Wednesday, July 17 2013

The foreign markets seem to
be preparing some new surprises for our economy after its relative post-crisis
revival. The Central Bank is reluctant to soften its fiscal policy for fear of
inflation, while the Government is bogged down in its paper reforms and is
unable to do anything practical to improve the economy.

Just as some five or ten
years ago, today, our economy remains lowly diversified and highly dependent on
external factors, particularly, private money transfers (of which 70% come from
Russia) and the global prices of gold, copper and some other metals (which have
made up at least 1/3 of our GDP in the past years). It was these two factors
that kept the rotten ship of our economy afloat before the crisis of 2008. But
being just a couple of two thin sails, they were unable to stand the storms of
the crisis, and were it not for the money borrowed from Russia and some
international donors, the ship would surely sink, leaving us to face some
unpredictable social aftermaths.

Now that the global economy
is recovering, our economy seems to be reviving, but it is still unable to
overcome the turbulence of declining business, growing unemployment, chronic
social apathy and continuing migration. As a result, our key donors, the IMF
and the WB, expect a low 4.2% economic growth for this year in contrast to the
official upward projections. For the next year they predict an even lower 4%
growth. Their key arguments are not so much our own risks and bottlenecks as
stagnating economy in Russia and slumping energy and metal prices in China,
India and some other Asian “monsters.” Unluckily for us the global prices of
gold and metals – our key export items – are quickly declining.

The point is that all developing
markets – and Armenia can already be reckoned as one - depend on external
demand (be it demand for raw materials or demand for industrial products). Low
demand leads to low growth. For example, in Turkey GDP growth dropped from 9.2%
in 2010 to 2.5% in 2012. In Russia it went down from 4.3% to 3.4% in 2011-2012
and may reach 2.5% this year. But the biggest danger for developing countries
will be a decline in China. Already today that country is recording a drop in
foreign investments due to worsening prospects of its economy. The same is
happening in other developing countries. In Armenia last year direct foreign
investments slumped by 40%. Partly that slump was due to the past elections but
mostly it comes from the current global trend.

All countries are trying to
resist it by attracting foreign investments, softening their fiscal policies,
boosting their exports, increasing their currency earnings and tax revenues,
creating new jobs. All this is crucial for macroeconomic and social stability.
Today, nobody can say how low the gold and metal prices may fall. Their decline
is making people panic. Lots of metal is piled up in warehouses in the United
States and Europe, with the offer gradually exceeding the demand and the threat
of overproduction looming large in the near future. According to a top manager
from the Chinese mining industry, this year cathode copper consumption in China
will start to grow after three years of decline, but the demand for other
commercial metals will drop following industrial crisis in Europe, the key
sales market for China.

However, the gold market that has constantly been amazing the analysts
by its record highs is perhaps becoming the most unpredictable market. Now that
prices are dropping, gold workers realize the need for the production cost decline.
But it is impossible to achieve that without extra investments. Large companies
investing in technologies and having some safety cushions can hang on without
essential job cuts, while “junior” companies may come across big problems, even
suspension of their activities. Investors keep an eye on the gold production
cost, because, as William Tankard, Research Director, Mining at Thomson Reuters GFMS, has said, if the gold price is 1200 USD/ozt, nearly
half of the gold mining industry starts suffering losses. He does not think
most of the gold mining enterprises will suddenly announce their closure. Tankard believes that the process will go on gradually.            

What will stop the fall in the yellow metal prices? Shortly after Bernanke
announced the closing up of the “quantitative easing” measures, traders and
analysts started showing more interest in other market segments they had paid
no attention to for many years before, because the investments flowed to the
gold market. Denis Alexandrov, CEO at Auriant Mining (Russia), says in an
interview with Prime (Russia) that in 2003 the gold price was 300-350 USD/oz,
and the cost was 150 USD/oz. He says that now gold costs 1400 USD/oz, and the production
cost is over 600 USD. He thinks it is a temporary situation when the gold price
is dropping and the cost of production is even growing. The most important
thing is to overcome this period, because sooner or later either the price will
go up or the production cost will go down. He believes that industry cannot
live in price scissors and he hopes that there will be no such a situation.
Anyway, one should be ready for it, he says. Some analysts forecast the gold
prices to drop to 800 USD/oz.

Thus, the problem of survival of even such a strong sector of Armenian economy
as the mining sector is becoming especially relevant. However, it may also face
the risk of being sacrificed to maintain the targeted macroeconomic indices.
For instance, lapidary production was once declared a priority; however, in the
mid 2000s the priority of this sphere was forgotten and sacrificed for
macroeconomic stability and floating exchange rate. The enterprises that had
received serious foreign investments to be upgraded eventually found themselves
under double pressing – currency and tax pressing. As a result, most of them
closed down and now the country lacks such a field, and thousands of
specialists have left the country. Tax lawsuits have lasted for many years.
Shoghakn Plant, the lapidary flagship, found itself in a similar situation. It
has become an Armenian tradition to bite the hand that feeds you. It cannot be
ruled out that this is a well-considered foreign policy, a policy of the forces
that consider any economic strengthening of a country to be a headache
tantamount to death. This policy is often self-confidently supported by the
so-called specialist-officials, whose key advantage is to be capable of
“jawboning” any housewife from the TV screen.

Despite the ecological costs, the mining sector of Armenia is
undoubtedly an economic advantage of our country and has an essential
multiplier social effect. Today the role of the state is to maintain and
protect it against the strong external negative factors and to prevent
recurrence of the sad fate of the lapidary sector for instantaneous benefits,
no matter state or private. The unfavorable climate cycle may be rather long.
It may last for several years, mayn’t it?