Armenia's Economic Growth and Future Potential

Armenia2020 updated
January 2015
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Executive summary (1/3)
▪ Armenia has shown a steady economic growth of ~7%1 over the last decade, in line with its
regional peers
– With a GDP PPP per capita of USD 7,000 in 2013, Armenia's GDP remains low in the CIS
region
– Growth rates of 8% p.a. have been reached before the financial crisis, mainly due to foreign
financial expansion of the construction sector and domestic services
– After the financial crisis, growth rates fell to ~5% p.a.; growth was mainly driven by the
service sector (retail, banking, transport, and communication), expanding exports based on
high commodity prices for metals and minerals, and high agricultural output
▪ Armenia's economic growth has been fueled by favorable external effects and not through strong
focus on economic development, as suggested by the Singapore scenario, especially after the
financial crisis and thus bears the risk of high volatility and unsustainability.
– Increased private consumption, mainly driven by remittances that increased from 6% of
GDP in 2003 to >20% today, thus not supporting a sustainable development of the economy
– Increased exports after the crisis, but not diversified (3 products2 account for 70% of goods
exports) and focused on commodities that did profit from high market prices
1 PPP, real, 2003-13

2 Metals, and ore diamonds, alcoholic beverages
McKinsey & Company | 1

▪ Several factors indicate that Armenia’s GDP growth path might not be sustainable in the
near future
– While FDI1 played an important role before the financial crisis, Armenia seems to have lost its
attractiveness to foreign investors – FDI steadily declined from its peak in 2008 (USD 1.1
billion) to 2013 (USD 0.4 billion)
– Except for Aluminium, most commodities exported by Armenia are forecasted to have reached
their peak market prices in recent years
– Armenia's productivity is catching up, but is still behind its regional peers with USD 19,300
GDP PPP/capita vs. USD 41,000 as CIS average, decreasing Armenia's competitiveness
– Armenia's economy is highly dependent on Russia in all dimensions – from exports and
imports, to FDI1 and remittances, which bears the risk to hinder further growth should the
Russian economy continue to slow down
– Thus, it is not surprising that most key sectors identified within Armenia 2020, with the
exception of banking and tourism, did not fully exploit their productivity and employment
growth potential
▪ In terms of creating a growth-enabling environment, such as business environment, assets, and

education, Armenia compares favorably to its regional peers, but still ranks low on a global
scale; regional leading examples such as Georgia show that there is still significant room for
improvement
1 Foreign direct investment

▪ Furthermore, growth over the last years seems to have had only limited impact on social
indicators
– The relatively strong economic growth over the last years could not reduce the constantly
high net emigration rate in Armenia of 6 per 1,000 population in 2014
– The growth over the last decade has been supported mainly by an increase in productivity,
while the economy failed to create a significant amount of new jobs (Armenia's
unemployment rate 18.5% vs. 9.6% in CIS region in 2013)
– Today in Armenia, every third person is poor and poverty even increased over the last years
– Armenia still has a very large share of informal economy (~40% of official GDP), which could
be reduced only marginally over the last decade (~45% in the early 2000s)
▪ Based on this country snapshot, Armenia should look for new models of growth to diversify its
current economy and make growth more sustainable. Morocco, Chile, Georgia, and Malaysia
are archetypes of economies that have a strong and sustainable growth trajectory and have
succeeded in diversifying their economy
▪ The Armenian government, business leaders, and also Dolphyn can support this development
by addressing 4 areas
– Business environment, institutions, and policies
– Financial market and availability of capital
– Infrastructure
– Human capital

Contents
▪ Snapshot of the Armenian economy today and its

development over the last 10 years
▪ Armenia's development in context of Armenia2020's

models of growth
▪ Sector deep dives – actual development vs. potential
▪ Emerging new models of growth
▪ Armenia's way forward

We have analyzed Armenia’s economy in 3 dimensions
Growth-enabling
environment
▪ Is the business environment
and infrastructure pro
business?
▪ Is the economic environment Production of
supporting the positive goods and
development of social services
indicators?
▪ How many goods
and services have
been produced?
▪ What has been
produced?
Growth drivers
▪ What has fueled GDP
growth?
▪ Are these growth drivers
sustainable in the future?

Over the last decade, Armenia has shown a steady economic growth …
GDP PPP per capita, constant 2010 USD
Strong growth, largely Financial crisis hits the ▪ Transition to market

7,500 driven by foreign- Armenian economy economy fueled
financed expansion of strong economic
7,000
construction sector as growth in the first
6,500 well as banking and years of the new
6,000 energy sectors millennium with an
5,500 average GDP
5,000 State of emergency growth of 6.6% p.a.
declared for 3 weeks ▪ However, internal
4,500
following presidential political issues and
4,000 elections tensions with
3,500 neighbors
3,000 Member of WTO, focus
constrained the
2,500 economic
on reprivatizing owner-
development
2,000 ship and transitioning
into market economy Increasing exports ▪ After the financial
1,500 and private con- crisis, Armenia's
1,000 sumption drive growth recovered,
500 economic growth driven by private
0 consumption and
resource-oriented
2002 03 04 05 06 07 08 09 10 11 12 2013 exports
SOURCE: IMF McKinsey & Company | 6

2002 XX Below 4%
… in line with its regional peers – however, Armenia's GDP 2013
XX 4% -7%
XX Above 7%
per capita remains low in CIS
GDP PPP per capita, constant 2010 USD thousands CAGR, 2002-13
Russia 14.3 4.5%

23.2
Kazakhstan 12.5 5.6%
22.8
Belarus 8.0 7.0%
16.9
Azerbaijan 5.3 10.8%
16.3
5.4
Turkmenistan 8.6%
13.3
Ukraine 4.9 3.7%
7.4
Armenia 3.6 6.6%
7.2
3.4
Georgia 6.9%
7.0
Uzbekistan 2.6 6.5%
5.1
Moldova 2.6
4.4 4.9%
2.1
Kyrgyzstan 3.7%
3.1
Tajikistan 1.4
2.4 5.2%
CIS 10.0
16.6 6.3%
SOURCE: Global Insight McKinsey & Company | 7

GDP growth was driven by the services sector during the last years,
however, Armenia's economy still has a strong focus on agriculture
GDP1 composition, 2003 GDP1 composition, 2013

Percent Percent
100% = USD 2,807 million 100% = USD 10,432 million
Agriculture Agriculture
Services 24 21
34
Services 46
32
42 Industry
Industry
▪ Services sector with strong growth, which is mainly driven
by increased private consumption
▪ GDP contribution of agricultural sector remains high
compared to other CIS countries (CIS average 8%, with
only Tajikistan and Moldova having a higher share)
1 Nominal GDP at current USD
SOURCE: World Bank McKinsey & Company | 8

Strong focus on Agriculture leads to Armenia still being in a transitional
phase compared to its neighbors
Categorization of CIS countries
Exports as share of GDP Bubble size proportional Bubble size proportional

2003, 2013, % to 2003 GDP1 to 2013 GDP1
75
Resource
70
rich
Turkmenistan3
65
Belarus
60
Diversified
55
Ukraine
50 Azerbaijan Kyrgyz Republic2 Georgia
45 Moldova
40 Kazakhstan
35
Uzbekistan2
30
Russian Federation
25
Armenia
20 Tajikistan
15 Pre-transition
10 Transition
5
0
10 20 30 40 50 60 70 80 90 100
Economic diversification
Manufacturing and services as share of GDP, 2003, 2013, %
1 GDP per capita PPP, 2011 international $ 2 Only 2012 data available 3 Only services as share of GDP for 2012
SOURCES: World Bank McKinsey & Company | 9

While Armenia's main GDP growth driver before the crisis was the
construction sector, in recent years it has been the domestic services and
export-oriented sectors
Agriculture Retail Transport and communication2 Tourism Mining and quarrying
Industry1 Construction Finance and insurance Health and social work Others
CAGR
GDP per capita of Armenia, PPP, in constant 2010 USD, percent 2002-13
7.2
6.8
6.1 21 4.8%
18
5.8 21
3.1%
19
20 13 16
15 8.0%
4.5
13 14
16 4.9%
3.6 24 14 14
14 7.9%
12
26 20 28 14 12
19 18.2%
23 7
12 26 7
7 5 5 10.4%
12 17 7 4 5
6 4 5
14 2 6 2 2 3 3 4
5 4 3
5 12.5%
6 3 5 5 3 3
3 2 3 3 2 13
1 3 9 12 12 14.2%
10 7 7
2002 04 06 08 10 12 2013 Label

Growth ▪ Construction ▪ High agricultural output
drivers ▪ Growth of service sector (e.g., finance, tourism)
▪ Export of metals and minerals
1 Incl. Manufacturing and electricity, gas, water supply
2 Excl. transportation of international tourists (~5% of total transportation in 2013)
SOURCE: Statistical yearbook of Armenia; Global Insight; Russian Federation Federal State Statistics Service; World
Bank; IATA
Growth-enabling
environment
▪ Is the business environment
and infrastructure pro
business?
▪ Is the economic environment Production of
supporting the positive goods and
development of social services
indicators?
▪ How many goods and
services have been
produced?
▪ What has been
produced?
Growth drivers
growth?

Armenia's economic growth has been fueled by positive
external effects, especially after the financial crisis
Detailed on next slides
Drivers of GDP, constant 2005 USD millions
Average annual Average annual
change in GDP, change in GDP,
2003-08 2009-13
▪1 Private consumption
consistently drove
1 Private consumption 332 209
GDP growth over the
past decade, largely
finance by
Public consumption 43 32 remittances from
fast-growing Russia
▪2 In recent years,
Investments1 332 70 exports have signifi-
cantly contributed to
GDP growth, driven by
2 Exports 28 204 increased service
exports and market
price increases of
Imports 151 48 commodities
Average
GDP increase 527 327
annual
1 Gross capital formation

1 Remittances have driven private consumption and increased
significantly from 6% of GDP in 2002 to >20% of GDP today
Personal remittances received
Current USD millions
▪ With its extensive
diaspora, Armenia is the
15th largest remittance
Country of origin
recipient in the world –
▪ 90% Russia
+29% p.a. ▪ 5% US 2,193 40% of Armenian
households receive
1,904 1,915 remittances from migrant
1,799 families
1,644 1,669
▪ Share of remittances
1,440 from Russia has increa-
sed significantly over
1,169 the years – from 75% in
2004 to 90% in 2011
915
Country of origin ▪ Yet remittances are not
▪ 75% Russia being used produc-
▪ 15% US tively; typically,
435
households spend 90%
168 of remittances on
current consumption
2003 04 05 06 07 08 09 10 11 12 2013
Percent 6.0 12.1 18.7 18.3 17.9 16.3 16.6 18.0 17.7 19.2 21.0
of GDP
SOURCE: IMF; World Bank; UNDP; Central Bank of Armenia; ILO McKinsey & Company | 13
2 Exports were a main driver of Armenia's growth after the crisis
Detailed on next page
Exports CAGR, CAGR,

Percent of GDP 2003-08 2008-12
Services1 Goods2
-14% p.a.
32.2 +12% p.a.
29.7 28.8
8.3 27.0
9.8 23.4 23.8 24.6
9.7
20.8
19.2 12.9 -6% 17%
7.9 10.9 10.4
7.0 15.0 15.5 10.1
23.9 6.0 7.6
19.9 19.1
15.4 14.2 14.1 -18% 9%
12.2
9.0 10.7 12.9
7.9
2003 04 05 06 07 08 09 10 11 12 2013
1 Mainly travel (55% of services), transportation (22%), and IT (8%)

2 Mainly basic metals, jewelry, alcoholic beverages
SOURCE: World Bank; ICT McKinsey & Company | 14

2 However, Armenia's exports of goods are resource-oriented and thus
fail to develop the economy sustainably and don't create high-quality
jobs Capital-intensive manufacturing Labor-intensive manufacturing Other
Primary resources R&D-intensive manufacturing
Breakdown of goods exports

CAGR
2005 2012 2005-12
100% = USD 0.9 billion 100% = USD 1.4 billion ▪ High prices for metals
and minerals supported
▪ Basic metals 6.3%
growth over last years
▪ Chemicals ▪ Food and
▪ Medical (see next page)
beverages
equipment ▪ Tobacco ▪ However, resource-
▪ Transport 26.4% based trade with
5 3 8
equipment significant drawbacks
9 – Vulnerability to
-13.7% global commodity
8 price fluctuations
34 50 49 – Little value add in
the local economy
16.5%
▪ Increased focus on
mining detracts from
25
more human-capital-
8 21.5% and R&D-intensive
sectors, making
Jewelry and Mining of Armenia's goal of high-
apparels metals and quality job creation1
ore more difficult to achieve
1 Republic of Armenia Government Decree, March 27, 2014: Armenia Development Strategy 2014-25
SOURCE: Oxford Policy Management; FAO; ICT McKinsey & Company | 15

