TOPIC OF THE WEEK: Armenia — Can politics break the dram’s stride?
One could be forgiven for not knowing that the Armenian dram has been the second-best-performing EM currency globally in the last decade, trailing only another potentially obscure candidate, the Albanian lek. Even if the better part of that dram appreciation occurred around the 2022 episode of accelerated Russia-related inflows, the AMD has been steadily, if more modestly, gaining strength ever since, even in the face of record-high CA deficits. The AMD's robust performance can then be traced to resilient inflows on the financial account, in turn driven by a more favorable outlook for political and geopolitical developments, including the ongoing peace process with Azerbaijan.
The core question that I ask here is how much of the dram’s resilience depends on external financing that could weaken during domestic political uncertainty, despite support from services earnings and substantial reserves. The immediate political focus is the latest set of developments on the constitutional dispute: possible snap elections, securing two-thirds parliamentary support, and then winning — or losing — the public referendum on a new Constitution. I connect those outcomes to investment, bank funding, deposit dollarization and pressure on the dram.
My conclusion is that the AMD can withstand a modest-to-moderate political shock, but prolonged uncertainty could expose its dependence on external financing. Surpluses on the services account of CA and central-bank FX purchases do provide a welcome cushion, but weaker financial account inflows could initially reduce reserve accumulation before forcing dram adjustment. In a more severe scenario, I estimate that combined FX pressure could amount to US$ 2.5bn, or around a third of current FX reserves.
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