Feb. 16, 2011 -
PRLog -- Recovery To Firm In 2011 O ur core views for the Caucasus remain firmly in play, with a relatively robust growth rate expected in all three economies in 2011. Azerbaijan will remain an outperformer, with exports continuing to drive headline economic activity in the near term, while Armenia and Georgia should also post strong growth on the back of the Russian recovery and firming domestic demand. On a general level, the region's importance as a key transit route for energy heading East and troops and equipment heading to Afghanistan is likely to ensure ongoing investor interest. As ever, the key risks are political, and we note that the potential for a breakthrough on the Nagorno-Karabakh dispute between Azerbaijan and Armenia is a lot slimmer than at end- 2009. Much will depend on the input of regional powers Russia and Turkey, which we believe will prevent an outbreak of state-on-state warfare. Relations between Georgia and Russia will also remain tense, although again here we see little chance of a resumption of hostilities. The region continues to benefit from a stable banking sector with a favourable growth outlook, although we caution that poor asset quality will weigh on lending in Georgia. We have revised up our Georgian 2010 and 2011 real GDP forecasts to 5.1% and 5.3% respectively, from 3.4% and 4.1% previously, on the back of the impressive 8.4% y-o-y growth posted in Q210. Despite the upward revision, our core views remain firmly in play, with private consumption and investment remaining the key drivers of growth over the long term, albeit at a rate well below pre-crisis levels. T he major challenges facing the Armenian government are unlikely to abate through the medium term, with ongoing tensions with neighbours Azerbaijan and Turkey set to continue to weigh on the country's risk profile. Renewed Russian military and financial support should help to avert a significant build-up of tensions, however. Domestically, reports of a split in the coalition will provide a key test for the government ahead of elections in 2012. U pcoming parliamentary elections in Azerbaijan are unlikely to result in a major shift in policy direction. While the electorate have reservations over the lack of free and fair elections, strong support remains for President Ilham Aliyev and his ruling New Azerbaijan party. As a result, we expect policy to continue to be orientated towards improving living standards rather than democratic reform, while in foreign policy the conflict with Armenia over Nagorno-Karabakh will remain the main theme.
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