We are conservative in making forecasts - ADB 

ArmInfo.The Asian Development Bank (ADB), having revised its April forecast figures for Armenia's macroeconomy, recently raised its GDP forecast for 2024 from 5.7% to 6% and at the same time sharply reduced its forecast for average annual inflation from 3% to 0.8%. ArmInfo's economic observer asked Grigor Gyurjyan,  senior economist at the ADB's Armenian mission, for clarification on the reasons for adjusting the figures in the latest issue of the Asian Development Outlook. 

- When you wrote in your April forecast that aggregate demand in the  country had begun to decline, few people paid attention to it at the  time. For example, the Central Bank of Armenia only recently, when  revising the key rate, stated this as a justification for reducing it  to stimulate growth. And despite the obvious decline in the level of  aggregate demand, you decided to adjust the GDP growth forecast  figure upwards? Why? After all, many other financial institutions, on  the contrary, their previous high forecasts to the same 6%.

- I accept the fact that our forecasts are somewhat more conservative  than our colleagues. As you can see, we have increased our forecast  for economic growth very insignificantly, by only 0.3 percentage  points. We proceeded from the presence of new factors that supported  the growth of the post-March indicators. They, of course, indicate a  general trend of slowing growth rates, but more restrained. Both the  monthly indicators of the economic activity index, and the data on  inflation, or rather deflation, and the decisions to further reduce  the key rate, and the situation with the current account, all this  became the subject basis for such an insignificant adjustment of the  forecast, its update. And this is despite the presence of such  downward factors as a decrease in the volume of incoming transfers  and the neutralization of the impact of the so-called "relocant  environment" on the economy.

- Do you think there is a certain imbalance between the rather good,  all things being equal, forecast economic growth of 6% and such a low  forecast average annual inflation of only 0.8%? Be that as it may,  but 6% is the figure at which, in my opinion, inflation close to zero  is practically impossible, or even harmful for any economy of our  type.

- Yes, but since the beginning of the current year we have been  facing long-term deflation and therefore, taking into account all the  accompanying macro factors, we believe that the revision to an  average annual 0.8% is quite justified. There are 4 months left until  the end of the year, and we do not see any significant inflationary  factors and expectations. Quite the contrary, and that is why we have  sharply reduced our inflation forecast.

- You certainly took into account the so-called global inflation  background, including among Armenia's trading partners. And it  remains quite high. This is also the forecast for Russia, although  inflation is declining there, but it still remains at a noticeably  high level, despite the Central Bank raising the key rate. The  situation is the same in Europe. And in the US, despite the Federal  Reserve's rate cut in order to stimulate the economy, the background  remains quite high. And our Central Bank is lowering the rate in the  hope of activating lending and supporting growth after a rather long  and tough monetary policy...

- We still believe that external inflationary pressure on Armenia is  mostly softening. This is our opinion, which underlies our forecasts.  This is the reason why inflation is decreasing, although there is  another factor that we have already mentioned - demand is falling due  to a decrease in private and public consumption. This is the reason  for the formation of a deflationary environment.

- In your forecast, do you see growth in the manufacturing industry?  According to statistics, it has increased from 2.5% to 7.5%. Many  believe that this is not about basic assets and their development,  but only a situational trend associated with the so-called transit  economy - transit export-import supplies of precious metals - gold  and silver - with minimal processing. What do you think about this?

- I would like to remind you that it was for this reason that the  government changed its forecast for the first quarter of this year,  replacing the forecast growth rate from 9.6% to 6.1%. According to  the forecast for the industrial sector, it was 6.5% for the first  half of the year. We believe that this figure is not related to the  story with precious metals, but reflects purely the growth of  potential in the manufacturing industry. As a result, we neutralized  this factor in our forecasts.

- In recent months, the rate of tax collection for the budget has  been declining. Did you take this into account in the forecast? After  all, the slowdown in this indicator, which was supported by many  factors, including inflation, limits the possibilities of capital  investments in the economy by the government, the investment activity  of the state.

