Business Monitor Online June 9, 2017 Friday Healthcare Market Limited By Demographics and Weak Economy Healthcare expenditure in Armenia will expand at a slower rate than its regional peers, reflecting the country's weak economic footing. Compounding the bearish outlook is the small population and negative demographic profile. We note that the introduction of a compulsory health insurance system would significantly shift the market landscape, although this is not planned until 2020 at the earliest. BMI View: Healthcare expenditure in Armenia will expand at a slower rate than its regional peers, reflecting the country's weak economic footing. Compounding the bearish outlook is the negative demographic profile. We note that the introduction of a compulsory health insurance system would significantly shift the market landscape, although thisis not planned until 2020 at the earliest.Armenia's healthcare market will provide few opportunities for multinational pharmaceutical firms and medical device manufacturers, given its small market size and limited growth outlook. Total expenditure on healthcare is the third smallest in the Central and Eastern Europe, behind only Kyrgyzstan and Montenegro. Moreover, the country's small population size (3.03 in 2016) is likely to decline over the long term due to the high degree of emigration coupled to a low birth rate. Indeed, according to the National Statistics Service, the number of births declines in 2016 by 2.3% compared to 2015. This will significantly limit potential growth opportunities. Recent Updates In June 2017, Armenian MPs opposed the privatisation of a number of healthcare facilities as part of the government's privatisation program for 2017-2020. In June 2017, the Ministry of Health announced the government's intentions to begin working on a draft law on compulsory health insurance to be submitted to parliament by 2020. Market Outlook Not Reflective Of Frontier Status Armenia - Healthcare Market Breakdown f = BMI forecast. Source: World Health Organization (WHO), BMI Between 2016 and 2021, we forecast that health expenditure Armenia will increase at a compound annual growth rate (CAGR) of 8.1% in local currency terms and 6.8% in US dollar terms, from AMD221.8bnbn (USD466mn) to AMD327.5bn (USD647mnn) in 2021. Over our extended 10-year forecast period, we project that healthcare expenditure will reach AMD560.5bn (USD1.02bn) in 2026, posting a local currency CAGR of 9.7% and a US dollar CAGR of 8.1%. As a percentage of GDP, healthcare expenditure was 4.3% in 2016 and is forecasted to rise to 5.3% by 2026. Per capita, healthcare spend was USD154 in 2016 and is set to increase by 2026 to USD356.Despite healthcare spending forecast for robust growth, we remain downbeat on the outlook for the Armenian market. Given the market's frontier status, it represents a potential for significant expansion highlighted by the small per capita expenditure on healthcare. However, the market will underperform relative to the majority of its peers in the CIS region. While the country's economy is set to recover from its recession in 2016, this return to growth will be stymied by the high reliance on remittances from Russia (itself only set for a sluggish economic recovery) and poor labour market dynamics. The government has repeatedly highlighted the need for greater cost-efficiency within the healthcare sector through 2017 to improve healthcare outcomes and reduce endemic corrupt practices, posing downside risk to public expenditure growth. Further compounding the weak outlook for healthcare expenditure growth is the high reliance on out-of-pocket payments, with private healthcare expenditure accounting for more than 55% of total healthcare expenditures.We note that the potential for Armenia to follow the lead of some of its regional peers, notably Georgia, Kazakhstan and Azerbaijan, in implementing a compulsory health insurance system in place of its current inefficient model would pose significant upside risk to our long-term outlook. According to the country's Minister of Health, a draft law on compulsory health insurance will be developed trough 2018-2019 for consideration by parliament in 2020.