indicators/analysis of these areas helps us orient our thinking, our assumptions and, consequently, our decisions in the commercial area.

Country Manager, DHL Express