Fitch Affirms Armenia at ‘BB-‘; Outlook Stable

Fitch Ratings has affirmed Armenia’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BB-‘. The issue ratings on Armenia’s senior unsecured foreign and local currency bonds are also affirmed at ‘BB-‘. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling is affirmed at ‘BB’ and the Short-term foreign currency IDR at ‘B’.


The affirmation of Armenia’s sovereign ratings reflects the following key factors:

– Fiscal outturns came in below budget for the second consecutive year in 2013. Due to higher-than-expected tax revenue and under-spending on large foreign-financed projects, Fitch estimates that the fiscal deficit remained virtually unchanged from 2012 at about 1.6% of GDP in 2013, compared with a projected 2.6% in the budget law.

– Debt dynamics are likely to remain fairly favourable, with debt/GDP expected by Fitch to fall slightly in 2014 and remain broadly stable thereafter. However, because 84% of public debt is foreign-currency denominated, Armenia’s debt profile is vulnerable to exchange rate shocks. The pension reform currently being passed should help to develop the domestic financial market, although this will take time.

– Fitch estimates GDP growth to have fallen to about 3% in 2013, down from 7.2% in 2012, mainly because of a slowdown in public investment, a poor agricultural season and a temporary rise in gas prices. Fitch expects growth to recover gradually, to about 4% in 2014 and 5% over the longer term.

– Fitch estimates the current account deficit (CAD) to have narrowed to a still-high 8.2% of GDP in 2013, from 11.2% in 2012, and is expected to shrink gradually over the forecast period. The improvement was primarily due to a significant rise in the income and transfers surpluses. A narrowing of the CAD, together with Armenia’s first sovereign eurobond issue, helped to generate a modest increase in foreign currency reserves.

– The Central Bank of Armenia (CBA) is allowing exchange rate flexibility, despite high dollarisation. Armenia’s ratings are supported by a fairly strong macroeconomic framework and an inflation track record in line with ‘BB’-rated sovereigns. Macroeconomic policy management has benefitted from a series of IMF programmes dating back to 2005 and Armenia recently agreed a further USD125m extended fund facility for 2014-17.

– Bank risks to sovereign creditworthiness are mitigated by a strong loss absorption capacity and by predominantly foreign ownership of banks. Despite having slowed in 1H13, lending growth remains high, notwithstanding CBA’s attempts to dampen growth in foreign currency lending.

– Armenia’s recent agreement to join the Russian-led customs union instead of the EU Eastern Partnership Programme underlined its strong ties with Russia. Entering the customs union will allow for a reduction in gas prices, thereby reducing the import bill and improving Armenia’s terms of trade. However, given the already predominant share of Russia in Armenian external trade, joining the customs union is unlikely to affect trade flows significantly.


The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the ratings are currently well balanced. Consequently, Fitch’s sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change.

The main factors that, individually or collectively, could lead to positive rating action are:

-Ongoing improvement in the current account deficit and a stronger reserve position

-Reducing public debt/GDP at a faster rate than Fitch’s baseline

-A track record of sustainably low fiscal deficits without affecting GDP growth would improve creditworthiness, especially given a forecast rise in sovereign external funding costs

The main factors that, individually or collectively, could lead to negative rating action are:

– Material slippage in the performance of public finances leading to a rise in the debt/GDP ratio

– A sharp depreciation in the exchange rate worsening solvency risks, given the government’s largely foreign currency-denominated debt. This would pose risks to the financial system in view of the high level of dollarisation

– An escalation of tensions with Armenia’s neighbours


The ratings and Outlooks are sensitive to a number of assumptions:

-Fitch assumes that real GDP growth and fiscal outturns do not deviate greatly from its forecast, and that any spillover from slowing growth in Russia is contained

-Fitch assumes that there is no material shift in Russia’s policy towards Armenia

-Fitch assumes that a sharp downswing in metals prices is avoided. Mining exports, especially copper, account for nearly half of Armenia’s goods exports.

-Fitch assumes that Armenia continues to enjoy broad social and political stability, and that there is no significant worsening in tensions with Azerbaijan surrounding Nagorno-Karabakh

-Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key macroeconomic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. It also assumes that the risk of fragmentation of the eurozone remains low.

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