2 Armenia's resource-based exports have profited from growing
market prices over the last decades
Price increase between 2002 and 2013 Price

increase >100%
Other heating
Price Aluminum machinery
increase foil
300% Price
Text increase
Raw copper Molybdenum Scrap iron
>400%
Price Scrap copper
increase
500% Copper ore Precious Zinc
metal ore
ore
Molybdenum
Molybdenum Planes, Aircraft Men's Men's Pitted Grapes
parts suits coats fruits
ore
Ore helicopters,
and/or 0.69% 0.57%
0.7%
spacecrafts 0.64% 0.64%
Rolled
Hard tobacco
Packaged
Watch cases
and parts
liquor
medica-
tions
Fresh fish Glass bottles

Water
SOURCE: The Observatory of Economic Complexity; Bloomberg McKinsey & Company | 16

Several factors indicate that Armenia’s current GDP growth path might not
be sustainable in the near future
While FDI played an important role before the

1 financial crisis, Armenia lost its attractiveness
to foreign investors after 2008
Forecasts for basic metals and minerals suggest that

2 commodities have reached their peak prices in
2012/2013
Armenia’s productivity is still low, even compared

3
to its regional peers
Strong link to Russia might hinder future growth as

4
Russia will most likely face difficult economic times
Sectors identified within Armenia2020 have not

5 reached their potential, suggesting that there are
no structural changes in key industries

1 While FDI played an important role in Armenia’s economic
development until 2009, they are declining since then
FDI inflows
Current USD millions ▪ Strong increase in FDI
since late 1990s sup-
Growth driven by Global economic crisis and a
ported by government
▪ Diaspora capital flowing into slowdown of infrastructure
real estate development leads to decline – Privatization of
▪ Privatization in mining, telecom, economy
1,200 and airport infrastructure – Granting foreign
1,118 companies same
1,100 rights as local
1,000 -20% p.a. companies
900
– Investment
+47% p.a. 829 guarantees for
800 foreign investors
703
700 675 – Attracting FDI
598 flowing into real
600 536 estate sector
500 437 ▪ Today, FDI account for
400 370 20% of total invest-
304 ments in Armenia
300
218 235 ▪ Main sectors attracting
200 FDI (2003-13)
111
100 – Financial services:
30%
0 – Communications:
2002 03 04 05 06 07 08 09 10 11 12 2013 22%
– Metals: 14%
Percent 4.7 7.8 6.6 6.2 6.8 7.3 9.6 9.6 5.8 6.9 6.0 3.5
of GDP
SOURCE: Armenian Development Agency; UNCTAD bilateral FDI statistics; Global Insight; NSSRA McKinsey & Company | 18
2 Except for Aluminium, most commodities exported by Armenia seem to
have reached their peak market prices in recent years
USD
3,000
2,917
2,500 2,397 2,400 Aluminium

2,350
2,250 tonne
2,153
2,171
2,000
1,846 1,873
1,669 Gold
1,571
troy oz
1,500 1,412 Iron ore
1,320 1,330 dry metric
1,225 1,265 1,270
1,208 tonne
146 164 129 135 95 70 75 80 90 Copper
3 4 4 3 3 3 3 3 3 lb
0
2010 11 12 13 14 15 16 17 2018
SOURCE: EIU Economic and Commodity Forecast, December 2014 McKinsey & Company | 19
2002 XX >7%
3 Armenia's productivity is catching up, XX Between 5 and 7%
2013
but is still behind its regional peers XX <5%
Productivity, GDP PPP per employee, USD thousands CAGR, 2002-13

27.3 6.3%
Kazakhstan
53.6
31.6 4.3%
Russia 50.1 Room for improve-
11.1 12.0% ment remains
Azerbaijan
38.6
18.0
▪ Nearly 40% of
Belarus 6.6%
36.3 workers are
employed in
12.3 9.6%
Turkmenistan agriculture, which
33.7
only accounts for
9.9 6.3%
Armenia 20% of GDP
19.3
Georgia 8.5 6.9% ▪ Lack of modern,
17.8 high-productivity
7.5 7.6% sectors
Uzbekistan
16.8
11.8 3.1% ▪ Gap in produc-
Ukraine tivity to CIS
16.5
5.7% average somewhat
6.3
Moldova overestimated due
11.6
7.4% to natural resource
Tajikistan 4.7
10.4 production in some
4.3% countries leading to
5.7
Kyrgyzstan high productivity
9.0
CIS 27.9 3.5%
41.0
1 US productivity in 2013: ~ USD 117k

3 The Armenian productivity is significantly lower than that of Germany
across all sectors and has even declined after the financial crisis
Mi
Productivity1, 2013
Germany = 100%
▪ Highest productivity is achieved in finance sector

▪ Until the financial crisis, Armenia improved its
productivity from ~5-12% of Germany's average
26 productivity
Financial 26
services Construction
▪ After the financial crisis, the gap to Germany's
productivity increased again
18 ▪ 2003 productivity per sector detailed in backup
Real estate
services 18
14 12
IT and communication Business
services
11 11 9 2008: Ø 12
Trade, transport, Industry 2013: Ø 10
9
accommodation,
and food services Manu-
Agriculture3 Public services,
facturing education, health, 2002: Ø 5
and other services
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
0
Share of employees
Percent
1 GDP per employee 2 Incl insurance 3 Incl forestry and fishing
Note: Detailed sector allocation in backup
SOURCE: German Federal Statistics Department; National Statistical Service of the Republic of Armenia (NSSRA) McKinsey & Company | 21
4 Among the CIS countries, Armenia has one of the strongest
dependencies on Russia
2013 for exports and imports 2012 for remittances and FDI, Percent of GDP
>5% of GDP 2-5% of GDP <2% of GDP Detailed on next pages
Exports to Imports from Remittances FDI stock

Russia Russia from Russia from Russia
Armenia
Azerbaijan
Belarus
Georgia
Kazakhstan
Kyrgyzstan
Moldova
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
SOURCE: World Bank; UN Comtrade database; UNCTAD McKinsey & Company | 22

4 Armenia's dependency on Russia has increased significantly – FDI
stock held by Russian investors increased from 25% in 2002 to >50%
today
FDI inflows
Current USD millions
1,200 1,118
1,000
383 829
800 703
675
598
600 429 536
437 336 345
400 370
304 735 334 508 Other
218 235 283 170
200 399 countries
111 149 183 291 340 358
6 105 154 202 200 Russia
68 52 13 91
0
2002 03 04 05 06 07 08 09 10 11 12 2013
FDI stock 25 29 28 23 21 46 56 55 51 54 53 55
held
by Russian
investors
Percent
SOURCE: Armenian Development Agency; UNCTAD bilateral FDI statistics; Global Insight; NSSRA McKinsey & Company | 23
Percent of
4 While Europe is Armenia's main trade partner, it relies total exports
increasingly on Russia for export trade < USD 50 million USD 50-100 million
Export partners' trade value and share USD 100-200 million USD 200-300 million >USD 300 million
▪ Strong and
North growing trade
America Russia
Europe with Russia,
12
9 23 fostered by a free
42 41 12 trade multilateral
agreement with
2002 2013 CIS countries
2002 2013
2002 2013 ▪ Exports to
Russia expected
Russia
to further
increase with
Armenia joining
the Eurasian
Customs Union
in 2015
Middle East ▪ Exports to the

Middle East
25 have been
10 decreasing due
Other to the political
situation in the
2002 2013 13 14
region and
deteriorating
relations with
2002 2013 neighboring
countries
SOURCE: Oxford Policy Management; FAO; ICT McKinsey & Company | 24

4 Armenia's high dependence on Russia might lead to a decline in
GDP growth if the slowdown of Russias growth continues Forecast
Impact of 1 percentage point fall in ▪ Armenia has

Russias GDP growth on CCA oil experienced robust
importer countries1 GDP2 growth rate Russia growth over the last
Remittances years
5
Trade and other channels ▪ However, current
Investor uncertainty3 4 growth model is
highly dependent
0
3 Russia's economy
-0.1 ▪ With negative
-0.2 2 forecasts for
Russia's economy,
-0.3 1 Armenia could face a
-0.4 substantial decline in
0 GDP growth in the
-0.5 near future
-0.6 -1
-0.7
-2
-0.8
2010
2012
2013
2014
2015
2016
2017
2018
2019
2011
1 Armenia, Georgia, Kyrgyzstan 2 GDP, PPP, real 2010 USD

3 Escalating geopolitical tensions raise risk premiums in Russia (by ~220 basis points) and other countries, incl. the CCA oil importers
(by ~75 basis points) and CCA oil exporters (by ~45 basis points).
SOURCE: IMF; Regional economic outlook Middle East and Central Asia McKinsey & Company | 25
Key sectors, detailed on
5 Many sectors did not exploit their productivity and next slides
Growth potential 2003-10
employment growth potential identified in Armenia2020 Actual growth 2003-10
Productivity and growth potential for key sectors identified in Actual growth of these sectors1 between
Armenia2020 (as of 2003) 2003 and 2010 (showing only sectors for which data is available)
High High 4 1
(>10% 12 (>10% 12
CAGR) 9 6 CAGR) 12 6
3 10
Real productivity growth

8
16 16
13 1313 6
15 7 15
Medium 4 Medium 4
14 2
(5-10% 1 (5-10% 1
CAGR) 11 CAGR)
5 5
15
Low Low
(0-5% (0-5%
CAGR) CAGR) 5
16
Negative Low High Negative Low High
(-5-0% CAGR) (0-5% CAGR) (5-10% CAGR) (-5-0% CAGR) (0-5% CAGR) (5-10% CAGR)
Sector employment growth Sector employment growth
1 Mining 5 Construction 9 Industrial machinery 13 Retail and wholesale
2 Metals 6 Banking and insurance 10 Electronics and precision 14 Jewelry and diamonds
3 Telecommunications 7 Food processing 11 Construction materials 15 Transportation
4 Tourism and restaurants 8 Textiles and apparel 12 Healthcare 16 Software and IT services
SOURCE: World Bank; UNDP; NSSRA; World Travel & Tourism Council (WTTC); USAID; Enterprise Incubator
Foundation
Growth-enabling
environment
▪ Is the business
environment and
infrastructure pro
business? Production of
▪ Is the economic goods and
environment supporting services
the positive development
of social indicators? ▪ How many goods and
services have been
produced?
▪ What has been
produced?
Growth drivers
growth?

Top 20th percentile (best)
20th-40th percentile
Examples such as Georgia show that there is room for 40th-60th percentile
improvement for Armenia to build a growth-enabling 60th-80th percentile
environment Lowest 20th percentile (worst)

... Detailed on next page
Business environment Assets Education

1 Control Government 3 Quality 3 Quality
of corrup- effective- Rule Regulatory 2 Mono- Infra- Invest- of primary of higher
tion ness of law quality polies structure ments education education
Armenia
Azerbaijan
Belarus
Georgia
Kazakhstan
Kyrgyzstan
Moldova
Russia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
SOURCE: World Bank Worldwide Governance Indicators; WEF; World Bank McKinsey & Company | 28
Top 20th percentile (best)
While Armenia has improved across most indicators, 20th-40th percentile
there has not been a step change in performance 40th-60th percentile
60th-80th percentile
Armenia's rank (out of 100 with 1 being the best) Lowest 20th percentile (worst)
Change in rank ≤5
Change in rank >5
Business environment Assets Education
1 Control Government 3 Quality 3 Quality

of corrup- effective- Regulatory 2 Mono- Infra- Invest- of primary of higher
tion ness Rule of law quality polies structure ments education education1
Past
(2008) 68 50 54 40 93 67 42 61 70
Today 60 42 55 41 66 54 39 52 52
(2013)
Change 2,262 2,262 2,262 2,262 2,262 2,262 2,262 2,262 2,262
1 Includes higher education and training training such as staff training and management schools
SOURCE: World Bank Worldwide Governance Indicators; WEF (Infrastructure and Education); World Bank (Monopolies) McKinsey & Company | 29
1 Armenia is perceived as a corrupt country, hindering the growth
of the economy
Armenia ranks low on the
perceived corruption index … … and is struggling to improve the situation
▪ Government follows an AntiCorruption Strategy
since 2003 and established an AntiCorruption
''' Council in 2004, chaired by the Prime Minister
''' ▪ However, little progress has been made to
''' reduce the corruption
– Global integrity report rates the anticorruption
''' law as “weak” and its enforcement as “very
weak”
94 – Policy Forum Armenia: “most anticorruption
measures are dead from the start”
'''
– Armenia's rank within the corruption index
''' worsened from 2003 to 2011 (from rank 78 to
''' rank 129); progress has been made from 2011
to 2013 (rank 94), but corruption in Armenia is
177 still rated the most problematic factor for
doing business
SOURCE: Transparency International; WEF; Policy Forum Armenia; GK Tribe Global McKinsey & Company | 30
2 Monopolies are highly prevalent in Armenia
2009 market shares percent
Monopolies are prevalent,

