Fitch revises outlook on Armenia to negative due to “coronavirus shock”

Fitch Ratings has revised the Outlook on Armenia’s Long-Term Issuer Default Ratings (IDR) to Negative from Stable and affirmed the IDRs at ‘BB-‘.

Fitch says the coronavirus shock negatively affects the Armenian economy due to its exposures to commodities (a majority of exports), the Russian economy (for remittances, trade and FDI) and to tourism, only partially offset by the benefit of a lower oil price. This is in the context of Armenia’s relatively high net external debt and structural current account deficit, which is only partly financed by non-debt creating capital inflows.

Despite a robust macroeconomic policy framework and continuing commitment to reform, the economic shock has put public debt on a markedly higher trajectory, and there are downside risks to the forecasts should the COVID-19 outbreak not be contained in 2H20 in line with Fitch’s current baseline assumption.

“We forecast the coronavirus shock will drag down GDP growth from 7.6% in 2019 to 0.5% this year. Growth accelerated in 2H19 to 7.9%, and momentum remained strong in 2M20, providing some offset to the sharp contraction expected in 2Q20. The government has announced a state of emergency, with a support package totaling 2.3% of GDP, and the central bank has cut interest rates by 25bp to 5.25% following a fall in inflation to an average -0.1% in the first two months of 2020,” Fitch says.

Fitch projects that GDP growth partially recovers in 2021, to 5.5%, supported by a rebound in external demand, investment catch-up, and revival of private consumption and employment growth, with a moderate drag from fiscal tightening.

Fiscal stimulus and weak growth will push out this year’s general government deficit to a forecast 5.0% of GDP in 2020, up from 1.0% in 2019. The government’s coronavirus stimulus package has a focus on social support, subsidised lending, and loan refinancing and risk-sharing, with a high degree of uncertainty over how much will ultimately fall on the government balance sheet.

“Fitch anticipates additional fiscal measures including to directly support employment, partly offset by under-execution on capital projects and some reprioritisation of non-essential recurrent spending this year. We forecast the general government deficit will narrow to 3.5% of GDP in 2021, on the back of stronger GDP growth and a partial unwinding of support measures, underpinned by the government’s strong commitment to its medium-term fiscal targets,” Fitch said.  

General government debt is projected to rise from 53.6% at end-2019 to 59.2% of GDP in 2020 before falling back to 56.0% in 2021, upward revisions of 9.4pp and 7.4pp, respectively, since the last review, and well above the current ‘BB’ median of 46.5%.

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