ING report: Armenia faces fiscal pressure as economic growth slows

Azerbaijan and Armenia are seeing positive developments from reduced regional geopolitical risks, while Kazakhstan and Uzbekistan are experiencing stronger-than-expected economic growth, according to ING Group's latest analysis.

The Dutch banking giant highlighted the continued stability of the CIS-4 economies despite global economic challenges, as per local media.

While the peace agreement between Armenia and Azerbaijan could bolster investor sentiment, ING analysts caution that the economic benefits for Armenia will largely depend on the effective implementation of the terms of the agreement.

Azerbaijan's economic growth is expected to moderate in 2025, following a robust performance in 2024. ING reports that the country's GDP contracted by 2.3% in July, after registering a modest 1.5% growth in the first half of the year. This slowdown is attributed to a deceleration in economic momentum despite continued fiscal stimulus and favourable credit policies.

Azerbaijan’s budget remains in surplus, with a 2.6% GDP surplus, and retail lending remains high. The central bank reduced its benchmark interest rate to 7% in July and held it steady in September. The manat continues to be pegged at 1.7 to the US dollar, with this peg expected to remain stable throughout 2025.

A key positive development for Azerbaijan was Moody's upgrade of the country's credit rating to investment grade in July. This upgrade reflects the growth in foreign exchange reserves and the normalisation of diplomatic relations with Armenia. However, analysts point to a significant drop in the trade surplus—from $5.5 billion in 2024 to just $1.8 billion in 2025—largely driven by volatility in global oil prices, which remains a major risk factor.

For Armenia, the outlook appears less optimistic. While the peace agreement with Azerbaijan is seen as a potential positive factor, the economy is showing signs of slowing down. After a strong surge in 2023-2024, Armenia’s GDP growth decelerated to 5.6% in the first half of 2025.

ING highlights growing fiscal challenges, with the country’s fiscal deficit widening to 4% of GDP and its trade deficit reaching approximately 15% of GDP. These figures underscore the growing vulnerability of the Armenian economy. Despite the strong performance of the dram, inflation remains above the central bank’s 3% target, and the central bank has kept its key interest rate at 6.75% since February.

Additionally, remittance flows—once a significant support for the economy—have fallen below 5% of GDP, which is having an adverse impact on economic stability. The report stresses that while the peace process holds potential for long-term economic benefits, Armenia faces substantial short-term challenges.

Kazakhstan’s economy is outperforming expectations, with GDP growth accelerating to 6.2% in the first half of 2025, fueled by robust performance in the construction and domestic trade sectors. However, the country faces rising inflation, which surged from 8.6% at the end of 2024 to 12.2% in August 2025.

The central bank has maintained its base interest rate at 16.5% since August and warned of potential rate hikes to combat inflationary pressures. Key factors contributing to inflation include a weakening national currency (tenge), rising tariffs, and an anticipated increase in VAT in 2026. Despite interventions to stabilise the exchange rate, Kazakhstan continues to face challenges with a widening current account deficit and capital outflows, posing risks to medium-term stability.

Uzbekistan remains the standout performer in the region, with GDP growth accelerating to 7.5% in the second quarter of 2025. The country's economic expansion is driven by strong domestic demand and robust export growth.

Inflation in Uzbekistan stood at 8.8% in August, a manageable figure supported by a strengthening national currency (sum) and effective fiscal consolidation measures. The central bank has kept its policy rate at 14% since March 2025. However, achieving the long-term inflation target of 5% remains a challenge for the country in the future.

By Tamilla Hasanova