100% mainly due to widespread
corruption and lack of law
enforcement
More than 36 38
40
6 players ▪ Mutual agreements
55 between entrepreneurs
62
and judiciary prevail in all
levels of government
32 ▪ Weak framework for

Oligopoly (3-6) 36 43 contract enforcement
makes prosecution difficult
25
▪ Most concentrated markets
Duopoly 5 15 33
6 5 are sugar, wheat, and
energy/gas transmission
Monopoly 19 15 15 15
4 1 ▪ Consumer welfare losses
due to above-average
Arme- Azer- Kyrgyz- Mol- Russia pricing USD 300 million
nia baijan stan dova p.a.
SOURCE: Hrayr Maroukhian Foundation 2013; "Monopolies in Armenia" ; World Bank BEEPS McKinsey & Company | 31
3 There have been several lighthouse educational projects
in Armenia over the last years …
Example projects Description Status and size
Ayb School ▪ First Armenian school community integrating the ▪ Opened in 2011
best of Armenia’s educational traditions with the ▪ USD 15 million
world’s latest technological resources of investments
▪ Goal is for >1,000 students to attend across
elementary, middle and high schools (70%
receiving scholarships)
▪ National Education Excellence Program launched
Tumo Centre ▪ >5,000 children aged 12-18 getting lessons in ▪ Opened in 2011
for Creative animation, game development, digital media and ▪ >USD 40 million
Techno- web design (free training courses) of investments
logies
Dilijan ▪ international co-educational boarding and day ▪ Opened in 2014
International school for students aged 13 to 19 years ▪ USD 120 million
School ▪ Up to 800 students from 50 nationalities of investments
The ▪ The only US-accredited university in the CIS ▪ Opened in 1991

American ▪ > 1,000 students, of which ~half receive
University of scholarships
Armenia
SOURCE: Homepages; Report Armenia McKinsey & Company | 32

3 … which have led to improvements in the quality of education in
Armenia, while enrollment figures are still low
Enrollment rate Quality of education
Percent
TIMSS rank1
90 Science: 8th out of 14 CIS countries
78 Math: 13th out of 14 CIS countries
Global competitiveness rank
Primary Quality of primary education
education 2013 2008
1 77 25 144
Best Worst
81 85 Global competitiveness rank
Quality of 2013 2008

Secondary
higher
education 1 69 98 144
education
Best Worst
Quality of 2013 2008

management 120 124 144
1
Tertiary school
39
education 28
Quality of 20132008
math and
Armenia CIS science 1 67 76 144
country education
average
1 Trends in international mathematics and science study
SOURCE: UNESCO EFA; World Bank; WEF; TIMSS McKinsey & Company | 33
3 High share of unemployed market entrants suggests a mismatch
between education and its relevance to labor market needs
Distribution of unemployment by cause, 2010
Layoff
26 ▪ In most cases, unem-
ployment in Armenia is
not caused by job loss
due to layoffs
Market 52
entrants ▪ Instead, more than half of
the unemployed are new
22 labor market entrants –
Voluntary quit mostly youth
▪ 1/3 of respondents
Youth unemployment rate (age 15-24), mentioned "inadequately
Percent educated workforce" as
60 obstacles to firm
38
40 56 activities in Armenia in
20 enterprise performance
0 survey1
2003 04 05 06 07 08 09 10 11 2012
1 World Bank Business Environment and Enterprise Performance Survey (BEEPS) , 2008
SOURCE: World Bank: "Armenia Promoting Productive Employment, 2012 "; World Bank Business Environment and
Enterprise Performance Survey (BEEPS), 2008
Top 20th percentile (best) 60th-80th percentile
Armenia still ranks low on important 20th-40th percentile Lowest 20th percentile (worst)
social indicators 40th-60th percentile Detailed on next pages
20131 Indicator Country ranking

1 Emigration rate -5.9/1,000 197 out of 228
Overall
Population growth rate -0.1% 209 out of 228
2 Unemployment rate 18.5% 188 out of 206

Self-
sufficiency
Youth unemployment 33.1% 182 out of 206
Income inequality (Gini) 30.9 27 out of 141

Equity
and 3 Poverty 35.8%2 n/a
health
Life expectancy 74 116 out of 228
Judicial independence n/a 108 out of 142

Social
Cohesion
4 Size of shadow economy 40% 124 out of 162
1 2008 data for GINI 2 Share of population below poverty line
SOURCE: World Bank, CIA World Factbook, Transparency International; Armbanks: "Armenian shadow economy share is
35-40 percent", 19.06.2010
1 The relatively strong economic growth over the last years could not
reduce the constantly high emigration rate in Armenia
Net migration rate per 1,000 population, Republic of Armenia
-3.5 -3.4
-4.2 -4.2
-5.3 -5.0
-5.9
-6.5
2000 2002 2004 2006 2008 2010 2012 2014
Source: CIA World Factbook McKinsey & Company | 36

2 Armenia's growth has been driven by productivity gains only, while the
economy failed to create new jobs Detailed on next slides
Employees per capita

Percent
0.6
+1% p.a. 0% p.a.
0.4
GDP PPP per capita
USD thousands1 0.2
+5% p.a. 0
8 +8% p.a. 2002 04 06 08 10 2013
6
4 Productivity
GDP PPP per employee, USD thousands p.a.1
2
0 +5% p.a.
+7% p.a.
2002 04 06 08 10 2013 20
15
10
5
0
2002 04 06 08 10 2013
1 Constant 2010 USD

2002 XX <-3%
2 While decreasing, Armenia still has the largest XX -3%-0%
2013
unemployment rate in the region XX >0%
Total unemployment, percent of total labor force CAGR, 2002-13

5.6
Azerbaijan 5.4
-0.3%
6.8
Moldova 5.6
-1.7%
Russia 7.9 -3.2%

5.5
9.3 Decrease in
Kazakhstan 5.3 -5.0%
unemployment
9.6 rate higher than
Ukraine 7.7 -2.0%
increase in
10.2 employees/capita
Belarus 9.7
-0.5%
as <____> capital
12.5 also factor
Kyrgyzstan 8.4
-3.5%
economically
11.3 active population
Uzbekistan 11.3
0.0%
and labor
11.6 participation in
Turkmenistan 11.3 -0.2%
(both stable over
11.8 last decade)
Tajikistan 11.5
-0.2%
12.6
Georgia 15.0 1.6%
27.8
Armenia 18.5 -3.6%
11.4
CIS average 9.6 -1.6%

3 In Armenia, every third person is poor and poverty even increased
over the last years
Percent of total population
▪ In 2012, almost every third
15% person in Armenia was poor
20% ▪ From 2008 to 2012
35.0 – Poverty in Armenia
32.4 increased by 20%
27.6
– Extreme poverty
increased by 15%
23.6 16.3 ▪ Increases are due to the
Very poor/
14.2 financial crisis whose effects
extremely poor1
could not be compensated
by the economic growth over
the last years
16.1 ▪
Poor2 13.4 11.4
Extreme poverty could be
reduced in recent years,
leading to a brighter outlook for
the years ahead
2008 2011 2012
1 Very poor: Consumption per adult below the lower poverty line of AMD 24,400 in 2008 and 30,500 in 2012
Extremely poor: Consumption per adult below the food poverty line of AMD 17,600 in 2008 and 21,700 in 2012
2 Consumption per adult below the upper poverty line of AMD 29,900 in 2008 and 37,000 in 2012, but above the lower poverty line
Source: Armstat: social snapshot and poverty in Armenia, 26.11.2013 McKinsey & Company | 39
4 Armenia with a high share of informal economy –
in line with the trend in the region ESTIMATES
Size of informal economy

Percent of official GDP, 20071
Georgia 62 ▪ Armenia could reduce

the size of its shadow
Azerbaijan 52 economy over time
(from ~46% in 2000),
Ukraine 47 however still ranks
124 out of 162
Belarus 43 countries today
▪ As per Aristomene
Armenia 41 Varoudakis, Head of
World Bank’s Yerevan
Tajikistan 41 office, Armenia's
informal economy in
Russia 2010 stood at 35-40%
41
Kyrgyzstan 39
Kazakhstan 38
1 Latest year available
SOURCE: Friedrich Schneider: “Shadow economies all over the world”, 2010;; Armbanks: "Armenian shadow economy
share is 35-40 percent", 19.06.2010
Contents

▪ Armenia's development in context of

Armenia2020's models of growth

Armenia's growth exceeded the Singapore scenario developed during
Armenia2020 X% CAGR, 2002-13;
Armenia 2002-09 and 2009-13
GDP PPP per capita, constant 2010 USD
13,000 Armenia
Very high growth:
Singapore 6.1%
model of early
11,000 acceleration
6.6% ▪ Armenia with
strong
5.1% Robust growth: growth
9,000
Ireland model of 4.5% before the
gradual acceleration crisis,
exceeding
7.7%
7,000 Singapore
Slow growth: Israel scenario
model of fluctuating 2.6% ▪ Growth
performance rates since
5,000
No growth: 2009
Paraguay model 0.1% between
of 2 lost decades Singapore
3,000 and Ireland
scenario
2,000
1,000 See backup for explanation of

differences in Armenia's
0 performance between this chart
and chart in "Armenia & Armenian
1990 94 98 2002 06 10 14 18 2022
World" presentation of Oct 2014
SOURCE: Global Insight; Armenia2020 McKinsey & Company | 42

However, Armenia reached its strong growth not by following the
Singapore model – instead, it integrated more and more with Russia
Syrian – 30 years 1 Russian: From

with the right of Russia with love
correspondence
Not relevant 2013
any more given recent
developments in
Syria 2002
2 European: Coming 3 Singapore: Dare

home Armenia and to excel from
European Union survival to revival

Armenia2020 – scenarios
4 development scenarios for Armenia
Syrian: 30 years with the right of correspondence 1 Russian: From Russia with love
Dominant role of a centralized state and a strong army. Russia extends its political and economic influence in the
In an underdeveloped rule-of-law state, much of the post-Soviet space and becomes a guarantor of stability and
economy goes into the informal sector, controlled by security in various regional conflicts. Armenia will develop
strong "clans". The cheap manpower and dirigiste economically due to its highly skilled manpower, invest-
measures can ensure short-term growth. This, however, ment in education and scientific research, and extensive
will be followed by stagnation due to regional isolation support from the diaspora. However, this growth will not be
and the lack of investment needed for the reproduction of consistent because Armenia will be affected by the chronic
human and technological capital hostility of its neighbors, a low level of regional
integration, active emigration, and Armenia's high transaction
costs which affect the final price of its products
2 European: Coming home Armenia and

3 Singapore: Dare to excel. From survival to revival
European Union
Armenia, together with Azerbaijan and Georgia, meet the Armenia is rapidly transitioning to an innovation development
criteria for joining the EU (depending upon its economic model through the application of the latest technologies in all
situation, level of democracy and a rule-of-law state). spheres of life. This model boosts economic development due
Armenia's accession to this larger and more developed to cheap manpower, large investments in education and
economic space brings stable growth. In order to meet the infrastructure, as well as consistent liberalization of the
integration requirements, Armenia liberalized its economy. It also depends upon the leading role of a centralized
economy, which accelerated its development given its state, extensive transit trade, and more attention to critical
relatively cheap yet productive source of manpower. stages in production
The adoption of European standards strengthened
democracy and civil society, as well as boosted
investment in science and education
Note: Syrian scenario analysis in backup

1 Russian: From Russia with love Not realized
in Armenia
Fully realized
in Armenia
Elements of scenario Assessment for Armenia Evidence

