On 1 October, the European Bank for Reconstruction and Development (EBRD) published the economic forecasts for the emerging economies where the bank is present. The EBRD forecasted an overall contraction across its economies of 3.9% this year, and a return to growth next year of 3.6%.

Speaking on the Caucasus region, the EBRD outlined that the Covid-19 crisis weighed on growth in eastern Europe and the Caucasus through a sharp fall in remittances during the early months of the pandemic, lower commodity prices, which affected Armenia, Azerbaijan and Ukraine, and a collapse in tourism that weighed on growth in Georgia. GDP in the region is expected to fall by 4.5% in 2020, recovering somewhat to 2.5% growth in 2021. Another important aspect were the remittances, which fell by 29% year on year in the second quarter of 2020, relative to the same period of 2019, similar to the decline seen during the global financial crisis.

Armenia

The report highlighted that Armenia’s GDP growth of 3.9% year-on-year in the first quarter of the year turned to a 13.7% decline year-on-year in the second quarter as household consumption contracted by nearly 20%, investments by nearly 30% and trade by approximately 35% year-on-year in real terms. High-frequency indicators of economic activity point to a 10% decline (year-on-year) in economic output in July. Remittances contracted by nearly 40% year-on-year in April-May. The decrease in remittances nearly levelled off in June-July, as a strong increase in transfers from the US partially offset falling remittances from Russia. In the absence of significant inflationary pressure, the refinancing rate was lowered four consecutive times in 2020, to 4.25% in September.

A contraction of goods and services imports, including outbound tourism, balanced out the decline in export revenues, helping to contain currency pressures and supporting exchange rate stability following the initial depreciation at the onset of the pandemic. The Armenian economy is expected to shrink by 5.0% in 2020. Growth of 4.0% is expected in 2021, subject to considerable uncertainty related to the pandemic’s future path.

Azerbaijan

The report highlighted that the oil price shock on top of the Covid-19 pandemic is taking a toll on Azerbaijan’s economy. Following robust growth at the beginning of 2020, growth in the non-oil sector turned negative with the introduction of public health measures in March. Output in the non-oil and gas sector reached a trough in June before it started slowly recovering. In total, non-oil GDP contracted by 1.7% year-on-year in the first eight months, while total GDP fell by 3.0% year-on-year in the same period. External and fiscal surpluses have turned into deficits on the back of significantly lower oil revenues and rising expenditures aimed at supporting the economy.

Annual inflation has remained low and stood at 2.9% year-on-year in August 2020, on the back of the currency peg, which is supported by foreign exchange transfers from the State Oil Fund of Azerbaijan (SOFAZ). The combined assets of the central bank and of SOFAZ, the state oil fund, amounted to nearly US$ 50 billion, more than the projected 2020 GDP. Azerbaijan’s economy is expected to decline by 3.0% in 2020, with growth recovering to 2.5% in 2021. Key risks remain, especially related to a possible resurgence of the pandemic and continued weaknesses in the oil market.

Georgia

Preliminary indicators of the EBRD showed that Georgia’s economy reached the trough of the cycle in April 2020 when GDP contracted by 16.6% year-on-year. In the first seven months of 2020, output is estimated to have declined by 5.8% year-on-year. The speed of economic recovery depends mainly on the return of tourism. The number of foreign visitors fell by 76% year-on-year in January-August 2020. The impact on the hospitality sector has been somewhat softened by the increase in domestic tourism. Remittances fell by 20% year-on-year in March-May before strongly recovering by 22% in June-August. Inflation reached 6.9% year-on-year in April 2020, driven by the pass-through of sharp currency depreciation in March to domestic prices.

The rate of price increases moderated to 4.8% in August 2020, which enabled the National Bank of Georgia to loosen monetary policy. The policy rate was lowered three times in 2020, to 8.0%  in August. International reserves increased to an all-time high of US$ 3.9 billion by the end of August on the back of official financing, including disbursements under the augmented IMF programme. GDP is expected to contract by 5.0% in 2020 followed by a recovery of 3.5% in 2021, provided the tourism sector posts a strong recovery next year and other risks remain contained.