Wednesday, October 25, 2006

Rapid but Unbalanced Growth

Armenia's GDP grew by 12.5 percent in the first nine months of 2006, in what promises to be the fifth year of the country's stunning annual double digit growth rate. The largest growth was experienced in construction which grew by 40 percent over the same period in the previous year. This sector accounted for one fifth of the GDP in 2005, and seems to be the only sector that experienced any significant growth.

The pattern of economic activity is a bit odd in that the country is experiencing a tremendous growth in construction yet very little of that has translated into robust growth in other sectors of the economy. One would expect construction growth to translate into greater demand for manufactured goods such as metal works and wiring, furniture, draperies, and carpets, faucets and plumbing supplies, appliances and so forth. I suspect that much of this demand is met by imports rather than domestic production. Indeed, imports grew by 19.4 percent in the first nine months through September, to USD 1,508 billion, while exports were USD 700 million, or about one percent down. One is tempted to blame this on the appreciating Dram. But perhaps there is something more structural at play. Looking at exports and imports in 2005 (see below and here and here) one cannot help but notice the lack of diversity in Armenia’s exports in contrast to that of its imports.

2005 Export (USD millions)
Foodstuffs 97
Ores and minerals 79
Textiles 37
Precious and semiprecious stones, metals 336
Non-precious metals 315
Other 86
Total 950

2005 Imports (USD millions)
Live animals and animal produce 43
Vegetable produce 97
Foodstuffs 144
Ores and minerals 295
Chemical products 115
Plastic and plastic products 47
Textiles 45
Precious and semiprecious stones, metals 348
Non-precious metals 92
Machinery and equipment 227
Transportation 146
Other 170
Total 1768

In addition, there is also the nagging question of the ability of Armenian businesses to compete and market their products globally. A 2004 study commissioned by USAID provides good examples of this (see here).

Obviously the rising value of the Dram is not helpful, but more needs to be done to explore the underlying causes of the developing structure of Armenia’s economy.

Thursday, October 12, 2006

Soaring Real Estate Prices

Real estate values keep up their upward march. Prices have more than doubled, tripled in some cases, over the past three or four years (see here excel file, also see in Armenian). In central Yerevan, the price per square meter was US 631 in 2005 compared to 328 in 2002. However, the price in the Nubarashen district of Yerevan was only USD 152 in 2005, but also grew rapidly up from 50 in 2002. [A square meter is 10.76 square feet]

In contrast to the capital, prices in the regions or marzes remain low but otherwise exhibit similar growth. In Dilijan, for instance, the price increased from USD 26 per square meter in 2002 to 64 in 2005. Similarly, the price in Sevan increased from USD 24 to 54 over the period 2002 and 2005.

The overall number of transactions nearly tripled from 44792 in 2001 to 122545 in 2005.

It should not be surprising that prices are much higher in Yerevan, particularly given the pace of construction with much of it taking place in the capital (see here, also see for more recent and location specific activity). But how long will this price appreciation continue, and what is driving it? Is there any evidence of local speculators? Who is building (and profiting from) the new construction? Are there any distributional issues we should worry about as the poor are frozen out of the market (as in the example in here)? Are we approaching a bubble of sorts, and are mortgages outstanding large enough to be an issue?

How much of what we see is driven by Diaspora purchases of apartments in Yerevan, and how would prices in the capital and more importantly the regions change once the Diaspora is allowed to buy land? How much the prohibition on Diaspora land purchases distorts real estate activity (and prices)?

[Please email me if interested in contributing]

Friday, October 06, 2006

Georgia, Russia, and Armenia’s Economy

The rising tensions between Georgia and Russia, and the severing of land and air links between the two neighboring countries, may have serious implications for the economy of landlocked Armenia.

Russia is the leading source of imports by Armenia (see AEA – excel file). It imported USD 260 million from Russia, or some 15 percent of its total imports of USD 1768 million in 2005. Much of this is in the form of critical energy, raw materials, and other intermediate goods. Imports of uncut diamonds, given their weight and volume, may not be impacted by the trade “embargoes,” and the pipeline shipments of natural gas are not yet slated to be cut. But the imports of many other products will be severely impacted. As an example, in 2005, Russia accounted for 84 percent of Armenia’s imports of cereals valued at USD 45.1 million and weighing 301,942 tons (see here – in Armenian and can be very slow). It also accounted for over one third of Armenia’s imports of vehicles and heavy machinery (USD 50 million), and about 10 percent of many other products.

The following is a breakdown of imports by country (diamonds feature prominently in the trade with Belgium and Israel):

Total imports 1767.9 USD millions
Russia 259.5
Belgium 162.4
USA 116.0
Germany 114.0
Israel 102.5
Iran 102.0
Other 911.5

Exports are much smaller but relatively no less important, given the country’s GDP of less than USD 5 billion. Armenia exported USD 119 million to Russia in 2005, or some 20 percent of the total exports of 950 million, making the latter the fourth largest importer of Armenian goods, after Germany, The Netherlands, and Belgium (see AEA). Beverages and spirits represent much of what Armenia exports to Russia, valued at USD 71.3 million and weighing 23,258 tons (see here – in Armenian and can be very slow). Indeed, this represents about 85 percent of all Armenian beverage exports in 2005.

The following is a breakdown of exports by country (diamonds feature prominently in the trade with Belgium and Israel):

Total exports (USD millions) 950.4
Germany 147.2
Netherlands 130.1
Belgium 124.6
Russia 119.1
Israel 112.2
USA 62.1
Other 255.0

Regardless of the trading partners, much of Armenia’s imports and exports pass through Georgia and its ports on the black sea. As such, the stability and prosperity of Georgia are critical as well.

Airline traffic will also be affected. There are about 80 weekly flights from Yerevan to destinations all over Russia (see AEA, the overall number may vary with season). Half of these are served by Russian airlines which will not fly over Georgia. The necessary detours will most likely add to the duration of the flights and to the cost of air travel.

One hopes wisdom prevails as Georgia and Russia settle their differences. In the meantime do we know of any ongoing research on shipping costs to and from Armenia on various modes of transportation? There are considerable amounts of statistics on the volume and how goods are shipped (see AEA), but little is reported on costs.

Wednesday, October 04, 2006

Trends in Dram Circulation

While reviewing the data on currency circulation recently posted on the website of the Armenian Economic Association, I was intrigued by the pattern of Drams held outside the Central Bank. The volume of Drams in circulation grew by some 47 percent in 2005, to 155 billion [see here, column N]. Of course this is not the first time that such rapid growth was experienced. The growth rate in 2002, for instance, was 38 percent. Indeed, Drams in circulation ranged from 26 billion Drams in 1995 to 155 billion in 2005.

It may be useful to explore the underlying trend of the various Dram denominations and examine where much of the growth is coming from. The 20000 note, with 40.2 billion Drams in circulation in 2005, has experienced the fastest growth since it was first issued in 1999 (see here). Similarly, the 10000 note grew rapidly since it was first issued in November of 2003, as well as the 50000 notes since it was first issued in June of 2001.

Here is the trend in circulation of the largest denominations (in billion Drams):

Denomination 2001 2002 2003 2004 2005
5000 drams 32.58 40.41 44.94 37.82 48.84
10000 drams 0.00 0.00 7.30 25.22 42.98
20000 drams 12.35 24.16 23.04 21.02 40.20
50000 drams 0.78 1.61 1.39 0.95 1.61

This trend is in many ways fascinating. But what explains it? What does it tell us about economic growth? About the shadow economy? About errors in measuring the true growth of the Armenian economy? Also, are there studies of the demand for the various denominations?