▪ Use of Russian language ▪ Armenian is the official language ▪ Widespread knowledge of Russian
and spoken as by majority language in Armenia
▪ Russian is still by far the best – 24% advanced
known foreign language – 59% intermediate
– 11% beginner
▪ Debt settlement with Russia ▪ Debt settlement in assets mainly ▪ 2002: debt settlement of USD 100 million
in assets through transfer of energy (incl. Hrazdan thermal power plant)
companies/plants in 2002 to ▪ 2014: debt settlement of USD 155 million
2014 (ArmRosgazprom)
▪ Investments in Armenia by ▪ While FDI decreased after the ▪ Today, >50% of FDI stock held by Russian
diaspora living in Russia financial crisis, share of Russian investors
FDI constantly increasing
▪ Establishment of a macroregional ▪ Creation of Eurasian Economic ▪ Detailed on next page
market on post-Soviet territory Union as of 2015
▪ High dependence on Russian ▪ Armenia highly dependent on ▪ Gas: domestic consumption needs 100%
energy sources Russia and dependence likely to fulfilled with Russian gas
further increase ▪ Oil: Russian share 30%, but likely to
increase due to new cooperation agree-
ment allowing duty-free exports of oil, gas,
and diamonds from Russia to Armenia
▪ Armenia as Russia's offshore ▪ Armenian stock market growing, ▪ Stocks traded <1% of GDP (2013 USD 45
banking zone but still insignificant for region million, 14 companies traded)
– Highly improved investment ▪ Armenia's rank for financial market
attractiveness development
– Largest financial and stock – 2003: 102th out of countries
market in the Middle East – 2013: 97th out of 144 countries
1 E.g., natural, technologic, social emergencies, and terrorist attacks
SOURCE: Armenia2020 Scenarios Book; Bayramov, V., Giragosian, R. ,Lukyanov, F., Kempe, I., Valiyev, A., Yakobashvili, The South
Caucasus between the EU and the Eurasian Union”;; Center for Security Studies, Zurich 2013; WEF Global McKinsey & Company | 45
Competitiveness Report; UN Comtrade; UNCTAD
1 The Eurasian Economic Union will create a single economic market on
post-Soviet territory
▪ Internal market: development of a single market with the “4

freedoms: free movements of goods, capital, services, and people
▪ Competition: equal competitive conditions in the commodity

markets of the Single Economic Space; harmonization and
improvement of legislation in regard to competition policy
▪ Monetary Union: closer coordination of economic and monetary

policy, incl. the potential use of a common currency in the future (5-
10 years)
▪ Energy: creation of a single energy market
▪ Sky: the Single Eurasian Sky program, outlines the creation of a

single market for air services and a single air traffic zone
▪ Agriculture: coordination of agricultural policymaking between

member states and ensuring collective food security
SOURCE: Press search McKinsey & Company | 46

2 European: Coming home Armenia and the Not realized
in Armenia
Fully realized
in Armenia
European Union
Renewed surge in diaspora commitment in Decline in FDI over time FDI
business investments ▪ 2003: 4.3% of GDP
▪ 2013: 3.5% of GDP
Opening of formal negotiations with EU Before, its decision to join the 2004: Armenia as part of EU's European
Eurasian Economic Union in neighborhood policy
2013, Armenia took several 2009: Armenia enters EU's Eastern partnership
important steps leading to 2010: Armenia and EU start negotiating on
stronger ties with the EU Association Agreement, which might include
free trade
2013: Armenia stopped EU association process
Most young adults speak 3 languages While the popularity of English is Second language
growing, it is still far behind
Russian Other
53% Russian
4%
Time
English
Legislative changes enacted to achieve EU Rule of law 2003 and 2013: Armenia 50th
compliance percentile (the lower, the better)
Regulatory quality 2003 and 2013: Armenia
While reforms have been in 40th percentile
Corruption declines, but bureaucracy increases implemented, Armenia Control of corruption 2003 and 2013: Arme-
struggles to improve nia in 60th percentile
Government effectiveness Armenia
improved from 2003 (50th percentile) to 2013
(40th percentile)
Several Armenia companies succeed to enter No Armenian company as global No Armenian company within top 20 of its
the top 3 of their sector globally leading player sector (in terms of revenues)
Armenia joins EU, Euro adopted as currency Armenia decided to join the n/a
Eurasian Economic Union as of
January 2015; Association
Agreement with EU put on hold
SOURCE: 2011 Armenia census; WEF Global Competitiveness Report; World Bank Worldwide Governance Indicators;
Bloomberg
3 Singapore: Dare to excel. From survival to revival Not realized
in Armenia
Fully realized
in Armenia

▪ Economic development as most ▪ While economic development is an ▪ N/A
prominent national agenda item and important topic, it is not no.1 priority
institutionalized at all levels of ▪ Institutions such as NCFA and ADA1
government; institutions created to have been created, but with mixed
support economic development impact and success
▪ Focus on transparency (tax, ▪ While reform have been implemented, ▪ Rule of law 2003 and 2013: Armenia 50th percentile
legislative, and judicial process) Armenia still struggles to improve (the lower, the better)
▪ Regulatory quality 2003 and 2013: Armenia in 40th
percentile
▪ Control of corruption 2003 and 2013: Armenia in
60th percentile
▪ Government one of most attractive, ▪ Government not known to attract high ▪ Monthly base salary of government employees
smallest, and most effective potentials USD 160 vs. USD 330 in public sector
employees ▪ According to the World Bank, application statistics
share low level of interest in public sector jobs
▪ Dozens of specialized export- ▪ While a few number of free zones exist, ▪ 70% of exports from low value-add products,
oriented industry clusters (e.g., IT, no cluster development metals and ore, diamonds, alcoholic beverages
tourism, jewelry) with active ▪ Export heavily dependent on low value- ▪ Goods export increased, but still relatively low
multinational companies add products/natural resources – 2003: XX% of GDP
– 2013: 14.4% of GDP
▪ Sharp increase in FDI ▪ Increase until 2008, but constant ▪ FDI net inflows as percentage of GDP
decrease over last years. However, – 2002: 4.7%
Armenia ranks high compared to its – 2008: 8.1%
regional peers – 2013: 3.3%
▪ Armenia ranks 3 out of 8 CIS countries in terms of
FDI stock as percentage of GDP
▪ Highly educated, trilingual workforce ▪ Armenia ranks constantly low on quality ▪ Quality of primary education
of education – 2006: 85th out of 144 countries
▪ Widespread knowledge of Russian as – 2014: 83rd out of 144 countries
second language, however, only 4% ▪ Quality of higher education
with advanced proficiency of English – 2006: 68th out of 144 countries
– 2014: 86th out of 144 countries
1 Armenian Development Agency
SOURCE: World Bank Public Expenditure Review of Armenia, May 2014; WEF Global Competitiveness Report; World
Bank Worldwide Governance Indicators; UNCTAD bilateral FDI statistics; ICT; 2011 Armenian census
Contents


models of growth
– Tourism
– Healthcare
– IT
– Banking

Key sectors, detailed on
Many sectors did not exploit their productivity and next slides
Growth potential 2003-10
employment growth potential identified in Armenia2020 Actual growth 2003-10
Productivity and growth potential for key sectors identified in Actual growth of these sectors1 between
Armenia2020 (as of 2003) 2003 and 2010
High High 4 1
(>10% 12 (>10% 12
CAGR) 9 6 CAGR) 12 6
3 10

8
16 16
13 1313 6
15 7 15
Medium 4 Medium 4
14 2
(5-10% 1 (5-10% 1
CAGR) 11 CAGR)
5 5
15
Low Low
(0-5% (0-5%
CAGR) CAGR) 5
16
Negative Low High Negative Low High
(-5-0% CAGR) (0-5% CAGR) (5-10% CAGR) (-5-0% CAGR) (0-5% CAGR) (5-10% CAGR)
Sector employment growth Sector employment growth
1 Mining 5 Construction 9 Industrial machinery 13 Retail and wholesale
2 Metals 6 Banking and insurance 10 Electronics and precision 14 Jewelry and diamonds
3 Telecommunications 7 Food processing 11 Construction materials 15 Transportation
4 Tourism and restaurants 8 Textiles and apparel 12 Healthcare 16 Software and IT services
1 Showing sectors for which 2010 data is available
SOURCE: World Bank; UNDP; NSSRA; World Travel & Tourism Council (WTTC); USAID; Enterprise Incubator
Foundation
2003
Among the growth drivers identified in Armenia2020, the 2010 potential
banking and tourism sectors have gained the most 2010 actual
GDP contribution Employment

Constant 2005 USD millions Thousands
125 252 ▪ Banking sector has
Tourism and strong GDP growth of
restaurants1 192 583 19% p.a., driven by
291 20 – Productivity growth
of 7% p.a.
56 5
– Employment growth
Banking of >10% p.a.
110 10
216 12 ▪ Tourism sector has
strong GDP growth of
55 49 10% p.a., driven by
increased productivity
Healthcare2
173 40 ▪ All other sectors
78 46 performed below their
potential in terms of
53 3 productivity and
Software and employment
IT services 159 6
85 5
1 2008 data
2 Changed compared to original analysis in Armenia2020
3 Estimate, based on revised actual employment 2003
SOURCE: World Bank; UNDP; NSSRA; (WTTC); USAID; Enterprise Incubator Foundation McKinsey & Company | 51
Contents


models of growth
– Tourism
– Healthcare
– IT
– Banking

The tourism sector has strongly grown over the last decade
and has continuously improved its competitiveness x
Percent
of GDP
The number of international tourists visiting … and recent improvements in
Armenia has continuously increased … the sector's competitiveness
Thousands could facilitate further growth ▪ Tourism is an
important and
Overall rank fast-growing
in travel and 139 91 79 1 sector
tourism com-
petitiveness (Worst) (Best) – 5% of GDP in
901 2013
843
+17% p.a. ▪ Tourism 58 51 – 10% CAGR
regulatory from 2002 to
684 framework 2013
558 ▪ Tourism ▪ Government
business actively supports
environ- 100 88
382 the growth of the
ment and sector through
263 infrastruc- policy changes,
162 ture infrastructure
▪ Human, improvements,
cultural, 104 94 and collabo-
and natural ration with the
2002 04 06 08 10 12 20131 resources private sector
3.4 5.3 4.8 3.2 4.9 4.9 5.0
1 Estimated based on IATA passenger growth
SOURCE: World Bank; WEF McKinsey & Company | 53

Tourism in Georgia shows that there is significant further growth potential
for the tourism sector
International tourist arrivals Income per capita
Visits per capita from international
tourism, USD
▪ The government of
100 Armenia Georgia Georgia successfully
Georgia
supported the tou-
90 348 rism sector, e.g., by
80 – Opening the
aviation sector
70 and attracting
Georgian government foreign airlines
60 actively promotes the – Internationally
country as a tourist +34% promoting
50 p.a.
destination Georgia as a
164
40 tourist
Georgia opens destination
30
aviation sector Armenia
▪ Armenia could
20 increase its visitor
+18% numbers to ~3
p.a. 26 33 million by closing
10
the gap to Georgia
0
2002 03 04 05 06 07 08 09 10 11 2012 2002 2012

2013
The Armenian government considers tourism a key sector Detailed
Goal 2020
for the economy and actively supports its development Goal 2030
next slide
In 2008, the Armenian government defined a

tourism strategy with ambitious goals … which should be achieved by addressing several areas
Description Examples
0.9
International tourist Promote Armenia ▪ Country branding strategy
1.5 as a tourist destination
arrivals ▪ “Armenia, the Land of Noah”:
Millions documentary on CNN
3.0
Improve accessibility and ▪ Simplified visa requirements
transportation
▪ Introduction of Open Skies
n/a
Improve infrastructure ▪ Armenian monument awareness
Tourism income, 2007 project: development of tourism
1.4
USD millions sites
3.0 ▪ Construction of roads and
infrastructure, e.g., to Tatev
Improve workforce skills ▪ Partnership with World Federation

12 of Tourist Guide Association to
Accommodation establish training center
capacity 49
Thousand beds Improve business and ▪ Support of PPPs and private
51 investment environment sector engagement
▪ Improvement of regulations, such
as taxation reductions
SOURCE: Government of America; USAID; World Bank; Ameria Group; press search McKinsey & Company | 55
A country branding strategy has been defined and is implemented
together with private investors and development agencies
Goal: Increase the percentage of the most profitable segment – leisure tourism –
from 15% to 35% by 2017
Example: NCFA (now DFA) actively

Branding strategy has 3 objectives promotes Armenia as a tourist destination
Update tourism product and improve ▪ Air France featured Armenia in its inflight
user experience magazine
▪ Focus marketing on high-quality
providers
▪ Improve workforce skills
Increase awareness in source markets

▪ Promote Armenia as a yet-to-be-
discovered destination
Penetrate special-interest sales ▪ Participation at international travel fairs

channels
▪ Focus sales activities on special-
interest tour packages
SOURCE: NCFA; USAID McKinsey & Company | 56

The introduction of Open Skies in October 2013 sparked significant growth
in passenger arrivals to the country
Number of passengers
Percentage increase, 2013-14
43 ▪ In October 2013, the
Government of Armenia
announced the
37
liberalization of the
35 34 aviation sector (Open
Skies) to enable
– Reduction of air
ticket fares
– Increased number
of routes to/from
19 Armenia
17
15
– Increased frequency
of flights
10 ▪ Overall goal was the
connectivity and
accessibility of Armenia
for tourists and
Armenians
Jan Feb Mar Apr May Jun Jul Aug
SOURCE: Zvartnots Airport McKinsey & Company | 57