- You know, we mainly forecast two most important indicators:  economic growth and inflation. As for budget collection, we rely on  the data and justifications of the Ministry of Finance. We take into  account the fact that the government, aimed at implementing the  program of 6.5% economic growth this year, will do this, including  through state investments. It seems to me that tax collection largely  depends on the structure of the economy. If you look, the volume of  construction continues to grow, but the tax mechanisms of this area  are imperfect and weak. The issue of revising the turnover tax is  also at issue. In our studies, of course, we consider all factors  that are somehow related to macro trends, but we do not get into the  intricacies of tax and budget policy. At one time, we studied the  state of the current account, but today these trends are changing so  quickly that we prefer not to forecast this area. In those countries  where it is possible to do this, the bank does, where it is not, like  in Armenia, the bank prefers to avoid it.

- In terms of the GDP structure, do you expect growth in the  agricultural sector? According to statistics, it is 4.9% for 8 months  against 2.3% last year.

- We proceed from the government's program for the development of the  agricultural sector - expansion of intensive gardens, consolidation  of farms, preferential lending and much more, which will increase the  productivity of agriculture, put it on a modern track. Of course,  both investments and technology are needed here. We believe that  things are moving forward, and step by step the situation in the  agricultural sector is improving.

- How do you assess the situation in the services sector. It has  fallen almost twofold - from 14.7% last year to 7.5%?

- It is clear that the factor of neutralizing the impact of on the economy played its role here. The pace of  development of the industry is slowing down. But there is another  factor - the active introduction of artificial intelligence  technologies - another revolution in the industry with all its  advantages and costs.

In general, we consider the structure of GDP by 4 main components -  agriculture, industry, construction and services. We combine the  remaining areas into one folder. We see a slowdown in all of them.  The main reason is a decrease in investment activity and a  significant 30% drop in the volume of private transfers.

- Yes, you are right, and there is a tendency for the construction  industry to slow down, and real estate prices are gradually sliding  down.

- We think that we will see a slowdown in construction next year,  given that government incentive programs are being seriously cut,  primarily the tax deduction program. But we do not predict a crisis  in the real estate market. We believe that the growth rate of the  construction industry will still be high, given the volume of  government investment in infrastructure. This is the planned  large-scale construction of schools, medical facilities, other social  infrastructure, etc. And construction will support GDP growth.

- Let's talk about ADB's work in Armenia. Having exited Ameriabank's  capital in connection with the deal with BOGG PLC, you, in fact, like  most other international institutional financial structures, do not  have investments in the capital of Armenian companies. Even 10-15  years ago, this was a fairly common phenomenon. Are the risks  unreasonably high?

- I think that this is due to the imperfection of the corporate  governance system in Armenia. This circumstance, in my opinion, is a  strong deterrent to the involvement of structures like us in the  capital of companies. If the corporate governance mechanisms in  Armenia worked, there would be many more opportunities. I think the  main reason should be sought here - in the insufficient formation of  a corporate governance culture.

- Armenia has become a member of the Asian Development Fund. Tell us  a little about this.

- The Asian Development Bank classifies the countries where it  operates into several groups. These are low-income,  lower-middle-income, upper-middle-income, and high-income countries.  And the bank has 2 financing mechanisms. The first is the Asian  Development Fund and the second is Ordinary Capital Resources (OCR).  When Armenia was not an upper-middle-income country, it had access to  both funds, receiving fairly concessional loans. In 2018, the country  entered the upper-middle-income group of countries both according to  our classification and the World Bank, ceasing to use the Fund's  highly concessional resources and receiving access only to OCR  resources. Moreover, in 2023, Armenia decided to become a member of  the Fund, contributing $1 million to it either as a participant in  the donor pool or as technical grant assistance. Armenia has  effectively joined the ranks of ADB donor countries.