Economic News from Armenian

Implications of the World's Financial Crisis for Armenia's Economy
Policy Forum Armenia Occasional Report 02/08


Executive Summary

It has become clear by now that the ongoing financial crisis will have
a deep and prolonged impact on a wide range of economies. This is also
likely to be true for a peripheral economy like Armenia's, regardless
of how isolated its relevant sectors are from the rest of the world.
While in-depth research on the causes and consequences of the crisis is
still in the pipeline and will become available as more facts are
uncovered, economists around the world agree that there is ample
evidence of a serious crisis in the making. A number of large economies
have already come under strain and applied for emergency funding from
the International Monetary Fund.

In this context, Armenia's economy is likely to be significantly
affected. Recent developments in emerging markets suggest that the
crisis-related deterioration of the economic outlook is likely to occur
abruptly with little signs of early warning, making it important to
have pre-emptive policy response in place before things get worse.
Against this background, the report discusses the main channels through
which Armenia's economy is likely to be affected as a result of the
adverse global conditions and offers a set of specific policy
recommendations summarized below that may help mitigate the impact of
the ongoing global crisis on Armenia's economy.


Recommendations

Addressing Capacity Issue

* Establish a Crisis Prevention Team as a high-level policy advisory
body reporting directly to the Prime Minister. It should consist of
economists and financial sector professionals with strong reputation
and experience in dealing with crisis countries and include Diaspora
and possibly non-Armenian professionals.

Fiscal Policy Response

* As signs of the crisis become more pronounced, undertake a review of
the current budget envelope and reduce expenditures on items of
secondary importance (excluding social spending) and waste during
public procurement. Recourses that will have been freed in such a
way'as well as any new external financing that could be secured for
this purpose'should be used to provide exporter support and social
assistance as part of the fiscal stimulus package.

* As a counter measure to possible shrinkage of the traditional tax
base, broaden the tax base by ensuring that no privileged large company
remains outside of the tax authorities' radar screens.

* Launch a guarantee facility to ensure uninterrupted trade financing,
particularly for critical commodities.

Monetary and Exchange Rate Policy Response

* Allow for much greater flexibility of the exchange rate by reducing
to a minimum the Central Bank's interventions (i.e., sales of foreign
exchange) on the foreign currency market.

* Gradually reduce policy interest rate and reserve requirements, and
ease access to the Central Bank's credit and liquidity facilities,
while carefully monitoring inflation developments. Prepare to adopt
higher rates of credit expansion specifically targeting producers,
especially exporters.

Structural Policy Response

* Create a lending facility for Small and Medium Enterprises (SMEs) to
provide targeted and easy-to-access loans to viable SMEs in need of
emergency financing.

* Take measures to reduce the monopoly price-setting powers of key
import companies.

* Undertake a review of barriers for business operations and make
credible steps to eliminate some of those barriers in the near term.

* Enhance/expand the social safety net by: (1) undertaking a review of
the poverty guidelines, and (2) targeting the next layer (i.e.,
currently on the margin) of socially vulnerable strata of population,
and (3) making credible steps toward eliminating corruption from the
existing system.

* Review and enhance existing unemployment insurance and provide
assistance to employees that have lost jobs due to crisis-related
closures and downsizings.

MOODY'S ISSUES ANNUAL REPORT ON ARMENIA

Armenia's Ba2 government bond ratings and stable outlook are supported
by its manageable debt levels, says Moody's Investors Service in its
annual report on the country. The ratings are constrained by the low
level of economic and institutional development of the country, along
with its concentrated economic base and volatile neighborhood.
"Armenia has not been directly affected by the global credit crunch
although second-round effects are now being felt from the compression
of world demand and the difficult conditions in Russia, its primary
trading partner and the source of large diaspora remittances," said
Moody's Associate Vice President Joan Feldbaum-Vidra, Moody's
sovereign analyst for Armenia.

She said growth is likely to decelerate sharply in the next few years
even as the government moves forward with large public sector
investment projects financed by multilateral funds. The spending on
such projects should help sustain the growth momentum even as the
fiscal deficits are set to shrink. "The country's low government debt
and minimal refinancing risks are allowing its rating to maintain a
stable outlook in the current environment," said Feldbaum-Vidra. "A
weak revenue base is the main fiscal risk, although it is ameliorated
by the very comfortable debt service profile, its good relations with
its official creditors, and the liquidity provided by the expatriate
Armenian community." Moody's reports that Armenia's economic prospects
continue to be hampered by strained relations with Turkey and
Azerbaijan, and that the border between Turkey and Armenia is closed,
increasing the cost of both exports and imports. "Armenia's low
institutional strength is another constraint on its ratings," said
Feldbaum-Vidra. "The authorities are very keen to address this,
recognizing that high levels of corruption and a suboptimal business
climate need to be corrected in order to achieve long-term sustainable
growth and to attract investment." Moody's first-ever ratings for
Armenia were assigned in 2006 and include a Baa3 ceiling to foreign
currency bonds and notes and a Ba3 ceiling for foreign currency bank
deposits, all with stable outlooks.

ARMENIA PUTS UP PROPERTY AND BRANDS OF CJSC 'BJNI MINERAL
 WATER PLANT' TO AUCTION
ArmInfo
2008-12-19 17:39:00

ArmInfo. The property and brands of CJSC "Bjni Mineral Water Plant"
were put up to e-auction at 5:19 local time, Friday, Rouben Grdzelyan,
the press-secretary of Judicial Acts Compulsory Execution Service of
Armenian Justice Ministry, told ArmInfo correspondent.

According to him, the knockdown bid for the property and brands
"Bzhni" (mineral water) and "Noy" (clear water) is 4,934 bln AMD
($16 mln). The auction will last 10 days. Financial claims worth a
total of 4.1 bln AMD were filed to the company as a result of audit
of tax bodies. These assets have been transferred to the state.

To note, CJSC "Bjni Mineral Water Plant" is included in the
structure "SIL Concern" belonging to the Sukiassyans' family of
entrepreneurs. The fact of unprecedented pressure on the concern
structures is connected with the political activity of one of the
shareholders, Armenian MP Khachatur Sukiassyan, who openly supported
the oppositional candidacy of the first president of Armenia Levon
Ter-Ptrossyan during the presidential election in February 2008.

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