Lighthouse projects by private investors develop the tourism
infrastructure and build Armenia's reputation as a tourist destination
Example projects Description Status Size
Zvartnots ▪ New, ultra-modern airport, modeled New terminal Total

International after Munich airport opened in 2007 investment:
airport ▪ Named the Best Emerging Airport of USD 100
Russia, CIS & Baltic States in 2012 million
Tatev ▪ Access to Tatev monastery by cable car Cable car in Total planned
▪ World's largest cable car operation investment:
▪ Attracting >75,000 visitors per year USD 80 million
Tufenkian ▪ The region’s first luxury boutique hotel

4 hotels in n/a
hotel chain chain (Dilijan, Dzoraget, Tsapatagh, operation (Yerevan,
Yerevan) with an ethnic theme Dilijan, Dzoraget,
▪ Business model focused on job creation Tsapatagh)
in the regions
Two Hyatt ▪ Hyatt Place – the second internationally Yerevan opened in Total planned
Place hotels managed hotel in Yereven1 – opened in January 2014; investment:
Yerevan Jermuk to open in USD 15 million
▪ Second Hyatt Place will be situated in 2015
Jermuk mountain resort, a resort
currenctly being developed by the
Armenian government
1 After the Marriott hotel
SOURCE: Armenian Development Agency; Ministry of Economy; Web search; IDeA foundation McKinsey & Company | 58
Contents


models of growth
– Tourism
– Healthcare
– IT
– Banking

The Armenian healthcare system lacks quality and availability, Private
caused by inadequate regulation and insufficient spending Public
Spend in healthcare sector, percent of GDP

… and is now 1▪ Health provision
Overall spend relative to the GDP has declined in below the CIS ▪ Despite several reforms by
Armenia mainly due to reduced private spending … average the government, the quality
and availability of health-
care provision has not
improved
5.4
5.6 5.5 -0.9% 5.7 ▪ Financial austerity
5.3 prevents the government
from increasing health
4.6 4.5 4.6 4.5 expenses
4.3
2.5 ▪ Limited (public and private)
3.8 3.7 insurance leads to high
4.0 4.1 3.3 private expenses and high
4.0 2.5 2.5 2.6
2.2 2.6 share of informal payments
2.0 1.8
2▪ Pharma market
▪ ~20% of the total spend on
healthcare, with an expected
3.2 market growth of ~5%
1.9 2.1 2.1
1.8 2.0 1.9 1.9 1.9 ▪ While dominated by foreign
1.4 1.5 1.4 companies, successful
Armenian companies are
emerging
2002 03 04 05 06 07 08 09 10 11 2012 2011
SOURCE: WHO McKinsey & Company | 60

1 Government reforms have hardly improved the healthcare
provision in Armenia Detailed next slides
Recent government reforms … did not improve the overall Issues in Armenia's healthcare
(examples) healthcare provision system
▪ 2006 – improving access to Rank in HDI1 Health Index out of ▪ Low availability of
primary care services and 199 countries healthcare
extending basic benefits
package ▪ Lack of health insurance
▪ 2008 – obstetric care state Worst system and large informal
certificate program to improve payments
mother and child health and
reduce informal payments ▪ Low quality of services,
76 73 particularly in rural areas
▪ 2010-12 – introduction of co- 71 71
payments to reduce informal
payments
▪ 2011 – extension of obstetric
cure program to children
▪ 2012 – social package for civil
servants, incl. support for Best
additional health insurance 2000 05 10 2013
1 Human development indicator
SOURCE: WHO; UNDP McKinsey & Company | 61

1 Armenia has one of the lowest availabilities of healthcare Physicians
in the region Nurses
The number of health worker shas further decreased…

Workers per 100,000 inhabitants Key developments
1,190 ▪ Doctors are not well paid: average
salary of USD 88 per month1 is not
840 380 887
721 777 sufficient to support a household
278 269 ▪ Particularly in rural regions, Armenia
258 285
810 lacks doctors and nurses
562 463 492 618 ▪ Availability of
physicians and
adequate
2000 05 2011 2011 2011 medical facilities
Armenia CIS avg. EU avg. is slowly
improving, but
… as well as the number of hospital beds remains on a low
Beds per 100,000 inhabitants Key developments level
▪ Many former Soviet hospitals closed, ▪ Efficiency of
807 which often lacked even basic healthcare
equipment provision has
▪ Today, Armenia's hospital capacity is increased in
419 408
340 below the CIS or EU averages recent years
213
▪ Reduction of hospitals and training of
local administrative skills have improv-
ed hospital efficiencies; occupancy rate
2000 05 2011 2011 2011 increased from 32 to 61%
Armenia CIS avg. EU avg.

▪ In recent years, 2-3 modern hospitals
open each year
1 ASOL 2011
SOURCE: WHO; expert interviews McKinsey & Company | 62

1 Low salaries of healthcare workers and very limited insurance lead to
high private health expenses with large informal payments
Share of health expenses, 2011
Nonprofit
▪ Voluntary health Voluntary health institutions
insurance basically insurance Other
not existing
4 2
▪ In 2002, govern- 0
ment introduced ▪ Little insurance
vouchers for state coverage limits access
sector employees to healthcare,
to offer additional 36 particularly for the poor
Private
insurance; small 57 (out-of-pocket) ▪ Large share of informal
effect expected payments due to
Government
limited insurance and
low salaries of
healthcare workers
▪ >50% of the population
consider the
Basic benefits package (BBP) ▪ ~45% of out-of-pocket
healthcare sector the
▪ Providing free-of-charge, but limited primary spending is informal1
most corrupt sector in
care services for entire population ▪ Remaining spend is for Armenia
▪ Socially vulnerable groups (~18% of the popu- – Services not covered by
lation) receive all health services free of charge BBP, such as dentists,
▪ Recent introduction of co-payment fees to medication, hospital care
reduce informal flows – Co-payments within BBP
1 As of 2008
SOURCE: WHO; Policy Forum Armenia McKinsey & Company | 63

2 The Armenian pharma market is expected to grow by ~5% p.a., with
Armenian companies increasing their market shares
Armenia pharma market forecast, 2012 CAGR
Sales, USD millions1 Percent
2011-13 2013-18
▪ Pharma market is
+5% p.a. 160
152 expected to grow by
145 ~5% p.a. until 2018
138
132
126 ▪ Today, the market is
119 dominated by foreign
113
companies, with a
market share of ~90%
139
128 134 5 3-5 ▪ Armenian companies
118 123
Foreign 108 113 with above-average
103 growth of ~10-15%
companies
p.a., driven by
– Lower prices
Local
companies 17 18 21 10 10-15 – Increasing
10 11 13 14 15 acceptance of
products
2011 12 13 14 15 16 17 2018
– New product
Market share launches (3-4 p.a.)
of Armenian
9 9 10 10 11 11 12 13
companies
Percent
1 Exclude wholesalers
SOURCE: Company interviews McKinsey & Company | 64

2 The market is dominated by retail out-of-pocket sales, as government
expenses are limited to medication used in hospitals
Armenia market structure, 2012

Percent Description
100% = USD 119 million
▪ Purchasing policy set by Ministry of Health
Government and implemented by hospitals through
tenders, leading to challenging pricing
▪ GlaxoSmithKline is market leader together
with local partner PharmaTek; Roche is a close
second
~30%
▪ Primarily branded generics sold through

pharmacy chains
~70% ▪ Local Armenian companies typically focus on
lower-priced branded generics in higher-
volume categories, e.g., anti-infectives and pain
relievers
Private
▪ Takeda is market leader; Sanofi recently
entered with focus on OTC products
SOURCE: Market interviews McKinsey & Company | 65

Contents


models of growth
– Tourism
– Healthcare
– IT
– Banking

The information and telecommunications (ICT) sector has shown double-
digit growth in recent years, mainly driven by the IT industry
Telecommunications and IT
Industry turnover has increased in recent years
saw different developments
Constant 2010 USD, PPP, thousands
have developed differently
CAGR ▪ Telecommunications
1
– Growth of ~10% p.a. since
2010
21% p.a.
560 – Liberalization of market in
518 2004 triggered strong
growth
375 310 10% – Market saturation in recent
319 304
years
Telecom- 250
224 ▪ Software and IT services
2
munications
214 250 37%
IT 125 – Strong growth of ~35%
95 p.a. since 2010
2010 11 12 2013 – Improved telecommuni-
cation infrastructure and
government support fueled
GDP 5.4 6.1 7.8 8.1 growth and attracted
contribution
investors
Percent
SOURCE: Business Monitor International; BuddeComm; World Bank; Global Insight; EIF; USAID McKinsey & Company | 67
Armenia's ICT competitiveness has improved significantly and the country
is now considered a “rising star” Armenia
CIS
Network Readiness Index 2014 Lower-middle income group average
Armenia ranks higher than its peer group in all categories of the
Network Readiness Index
▪ Armenia's ICT competitive-
ness has improved
significantly over the last years
1. Political and
regulatory – Armenia now ranks 65 out
environment of 144 countries (2008: 114)
7 2. Business – Considered “rising star” by
10. Social 6 WEF
and innovation
impact
5 environment ▪ Armenia ranks particularly high
4 in
3.
3 – Workforce skills
9. Economic Infrastructure
impact 2 and digital – Telecommunications
1 content infrastructure
0 – Ease to start new
businesses
8.
Government 4. Affordability
▪ However, the competitiveness
remains constrained by
usage
– Low judicial independence
– Difficulty to enforce
7. Business contracts
5. Skills
usage – Low quality and availabil-
6. Individual ity of staff training and
usage management schools
SOURCE: WEF McKinsey & Company | 68

1 Liberalization of the telecommunications market sparked Mobile
strong growth and made services more affordable Fixed line

Millions of subscribers
Both mobile and fixed-line subscribers increased with the liberalization of the market
Orange enters
mobile market ▪ Liberalization of the
telecommunications
ArmenTel's ArmenTel reaches market fueled growth
monopoly on 100% digitalization and improved Armenia’s
Russian operator
fixed-line ends of fixed-line services connectivity of Armenia’s
VimpelCom acquires
5.1 – Mobile phone
ArmenTel UCOM enters 4.8
fixed-line 4.5 penetration reached
VivaCell enters market 100% in 2008
mobile market – Between 2009 and
3.3 3.3 2011, cost of
Government
3.0 Internet decreased
ends ArmenTel's
2.6 by ~80%, cost of
exclusive rights
mobile services by
for mobile
~50%
services
1.5 ▪ Mobile services now is a
1.2 highly competitive
0.9 market1
0.7
▪ Fixed-line services are
still dominated by former
monopolist2
2003 04 05 06 07 08 09 10 11 12 2013
1 Market shares as of 2013: K-Telecom: 64%, ArmenTel (Beeline): 20%, Orange Armenia: 16%
2 Market shares as of 2013: ArmenTel: 74%, UCOM: 24%
1 Future growth will be driven by growing broadband Internet use,
while the mobile market is relatively saturated xxx Subscribers per 100 capita
Mobile services with little growth Fixed-line services with strong growth in broadband
segment
Mobile phone subscribers, millions Subscribers, millions Broadband Internet Telephone
CAGR CAGR
3.4 3.4 3.4 3.4 3.5 3.5 3.5 1,59 1,61

3.3 1,44 1,50 1,55
1,38
1,27
1% 1,03 13%
0%
2011 12 13 14f 15f 16f 17f 2018f 2011 12 13 14f 15f 16f 17f 2018f
111 115 115 115 115 116 116 116 14 23 27 29 31 33 33 35

20 20 20 20 20 20 20 20
▪ Mobile services generate ~70% of the total sector ▪ Fixed-line services account for ~30% of the total sector
revenues today revenues in 2013
▪ Saturation of the mobile phone market is expected to ▪ Use of mobile phone services and remaining
limit future growth monopolistic status of ArmenTel prevent growth of
telephone subscriptions
▪ Strong growth of broadband services expected due to
low saturation and UCOM’s recent network
extensions
2 The number of foreign and local companies in the IT sector increased,
creating jobs for a highly skilled workforce
The increasing number of IT companies in … creates jobs for a

Armenia … highly skilled workforce ▪ IT is a key sector for the
Number of companies Thousands Armenian economic
development due to its
8 strong growth and by
providing jobs for highly
400 skilled employees
350 +15% p.a.
300
▪ Availability of talent and
a low cost base make
250
Armenia a possible
200 3 outsourcing destination for
150 programming and IT
100 services
50
▪ However, even stronger
0 growth is hindered by
200203 04 05 06 07 08 09 10 11 12 2013 2003 2013 several factors
– Supply of highly skilled
▪ Success of early movers like Synopsys ▪ >60% of the workforce IT graduates
encouraged other investors have a master’s degree
– Access to financing
▪ ~60% of revenues generated by foreign ▪ The salary in the IT
companies sector is ~5 times higher – Access to interna-
than the average salary tional markets
SOURCE: EIF; USAID; World Bank McKinsey & Company | 71

