ARMENIA'S STEADY GROWTH, STABLE ECONOMY:

UNCLAS SECTION 01 OF 02 YEREVAN 002407

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON ENRG EFIN EAID AM
SUBJECT: ARMENIA'S STEADY GROWTH, STABLE ECONOMY:
WINNING THE GAME OF INCHES


1. (U) This cable is sensitive but unclassified. Please
protect accordingly.

--------------
SUMMARY
--------------


2. (SBU) Armenia's 2004 economic performance should
lend confidence to investors and development economists
alike. Armenia's oft-cited problems maintaining a
transparent and fair business climate notwithstanding,
the economy continues to grow, driven largely by
private investment across several sectors. All
indicators suggest a stable macroeconomic environment
and steady (but slow) progress reducing poverty. End
Summary.

--------------
MACROECONOMIC OVERVIEW: GROWTH REMAINS STRONG
--------------


3. (SBU) GDP growth remained strong at 9.7 percent
during the first three quarters of 2004, vice 14.8
percent for the same period last year. The
government's estimate of a year-end growth rate of 8
percent is likely to be right: growth in the fourth
quarter is typically slower than the year average. By
sector, growth was strongest in construction, retail
trade and agriculture. A decline in the diamond
polishing industry due to reduced imports of raw
diamonds from Russia accounts for a fall in industrial
growth to 2.8 percent from 27 percent last year as well
as a similar fall in Armenia's export and import
numbers. Non-diamond industrial growth was 9 percent,
in line with overall growth in GDP.

--------------
PRIVATE CONSTRUCTION THRIVING
--------------


4. (SBU) As in 2002 and 2003, construction is one of
the key growth sectors. The continuing growth in the
construction industry has proven wrong the popular
assertion that last year's construction boom depended
wholly on the Lincy Foundation's humanitarian financing
of USD 115 million of improvements in 2002 and 2003.
Construction is up 18 percent on last year's level,
which includes the Lincy Foundation's contributions,
and 60 percent of all construction is privately
financed. In addition to providing a good source of
employment to unskilled workers, Yerevan's ongoing
construction boom (largely housing) bears witness to
the rising level of local investor confidence.

--------------
INFLATION AND EXCHANGE RATES STEADY
--------------


5. (SBU) Despite concerns about inflation earlier in
the year, the government is likely to meet its three
percent inflation target. In August 2004 the Central
Bank allowed the dram to appreciate against foreign
currencies making many imports cheaper. Controlled
annual inflation and the relative stability of
Armenia's currency create a stable environment for
business. The dram's sudden adjustment against the
dollar this year appears to be sticking: we do not
expect volatility in the currency market.

-------------- --------------
CASH POVERTY PERSISTS DESPITE SLIGHT IMPROVEMENTS
-------------- --------------


6. (SBU) Despite several years of high growth,
commensurate improvements in poverty levels have been
less evident. In October the GOAM statistics service
announced the first significant drop in the poverty
rate in several years, to 42.9 percent from 49.7
percent of the population. Although the official
poverty line (about USD 24 per month) is probably too
low to reflect the cost of living, lower-income
Armenians are "cash poor." People generally have
shelter and clothing and even old luxury items like a
television, but they lack income beyond meager pensions
or cash remittances from relatives living abroad. In
rural areas there are more serious poverty issues
related to access to water and electricity.

--------------
LOWER INTEREST RATES A POSITIVE SIGN
--------------

7. (SBU) No sign is more important to Armenia's
investors than the steady fall in lending and deposit
rates in the banking sector. Government treasury bond
yields have fallen to under 7 percent, illustrating a
perception of lower country risk and allowing
commercial banks to attract deposits more cheaply.
Although bank lending rates remain prohibitively high
at 18 percent, the sharp fall in deposit rates from 18
percent in 2001 to 4.8 percent today suggests that
banks will be able to lend money more cheaply in the
future. Armenia's banking sector is still a woefully
inadequate source of capital and people depend on
friends and family to finance investments.
Nevertheless, government measures designed to
strengthen the banking sector have done so and interest
rates are market-determined.

--------------
COMMENT: WINNING THE GAME OF INCHES
--------------


8. (SBU) While Armenia's critics rightly disparage what
appears to be worsening corruption and further
consolidation of wealth into the hands of a few
oligarchs, statistics continue to suggest that Armenia
is winning the game of inches. As Armenia's economy
continues on its path of strong growth, the overall
macroeconomic environment remains stable and there are
noticeable positive effects on poverty. The government
has had small success in raising its tax revenues by 18
percent, which should help it meets its targets to
reduce poverty among those populations that depend on
government salaries and pensions. The constantly
improving situation explains the public's general
acquiescence to Armenia's oligopolistic economy: the
course of Armenia's development and the distribution of
its wealth may not be fair, but inch by inch the
situation is improving for most people.
EVANS