CREDIT CRUNCH THREATENS EVEN ISOLATED ARMENIA
By Naira Melkumian
Institute for War and Peace Reporting
Dec 4 2008
UK
Until recently, banking system had managed to survive relatively
unscathed, mainly because it is only slightly integrated into world
markets.
Armenia’s economy appeared to be safe from the world’s financial
crisis, being small and isolated – though even here the shock of the
credit crunch is making itself felt.
Property prices have tumbled, and construction projects have been
forced to slow or close altogether, while the supply of remittances
from Armenians in Russia also threatens to dry up.
"The first wave of the crisis in the world markets, happily, did not
have a major negative effect on Armenia’s financial system, but we
know well that after a financial crisis, an economic crisis starts and
we must be ready," Prime Minister Tigran Sarkisian told parliament,
when presenting a plan to support the economy and subsidise companies.
He also proposed establishing a commission to examine ways of creating
more jobs, but that may be too late for workers at Armenia’s copper
smelters.
The three smelters in Kajaran, Kapan and Agarak have all reduced output
and laid off workers, which threatens to be a catastrophe for the
Syunik region where there are no other jobs. A government delegation
has already been forced to go to the region to prevent a strike.
Arpik Simonian is one of those workers struggling to know what to do
if he loses his job.
"The worst case scenario is that I remain here. I will survive, as
they say. I’ll have to borrow money. But I have no idea how I would
pay it back," he said.
He would, he says, prefer to go and get work in Russia but that may
not be possible, in the light of the crisis there.
"If the Russian financial crisis continues to deepen, then the Armenian
economy will experience an insufficient supply of direct investment
and remittances, which come to the country primarily from Russia,"
said Andrankik Tevanian, the head of the Politekonomia think tank.
He said 90 per cent of Armenians in Russia are working in the
construction sector, which is seriously affected by the crisis. Half
of them may fail to find work in Russia next year.
Since Russia is the source of 75 per cent of the remittances coming
into the country, experts predict a reduction in the amount of money
available to families and a corresponding reduction in citizens’
purchasing power, which in turn threatens producers.
However, remittances are currently still increasing, with a record 203
million US dollars coming into the country in September. The central
bank does not predict remittances to fall before the end of the year.
These same experts believe the government may struggle to maintain
its budget plans for 2009, since they were drafted before the crisis
struck. Expert Andranika Tevanian, for example, said the 3.3 billion
dollar budget relied on increased tax receipts, which threatens to
worsen the tax burden on small and medium businesses.
"In connection with the crisis, all countries in the world are taking
steps to ease the tax burden on business. In Armenia, on the other
hand, the government is taking steps to worsen business’s condition,"
he said.
The expansive budget may, experts fear, also stoke inflation, which
is already running above the government target. The International
Monetary Fund predicts full-year inflation of 9.4 per cent, which is
significantly higher than the budget target of four per cent.
"I don’t even know what to think, everyone’s talking only about a
crisis. They have promised to increase the pensions, but what’s the use
if the prices go up as well," Lyudmila Nikolayevna, a pensioner, said.
The banking system has managed to survive relatively unscathed so far,
mainly because it is only slightly integrated into world markets. But
all the same commercial banks have drastically reduced lending,
and now charge a higher interest rate on loans that they do give out.
Just a few months ago, a bank would agree to a mortgage of 15 or 20
years, but now a ten-year loan is more likely. This has had a knock-on
effect on the housing market, and caused prices to fall.
According to David Sukiasian, executive director of Armeconombank,
foreign banks are charging Armenian customers a rate three full
percentage points higher than they were, forcing his bank to raise
its own rates. Deposit rates have in turn increased from nine to 11
per cent, as banks seek to attract money.
Bankers expect credit rates to rise by one or two percentage points
over the next six months, which means credit will undoubtedly be
harder to come by and the economy will suffer.
"We currently are not seeing serious consequences of the global
crisis in Armenia. The main reason for this is that in Armenia the
financial system is still not very big. On the one hand, this is not
very good for the growth of the economy. But on the other, it is even
an advantage, because Armenia is out of the path of possible shocks,"
said Ninke Omes, the permanent representative of the IMF in Yerevan.
However, the crisis has already impacted on the building sector in
the capital, where property prices have fallen by 15 to 20 per cent,
and some construction projects have been frozen for lack of funds
"The crisis situation on the international markets requires investors
and agents, who regard the property market as profitable and secure,
to be careful. This is the main reason for the reduction in the number
of deals on the local property market recently," said Artur Javadian,
head of the central bank.
Experts currently predict the falls in the property market to continue
until at least the middle of next year, which will have a bad effect
on the economy as a whole, since construction and services together
make up 61.9 per cent of Gross Domestic Product.
Naira Melkumian is a freelance journalist in Yerevan. Nelli
Mirzakhanian, a journalist from the Sosi Studio in the city of Kapan,
also contributed to this article.