2 The government actively promotes the development of the IT sector,
supported by development agencies and the private sector
Example interventions
Enterprise incubator foundation
▪ Established 2002 with support of the World Bank
▪ Goal is to support the IT sector development, e.g.,
– By attracting foreign investors and channeling investments
Focus areas of the IT industry – By supporting start-ups with training and financially
development strategy of the Armenian – Through IT consulting
government – Through workforce development
▪ Partners (examples):
▪ Building competitive ICT infrastructure
▪ Improving quality of IT graduates
▪ Providing financing mechanisms for SUN educational laboratories
start-ups
▪ Attracting foreign companies ▪ Goal is to prepare skilled graduates for the IT industry
▪ Making the Armenian IT sector visible ▪ Establishment of educational and research facilities at
on the global market Armenian universities and research centers
▪ Training of ~200 students between 2008 and 2009; all
graduates found jobs within 3 months after program
completion
▪ Partner universities (examples):
SOURCE: Government of America; USAID; EIF McKinsey & Company | 72

2 Armenian success stories show that the IT sector moves from
outsourcing services to local product development companies
US-based Synopsys establishes R&D
2004: capabilities in Armenia 2011: Startup PicsArt is launched in Yerevan
▪ Synopsys is a world leader in semiconductor ▪ PicsArt is a mobile photo app combined with a
design software with a revenue of ~USD 2 billion social network
▪ Synopsys selected Armenia for its major ▪ The company's main office is based in Yerevan
offshore development office because of and has ~25 employees; an office in California
– Low cost base has 6 employees
– Government support of IT sector ▪ The numbers of users has increased significantly
– Availability of skilled engineers and software and surpassed Instagram on iPhones in 2014
developers
PicsArt’s user base is quickly expanding
▪ Today, Synopsys is the biggest IT company in Number of installations, millions
Armenia, with ~600 employees
▪ Synopsys partners with Armenian universities 228
to develop highly skilled graduates, supporting 179
>60 professors and >600 students 100
39 63
18
Jun/ Dec/ Jun/ Dec/ Jun/ Nov/

Further regional hubs and R&D 2012 2012 2013 2013 2014 2014
centers by Microsoft, VMWare,
Samsung, National instruments
SOURCE: Organization's Web sites; EIF; USAID; Androidrank.org McKinsey & Company | 73
Contents


models of growth
– Tourism
– Healthcare
– IT
– Banking

The Armenian banking system has shown an impressive growth over the
last decade
Domestic credit to ▪ Armenia's banking system has grown
private sector Soundness of bank rapidly over the last decade and is
GDP per capita, PPP1 Percent of GDP indicators (out of 144) sound – ahead most of its CIS peers
(see next slide)
373 44 95 ▪ Growth has been driven by well-func-
tioning and supportive Central Bank
-44 ranks
▪ Well-resourced and skilled CBA – the
(the lower independent body regulating the
the banking sector
better) ▪ Additionally, several legislative
initiatives mark the possibility of
+18% p.a. +18% p.a. significant change in other sectors
of the financial market
51
– Introduction of obligatory car
insurance (2011)
– Insurance law reforms to bring
legislation close to European
standards and attract international
brands (ongoing)
– Mandatory medical insurance (to
59 7
come)
– Pension law with a mandatory
component for public sector
employees and shift from pay-as-
you-go to multipillar pension
2002 2013 2002 2013 2002 2013
system (2014)
1 Constant 2010 USD
SOURCE: World Bank; statistical yearbook of Armenia McKinsey & Company | 75

Today, Armenia compares favorably to its peers in terms of size and
health of its banking system
Domestic credit to private sector, 2013 Soundness of bank indicators, 2013
Percent of GDP Rank out of 144 (the lower the better)
Ukraine 59 Armenia 51
Russian Federation 53 Georgia 92
Armenia 44 Tajikistan 100
Moldova 40 Kazakhstan 120
Georgia 40 Kyrgyzstan 131
Kazakhstan 37 Russian Federation 132
Azerbaijan 25 Azerbaijan 133
Belarus 23
Tajikistan 17
SOURCE: World Bank; WEF Global Competitiveness Report McKinsey & Company | 76
Armenia's banking system shows moderate concentration and includes
several local and international reputable brands
Assets of Armenian banks, AMD 2013, percent
100%=USD 2,941 billion

▪ Armenia's 22 banks
account for 92% of
11 financial sector assets;
banks are well-developed,
10 but small
▪ Rest of financial sector is
Other 52 9 made up of microfinance
institutions (12 players),
9 leasing companies (1
major player), non-bank
1 8 credit institutions
▪ Moderate concentration:
top 5 players with ~50%
▪ Level of foreign ownership
Mandate to finance long-term
is high: share of foreign
investment and infrastructure by
capital: 73% (2007: 38%)
leveraging diaspora resources
SOURCE: KPMG: Armenian Banking Sector overview, 2013 McKinsey & Company | 77
While Armenia ranks low on bank-related indicator, it still lacks an equity
Armenia 2014
and risk capital market Detailed on next page
CIS 2014
Financial Market Development Index 2014 Armenia 2006
Armenia ranks higher than its peer group in all categories of the Stock market capitalization to GDP
Network Readiness Index
55
Affordability of Belarus
financial services, 50
1-7 (best)2 45
7 Availability of Russian Federation
Legal rights index, 6 financial services, 40
0-10 (best)1 5 1-7 (best)2
35 Tajikistan
4
3 30
2
Regulation of Financing 25
1 1
securities through local
0
exchanges, 1-7 equity market, 20 Moldova
(best) 1-7 (best)
15
Ukraine
10 Azerbaijan Kazakhstan
Soundness of Ease of access to
banks, 1-7 (best) loans, 1-7 (best) 5 Georgia
Armenia
0
Venture capital
availability, 1-7 0 5 10 15 20 25 30 35 40 45 50 55
(best) Credit to GDP3
1 2007 data
2 Historical data not available
3 Domestic credit to private sector
SOURCE: World Bank; WEF Global Competitiveness Report McKinsey & Company | 78
While Armenia's banking sector is well developed, other parts of the
financial sector are still undeveloped
Private equity and venture capital Stock exchange
▪ 1 local fund: Granatus Ventures Fund I ▪ Stock exchange established in 2000 and acquired by
– Fund size: USD 6 million Nordic stock exchange operator NASDAQ
– 2 investments in Armenia1 ▪ Stock market very illiquid with only few equities
▪ 1 International fund: Caucasus Growth Fund trades
– Fund size – USD 40 million Tradings 2012
– Investments in Georgia, Armenia, Azerbaijan Corporate
– 1 investment in Armenia: New Force, a Equities 70 bonds
distribution company 8
Government
bonds 22
▪ Very low market capitalization of <1% of GDP

No government support system for private equity Rudimentary state of market due to
venture capital; availability of risk capital is minimal ▪ Lack of institutional investors managing long money
▪ Lack of transparency in companies/no sufficient
level of corporate governance in order to qualify for
stock exchange
▪ Failure to channel privatization through capital
markets; many government-owned companies are
making losses and are not attractive enough for a
successful public placement
1 WiCastr, a wireless mobile engagement platform, SoloLearn, a mobile platform comprising a series of learning apps
SOURCE: EV consulting Armenia, Investment map; European Investment Bank: Armenia: Private Sector Financing and
the role of Risk-bearing instruments"2014
Contents


models of growth

Armenia could follow one of 4 new growth models, which have succeeded
in diversifying their growths
Chile – economic Malaysia – export- Morocco – foreign Georgia – business-

liberalization oriented manufacturing markets friendly environment
▪ Broad economic libera- ▪ Diversification away from ▪ Increased connection to ▪ Create business-friendly
lization (liberalizing trade resource-based towards a foreign markets both as environment in non-
and banking sector, manufacturing exports source of FDI and demand business-friendly, but
pension privatization, labor economy (manufacturing, tourism) fast-growing area CIS
reforms) ▪ Assisted through export ▪ Balance of cross-cutting ▪ Neoliberal approach
▪ Active state support (R&D, processing zones (EPZs), "transversal" reforms focusing on general
training, financing, and aggressive courting of (e.g., free trade agree- enablers (e.g., improving
marketing) of target FDI and multinational ments) and sector government services,
industries corporations (e.g., through development (e.g., Special reducing corruption,
▪ Export drove growth, favorable invest-ment Economic Zones (SEZs), creating low flat tax,
especially resource-based climate; investment tax vocational training) liberalizing trade law) rather
manufacturing (e.g., food credits) ▪ Specialized policies for than selecting industries
and beverages, basic ▪ Significant improve-ments sector development ▪ Improvements in
metals) in education helped generally included infrastructure and service
▪ Growth in financial sector provide educated workforce liberalization, infrastruc- levels through
as crucial enabler for required ture, and financial privatization and
growth in other sectors incentives, e.g., tourism: deregulation most
tax subsidies, aid for successful in areas with
training and land, and relatively fewer stake-
liberalized air transport holders, e.g., finance
▪ Government created
vocational training
institutes to produce talent
for target sectors
SOURCE: McKinsey McKinsey & Company | 81

The 4 new growth models – where Armenia could be in 2030
GDP PPP per capita, constant 2010 USD X% CAGR1
Armenia
26,000
Georgia: 7.6%
24,000 business-friendly
environment
22,000 Malaysia:
export-oriented 6.8%
20,000 manufacturing
18,000 Chile:
economic 5.9%
16,000 liberalization
Morocco:
14,000 4.9%
foreign
12,000 markets
10,000
8,000
6,000
4,000
2,000
0
2005 08 10 12 14 16 18 20 22 24 26 28 2030
1 Georgia: 2000-08; Malaysia: 1975-90; Chile: 1984-90; Morocco: 2000-10

The 4 new growth models show a long-term growth, suggesting that
ingredients for success can be derived from all 4 growth stories
GDP, constant 2005 USD billions
CAGR from start
of reform to 2013
Malaysia 1975-90 Morocco 2000-10
220 Chile 1984- Georgia 2000-08 5.6%
90
Malaysia:
200 export-oriented
manufacturing
180 Chile: economic 5.5%
liberalization
160
140
120
100
Morocco: 4.7%
80 foreign markets
60
40
Georgia: 6.0%
20 business-friendly
environment
0
1975
2000
78
80
82
84
86
88
90
92
94
96
98
01
02
04
06
08
10
12
13
High
Country Economic Development strategy heat map – Medium
Low
overview of new growth models
Chile 1984-90 Malaysia 1975-90 Morocco 2000-10 Georgia 2000-08
Level of state intervention in economy

Overarching
1 strategy Market for growth Exports Exports Exports/foreign Domestic and trade
Funding for growth FDI FDI FDI FDI
Export and do- Manuf., agric., Manuf., esp:.electr. Manuf., agric., Trans., infra.,
2 mestic sectors Key industries
mining tourism, BPO manuf., energy
Infrastructure (communication, utilities, logistics)

Enabling
3 sectors Human capital (health, education)
Financial services
Labor markets and property security

Enabling Monetary, fiscal policy
4 policies and Promoting innovation, SMEs, or trade
institutions
Sustainability
SEZ
Strong system leaders

Rigorous self-assessment/diagnostic
Prioritization with quick wins
Cocreation of implementation plan
Implemen- Targets and routines for monitoring
5 tation
Delivery unit (new or existing)
Build capabilities
Change story
Finance linked to strategy and performance
Private sector involvement
SOURCE: Team analysis McKinsey & Company | 84

OVERVIEW CHILE – GROWTH PERIOD 1984-90
Chile's growth during the 1980s was driven by economic liberalization
1 Overarching strategy 2 Export and domestic sectors 6 Impact/achievements
▪ Broad economic ▪ Exports drove strong growth across all sectors, ▪ Immediate impact on real
liberalization (privatization, with strong domestic growth in support economic growth from
liberalizing trade and ▪ Biggest growth in natural resource-based 1984-90
banking sectors, pension manufacturing (food and beverages, basic – 5.9% real GDP CAGR
privatization, labor reforms) metals), mining (copper), and financial services – Boom in exports: from
▪ Controls on inflows of FDI to 24% of GDP to 34%
increase stability 3 Enabling sectors – FDI as percent of GDP
doubled on average
▪ Active state support (through between 1984 and1990,
R&D, training, financing, and
▪ Early growth in financial sector was a crucial
enabler for growth in all other sectors: broader and was 4 times the
marketing) of targeted non- Latin American average
and cheaper access to capital
traditional industries
▪ Set the basis for strong
particular success in salmon
continued social and
and wine, together ~2.5% of 4 Enabling policies and institutions economic growth
GDP growth
– 6.5% real GDP growth
▪ Copper industry remained throughout the 1990s
nationalized to fund state ▪ Liberalization, privatization, political stability
(although authoritarian), and close ties to US all – By 2009, eliminated
contributed to high levels of FDI USD ~2/day poverty
(down from 1/4 of
population prior to the
5 Implementation reforms)
– Life expectancy at birth
▪ Authoritarian, military government had total control over economy and institutions increased from 69 to 79
during most radical reform periods (Phase I and Phase II) years (largely due to
▪ Cold War politics insured high levels of investment from US and Japan drop in infant mortality)
▪ No comprehensive delivery unit, although Fundación Chile established to drive
– Increased tertiary
enrollment from 12-55%
development of new target industries (e.g., salmon)

OVERVIEW MALAYSIA – GROWTH PERIOD 1975-90
Malaysia's growth was led by export-oriented manufacturing sectors
▪ Economic development ▪ Malaysia shifted dramatically from a resource exporting economy towards a ▪ Real GDP growth of
was a priority to manufacturing economy 6.8% p.a. between
provide economic ▪ In 1970, ~95% of Malaysia's exports were resource based, in 1990 only 1975 and 1990
opportunities for all ~50% were natural resource-based with manufacturing taking over ▪ Per capita GDP growth
racial groups and – Electronics was the largest single contributor to growth of 4.1% in the same
provide funds for – Rubber and palm oil products continued as a significant but shrinking time period
redistributive policies proportion of the economy
▪ The overall strategy – Mining, primarily Tin, was also a large but shrinking proportion ▪ Increase in life
was to diversify – away expectancy of 6 years
from a resource-based from 64 to 70 between
economy towards a
3 Enabling sectors 1975 and 1990
manufacturing exports ▪ Large investments in transport infrastructure, in part funded by portfolio FDI, ▪ Increase in adult
economy helped lay the ground work for export-led growth literacy a from 69.5% in
▪ This was assisted by ▪ Significant improvements in education have helped provide the educated 1980 to 82% in 1991
the development of workforce required while training centers and higher learning centers, often ▪ Major shift from
EPE's, aggressive partly government funded, sprung up around EPZs to provide skilled labor resource-based
courting of FDI, and economy to
multinational corpo- 4 Enabling policies and institutions manufacturing
rations with the aim to economy
receive technology ▪ The establishment of 3 EPZs in Penang, Klang Valley, and Johore from 1972
transfer and FDI from greatly supported manufacturing
these companies to ▪ FDI was deliberately courted and a favorable investment climate established
spur growth through the Investment Incentives Act and Promotion of Incentives Act
▪ Multinational corporations in particular were courted to take advantage of the
abundant educated labor with incentives such as pioneer status, investment
tax credits, accelerated depreciation allowances, and export refinancing
facilities in EPZs
5 Implementation
▪ Implementation was very top down driven with Prime Minister Mahathir personally driving certain projects
▪ The Prime Ministers Office' Economic Planning Unit (EPU) had input and a view across all development work
and crucially also controlled the development budget which sits separately to the operating budget
▪ The Ministry of International Trade and Industry (MITI) played a leading role in implementing industrial policy
and the EPZs and regularly sought private sector feedback in improving implementation

OVERVIEW MOROCCO – GROWTH PERIOD 2000-10
Morocco's growth was focused on export and foreign markets
▪ Morocco's growth ▪ Specialized policies to promote selected sectors generally include ▪ Real GDP growth of
strategy focused on liberalization, infrastructure and service enablers, and financial incentives 4.9% p.a. (2000-10)
catalyzing growth in – Tourism: tax subsidies, aid for training and land, liberalized air transport ▪ Exports increased from
sectors where it had a – Agriculture: land reform and introducing aggregators to help subsistence 28% of GDP to 37% of
competitive advantage farmers move to commercial farming GDP (2000-07)
▪ Increased connection to
– Manufacturing: special economic zones created with administrative
foreign markets both as ▪ 5 fold increase in FDI
efficiency, tax incentives, vocational training, services, and infrastructure (2000-08)
source of capital (FDI)
and demand (BPO, ▪ Stable economic
manufacturing, tourism) 3 Enabling sectors growth – grew above
▪ Balance of cross-cutting 3.5% throughout global
"transversal" reforms ▪ Reduced gov. ownership in financial industry and opened to foreign financial crisis
and focused sector ownership, increasing availability of credit
▪ Secondary school
development ▪ Built highways to facilitate internal trade and ports to facilitate external trade enrollment increased
– Transversal and act as hub from 38% to 56% in
reforms include ▪ Created vocational training institutes to produce talent for target sectors 2000-10
economic stability
with prudent fiscal 4 Enabling policies and institutions
and monetary
policies, free trade ▪ Prudent monetary policy reduced inflation and interest rate volatility
agreements ▪ Fiscal policy enabled debt reduction and investment in growth
– Sectors developed ▪ Liberalized trade with free trade agreements with the EU, the US, Turkey,
with focused Middle East
incentives and ▪ Provided tax breaks and investment incentives
reforms, SEZs, ▪ SEZs – clusters created to provide a more business-friendly environment
vocational training, ▪ for FDI
and infrastructure ▪ Privatized creation and operation of SEZs to be more flexible and efficient.
5 Implementation
▪ Reforms led by the King and Prime Minister focused on catalyzing broad support and circumventing bureaucracy
▪ Focused on quick wins with competitive advantages, high willingness to reform, and high job potential
▪ Formed committees involving stakeholders to plan sectoral reforms; committees reported to PM
▪ SEZ implementation units were private or public firms, financed by the government and private sector partners

OVERVIEW GEORGIA – GROWTH PERIOD 2000-08
Georgia's growth was based on a truly neoliberal approach
▪ Since mid-1990s, ▪ Neoliberal approach focusing on general enablers rather than selecting ▪ Real GDP CAGR of
gradual liberalization – industries 7.6% leading to 80%
joined WTO ▪ Growth occurred in sectors sensitive to location, efficient government increase in GDP per
▪ After Rose Revolution and low taxes: driven by trade, transport, and manufacturing (notably non- capita (2000-08)
(2004), focus on metallic materials) ▪ 11% increase in
creating a business- secondary school
friendly environment to enrollment (2000-08)
attract FDI and ▪ Ease of doing business
leverage location in ranking from 114 to 8
3 Enabling sectors
non-business-friendly (2005-10)
but fast-growing area – ▪ Reforms focused on improving infrastructure and service levels using ▪ FDI increase from 130
on shortest route bet- privatization and deregulation million to 1.6
ween CIS and Europe ▪ Only sector with overall proactive government policy was energy due to billion(2000-08) –
neoliberal policy strategic importance CAGR of 36%
focusing on general ▪ Difficulties reforming controversial/complex areas such as education ▪ Time for container
enablers such as and healthcare clear customs from 52
improving gov. ▪ More success in areas with relatively fewer stakeholders, e.g., finance to 2 days (2006-10)
services, creating low ▪ Only 3% of Georgians
flat tax, and reducing paid bribe in 2010
4 Enabling policies and institutions
corruption
▪ Time to start a busi-
▪ Believed had 1 year to ▪ Established rule of law, e.g., reduced corruption using no-tolerance ness fell from 25 to 3
capitalize on revolution approach – fired 40,000 traffic policemen and instituted jail time for petty days (2004-08)
momentum – used corruption
unplanned and ▪ Liberalized labor and trade laws and introduced low flat tax rate
decentralized approach ▪ Ran prudent fiscal and monetary policy to promote economic stability
for speed
5 Implementation
▪ Customer-centric approach to government focused on improving services and reducing corruption
▪ Focus on getting things done immediately and visibly, rather than careful planning and strategizing –
encouraged public sector units to innovate and develop own initiatives, not wait for top-down instruction
▪ One consolidated budget and aligned incentives to outcomes, e.g., bonuses related to increasing process
efficiency
▪ Improved public sector caliber by firing corrupt officials, increasing salaries, and providing exit opportunities

Success factors from new country growth stories (1/3)
Success factors Examples
1 Ensure strong leadership: make sure that

system leaders at the highest level are publicly
committed to the transformation and are
▪ Malaysia: powerful prime minister, associated with
and engaged in reform program
substantially engaged in driving the progress
2 Get the facts on the table: start with a rapid,

pragmatic health and performance assessment,
▪ Chile: El Ladrillo – self-assessment of economic
situation in Chile
creating clarity on root causes to be addressed ▪ Morocco: 6-month "country diagnostic" before start
of reform program
3 Focus, focus, focus: focus on a few, highly

catalytic interventions by prioritizing visible
quick wins and high returns on investment
▪ Morocco: focus on target sectors
▪ Chile: privatization of financial sector and utilities
▪ Georgia: prioritization by improving government
effectiveness and eliminating corruption
4 Push the supporting sectors: early growth in

financial sector allowing for cheap access to
capital; investments in infrastructure to lay the
▪ Chile: early growth in financial sector through de-
regulation and foreign capital flows as crucial
enabler for growth in all other sectors
groundwork for export-led growth and internal ▪ Malaysia: large investments, in part funded by joint
trade ventures with private sector, in transport
infrastructure helped lay the groundwork for export-
led growth

5 Institutionalize a delivery engine: use a new

or existing organization to set clear targets,
▪ Malaysia: the Prime Minister's Office EPU had input
and view across all development work and
controlled development budget
monitor progress, hold individuals accountable,
and intervene as necessary to remove bottle- ▪ Morocco: Implementation units for SEZs autono-
necks or resolve issues mous from government – financial, operational, and
pay flexibility enabling hiring of high-caliber people
Align the stars for implementation: ensure ▪ Malaysia: innovative delivery-lab approach to
6 working-level collaboration in planning and
implementation across public institutions as
breaking down silos and cocreating plans
well as the private sector

Empower entrepreneurs to drive change – ▪ Chile: setup of a national incubator ("Fundación
7 both in the private and in the public sector Chile") to nurture private sector growth
Learn as you go: build capabilities and ▪ Morocco: model factories for SMEs
8 capacity in private and public sectors by
applying adult-learning principles and integrate
▪ Georgia: improved public sector caliber by firing
corrupt officials, increasing salaries and providing
learning directly into working exit opportunities
▪ Malaysia: EPU holds development budget to
9
Make the money support your ambitions:
ensure that all fundings – government fund 5-year plan
budgeting, private finance, and ODA – supports
the strategic plan and incentivizes effective
implementation

10 Educate workforce: educated workforce is a ▪ Malaysia: significant improvements in education

prerequisite for long-term growth but not its driver helped provide the educated workforce required,
multinational corporations in particular were
courted to take advantage of the abundant
educated labor
11 Create a favorable business environment:

create an environment that is very conducive
▪ Georgia: far-reaching reforms, incl. labor market,
monetary and fiscal policy, liberalized trade laws,
towards businesses, incl. legislation and and anticorruption efforts, improved business
institutions environment to most favorable in the CIS region
▪ Morocco: investor-friendly policies focusing on
ease of trade, stability, and incentives to attract FDI
resulted in 500% growth in FDI from 2000-08
12 Gain access to larger economic areas:

integration and access to larger and wealthier
▪ Morocco: free trade agreements with the EU, the
US, Turkey, and the middle East led to increased
trade area(s), both as a source of capital and connection to foreign markets both as source of
demand capital (FDI) and demand (BPO, manufacturing,
tourism)

Details country analysis to be found in
separate document New growth models

Contents


models of growth

Research has shown that 4 areas must be addressed to ensure
sustainable growth
Business environment, institutions, and

policies
▪ Government capability building
▪ Establishing professional networks to support the
economic growth, leveraging Dolphyn's own network
and expertise
Financial market and availability of capital

▪ Funding start-ups
▪ Facilitating investments
Infrastructure
▪ Facilitating large-scale investments and PPPs in
selected key sectors
Human capital
▪ Improving quality and enrollment in education to ensure
well-trained workforce and availability of talent
SOURCE: WEF; World Bank; McKinsey McKinsey & Company | 94

Armenia, IDeA and Dolphyn have many opportunities to create a more
sustainable growth environment (1/2) RECOMMENDATIONS
Country Dolphyn
▪ Diversify away from resource-based ▪ Create a national development roadmap,
exports by supporting the creation of supporting Armenia's sectors with the strongest
highly skilled jobs potential for GDP and job growth (e.g., IT, tourism)
Business
– Support start-ups and the creation of ▪ Support companies in these focus sectors in
environ-
SMEs in selected sectors such as IT their development, e.g., by
ment
(e.g., through facilitation of credits, tax
institu-
incentives)
– Pairing domestic institutions with skilled diaspora
tions and for expert advice, source of talent, and funding
policies – Improve the business environment – Being an advocate for fair market competition
(e.g., reduce incentives to join the
(e.g., communicate publicly if companies
informal sector, remove barriers to
supported by Dolphyn face unfair competition)
entry and competition)
▪ Improve the business and investment ▪ Support companies in attracting more FDI
climate – Connect diaspora to Armenian entrepreneurs
Financial ▪ Approach multinationals in manufacturing – Support potential investors in navigating the
market and tradable services and incentivize Armenian bureaucracy
and avail- them to relocate activities to Armenia
ability ▪ Create an incubator to provide start-ups with
of capital financial and training support
▪ Attract multinationals to Armenia and support them
with setting up their operations
▪ Work with private companies to realize ▪ Establish an investment board to facilitate large-
large-scale investments scale investments and PPPs in selected key
sectors
Infra- ▪ Improve the business environment to
structure attract FDI flowing into infrastructure ▪ Support companies in selected sectors such as IT
to establish required infrastructure
▪ Incentivize infrastructure investments,
e.g., through tax incentives
Armenia, IdeA and Dolphyn have many opportunities to create a more
sustainable growth environment (2/2) RECOMMENDATIONS
Country Dolphyn
▪ Improve the quality of teachers, e.g., ▪ Support the systematic improvement of
through regular training post university Armenia's school system
▪ Engage employers in the design of – Get involved in the design of a modern curricul-
academic curricula um that serves the needs of the economy in
▪ Institutionalize vocational training partnership with the government
– Centers to train teachers and support their
professional development, e.g., through classes,
forums, peer learning
▪ Improve the vocational training system
– Establish own vocational training institutes,
potentially in cooperation with employers
Human – Support training of workforce in cooperation with
capital their employers
▪ Improve the higher education system
– Connect Armenian universities with employers in
Armenia and the diaspora to foster exchange
and design of a modern curriculum incl. practical
elements
– Support universities to establish English as the
main language to attract international students
and ensure that graduates are attractive for
future employers
– Provide scholarships to Armenian and
international students

Backup

A mismatch in GDP units showed Armenia's development worse
than in reality
The updated scenario chart was based on We updated the diagram with consistent units
incorrect units for the Armenia GDP development1
15
Armenia
Singapore
10
Ireland
Israel
5
Paraguay
0
1990 94 98 2002 06 10 14 18 2022
Original data until Updated data since

2002: GDP PPP 2006: GDP PPP per Consistent units for all curves:
per capita in capita in current GDP PPP per capita in
constant 2002 international dollars as constant 2010 USD
USD reported by IMF
1 Screenshot: Armenia and Armenian world, RVVZ and IDeA, Oct 2014
SOURCE: Armenia2020; Global Insight; World Bank; IMF; RVVZ; IDeA McKinsey & Company | 98
Armenia's GDP growth was significantly higher in nominal terms
due to the relatively high inflation rate in recent years X%
Growth rates (based on
growth rates for real GDP)
GDP per capita, current USD
Armenia ▪ 3 different units are typically

7,000 used for the GDP
6,500 – Nominal: GDP in the
current value of a currency
6,000
14.6% – Real: removes effect of
5,500 inflation of the local
4.8% currency on the GDP
5,000
– PPP adjusted1: accounts
4,500 for different purchasing
power of different
4,000 20.7% currencies
3,500 ▪ Due to the relatively high
inflation rate of ~5-8% in
3,000 Armenia during the last years,
2,500 Singapore 6.1% the nominal GDP per capita
grew significantly stronger
2,000 than in real values
Ireland 4.5%
1,500 ▪ The growth rates assumed for
Israel 2.6% the 4 scenarios are based on
1,000 Paraguay real GDP, i.e., do not consider
0.1%
the effect of inflation
500
▪ Showing PPP-adjusted values
0 does not change the growth
1994 98 02 06 10 14 18 2022 rates
1 PPP: purchasing power adjusted; can be used both in nominal and in real units
SOURCE: Global Insight; Armenia2020 McKinsey & Company | 99

Similarities of new models of growth with Armenia Similarity
Armenia Chile Malaysia Morocco Georgia
Population 2.98 million 17.62 million 29.72 million 33.0 million 4.48 million
Income level1 7,500 21,400 22,600 7,000 6,900
Political system Semipresidential Presidential constitution- Constitutional Constitutional Semipresidential

republic; 23 years al republic; 204 years of monarchy; 57 years monarchy; 58 republic; 23 years of
independence independence of independence years of independence
independence
Natural resources Limited: construction Limited: copper, some Metals, natural gas, Limited: phos- Farming, minerals,
materials, metals, timber agriculture phates, metals, metals, fish
agriculture salt, fish
Access to sea Landlocked Pacific ocean South China Sea, Mediterranean Black sea
Gulf of Thailand, Sea, Atlantic
Andaman Sea Ocean
External environment Strong dependence on Some border tension Border tension with Dependence on Tensions with
Russia, hostility towards with Peru and Antarctica Philippines, France and Spain, Russia
Turkey and Azerbaijan disputes with sovereignty conflict
Singapore over raw over Western
water Sahara
Presence of diaspora 5-6 million people of Less than 1 million Up to 1.5 million 4.5 million people More than 3 million
Armenian descent Chileans abroad Malaysians abroad of Moroccan Georgian diaspora
abroad descent abroad members
1 GDP per capita, PPP (constant 2011 international dollar)
SOURCE: Source McKinsey & Company | 100

Syria – 30 years with the right of correspondence Not realized
in Armenia
Fully realized
in Armenia
Red tape and inefficient Lowered burden of governments regulation Burden of government regulation
administration in Armenia, but still high bureaucracy 2006: rank 69/144 countries (lower rank = better)
2014: rank 34/144 countries
Bureaucracy: 2006 and 2014 lowest 20th percentile
Strong army Military expenditures increased, however, Military expenditures
Country country not led by strong army 2003: 2.7% of GDP
level 2014: 4.1% of GDP
Trade restrictions with No major development over last decade – n/a
Turkey and Azerbaijan trade restrictions in place
No liquid stock markets While growing, Armenian stock market still Stocks traded <1% of GDP (2013: USD 45 million,
insignificant 14 companies traded)
Monopolies and unfair Monopolies still prevalent in Armenia Effectiveness of antimonopoly policy
competition 2006: rank 114/144 countries
2014: rank 105/144
Industry Ethical behavior of firms
level 2006: rank 100/144 countries
Large informal economy Stable share of large informal economy 2003: 44% of GDP (rank 124/151 countries)
2013: up to 40% of GDP
Poorly trained labor Armenia ranks constantly low on quality of Quality of primary education
education 2006: rank 85/144 countries
Quality of higher education
Company 2006: rank 68/144 countries
level 2014: rank 86/144 countries
Low level of investments Stable investment ratio, but low compared Gross capital formation
to regional peers 2003: 24% of GDP
2013: 22% of GDP
Rank 9 out of 10 regional peers2
1 Latest data available 2 Belarus, Kyrgyzstan, Kazakhstan, Georgia, Azerbaijan, Moldova, Uzbekistan, Tajikistan, Russia
SOURCE: Armenia 2020 Scenarios Book; WEF Global Competitiveness Report; World Bank; NASDAQ OMX Armenia;
Friedrich Schneider: “Shadow economies all over the world”, 2010; Armbanks; PRS
3 The Armenian productivity has always been significantly lower than that
of Germany across all sectors and even declined after the financial crisis
Mi
Productivity1, 2003
Germany = 100%
▪ Highest productivity was achieved in

construction sector
▪ Until the financial crisis, Armenia improved its
productivity from ~5-12% of Germany's
30
average productivity
Construction ▪ After the financial crisis, the gap to Germany's
productivity increased again
6
Finance and business services2
6 2013: Ø 10
8
6 Industry
4 2008: Ø 12
Trade, transport 2002: Ø 5
Manu- 3
and hospitality Agriculture3
facturing Other services
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
0
Share of employees
Percent
1 GDP per employee 2 Incl insurance 3 Incl forestry and fishing
Note: Detailed sector allocation in backup
SOURCE: German Federal Statistics Department; National Statistical Service of the Republic of Armenia (NSSRA) McKinsey & Company | 102
Productivity comparison between Armenia and Germany: Sectors matched
based on data availability
Aggregated
categories based
on data availability Individual Armenia components Individual Armenia components
Finance and ▪ Agriculture, hunting and forestry
▪ Agriculture, hunting, forestry and fishing
business ▪ Fishing
services
▪ Mining and quarrying ▪ Mining and quarrying
▪ Electricity, gas, steam and air conditioning supply
Industry ▪ Electricity, gas and water supply ▪ Water supply, sewerage, waste management and
remediation activities
Manufacturing
▪ Manufacturing ▪ Manufacturing
Construction
▪ Construction
▪ Construction
▪ Wholesale and retail trade; repair of motor vehicles, ▪ Wholesale and retail trade; repair of motor
motorcycles and personal and household goods vehicles, motorcycles
Trade, transport
▪ Hotels and restaurants ▪ Transportations and warehouse economy
and tourism
▪ Accommodation and food service activities
▪ Transport and communication
▪ Information and communication
▪ Financial intermediation ▪ Financial and insurance activities
Finance and
▪ Real estate activities
business
services
▪ Real estate, renting and business activities ▪ Professional, scientific and technical activities
▪ Administrative and support service activities
▪ Public administration ▪ Public administration
▪ Education ▪ Education
▪ Health and social work ▪ Human health and social work activities
Other services
▪ Other community, social and personal service activities ▪ Arts, entertainment and recreation
▪ Other service activities
▪ Activities of private households as employers and
undifferentiated production activities of private
▪ Activities of private households as employers and
undifferentiated production and services activities
households
of private households for own consumption

Armenia's Economic Growth and Future Potential

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Armenia's Economic Growth and Future Potential

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Armenia2020 updated

CONFIDENTIAL AND PROPRIETARY

1 PPP, real, 2003-13

McKinsey & Company | 1

▪ In terms of creating a growth-enabling environment, such as business environment, assets, and

1 Foreign direct investment

McKinsey & Company | 2

McKinsey & Company | 3

▪ Snapshot of the Armenian economy today and its

▪ Armenia's development in context of Armenia2020's

▪ Sector deep dives – actual development vs. potential

▪ Emerging new models of growth

▪ Armenia's way forward

McKinsey & Company | 4

McKinsey & Company | 5

Strong growth, largely Financial crisis hits the ▪ Transition to market

SOURCE: IMF McKinsey & Company | 6

Russia 14.3 4.5%

SOURCE: Global Insight McKinsey & Company | 7

GDP1 composition, 2003 GDP1 composition, 2013

SOURCE: World Bank McKinsey & Company | 8

Exports as share of GDP Bubble size proportional Bubble size proportional

SOURCES: World Bank McKinsey & Company | 9

2002 04 06 08 10 12 2013 Label

McKinsey & Company | 11

1 Gross capital formation

SOURCE: World Bank McKinsey & Company | 12

Exports CAGR, CAGR,

1 Mainly travel (55% of services), transportation (22%), and IT (8%)

SOURCE: World Bank; ICT McKinsey & Company | 14

Breakdown of goods exports

SOURCE: Oxford Policy Management; FAO; ICT McKinsey & Company | 15

Price increase between 2002 and 2013 Price

Fresh fish Glass bottles

SOURCE: The Observatory of Economic Complexity; Bloomberg McKinsey & Company | 16

While FDI played an important role before the

Forecasts for basic metals and minerals suggest that

Armenia’s productivity is still low, even compared

Strong link to Russia might hinder future growth as

Sectors identified within Armenia2020 have not

McKinsey & Company | 17

2,500 2,397 2,400 Aluminium

Productivity, GDP PPP per employee, USD thousands CAGR, 2002-13

1 US productivity in 2013: ~ USD 117k

SOURCE: Global Insight McKinsey & Company | 20

▪ Highest productivity is achieved in finance sector

Exports to Imports from Remittances FDI stock

SOURCE: World Bank; UN Comtrade database; UNCTAD McKinsey & Company | 22

Middle East ▪ Exports to the

SOURCE: Oxford Policy Management; FAO; ICT McKinsey & Company | 24

Impact of 1 percentage point fall in ▪ Armenia has

1 Armenia, Georgia, Kyrgyzstan 2 GDP, PPP, real 2010 USD

Real productivity growth

Sector employment growth Sector employment growth

1 Mining 5 Construction 9 Industrial machinery 13 Retail and wholesale

3 Telecommunications 7 Food processing 11 Construction materials 15 Transportation

McKinsey & Company | 27

environment Lowest 20th percentile (worst)

Business environment Assets Education

Business environment Assets Education

1 Control Government 3 Quality 3 Quality

Monopolies are prevalent,