Friday, September 2 2011 18:06

Fitch affirms Armenia at 'BB-'; outlook stable

ArmInfo. Fitch Ratings has affirmed Armenia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-'. The Outlook on the Long-term IDRs is Stable. At the same time, Fitch has affirmed the Short-term foreign currency IDR at 'B' and Country Ceiling at 'BB'.

"The affirmation of Armenia's ratings reflects the fact that the authorities are reducing fiscal and external imbalances in line with their IMF-backed economic policy programme," says Charles Seville, Director in Fitch's Sovereign group. "However, the economy is vulnerable to external shocks. Government debt and gross external debt are materially higher than they were before the 2008-2009 crisis."

Fitch expects the government to reduce the fiscal deficit to 3.9% of GDP in 2011. Withdrawing fiscal stimulus, the government narrowed the deficit to 5% of GDP in 2010. Consolidation plans rely on a mixture of restraining spending and increasing tax collection - a perennial challenge. The government is targeting further reduction to 3.2% of GDP in 2012, an election year.

The current account deficit (CAD) has narrowed in 2010-2011, driven by a revival in exports. This trend is expected to continue in 2012-2013. A forecast deficit of 12% of GDP in 2011 will be financed by external borrowing and FDI of around 6% of GDP.

External debt repayments will rise in 2012-2013 but remain low compared with the 'BB' median. The 60% share of sovereign debt in gross external debt (GXD), mostly on concessional terms, mitigates the high GXD of 69% of GDP.

Fitch forecasts real GDP growth of 4%-5% in 2011-2013, close to medium-term potential growth. Economic activity expanded by an average 5% in January-July 2011, driven by industry, agriculture and services, as well as higher commodity exports and remittance inflows. The government is seeking to improve the business environment and rebalance the economy towards productive and export-generating activities.

Growth at this level is sufficient to stabilise general government debt at around 40% of GDP, barring further fiscal or exchange rate shocks. However, as almost 90% of government debt is foreign-currency denominated, the solvency ratio is unusually sensitive to exchange rate movements.

The Central Bank of Armenia's (CBA) recent interest rate hikes have reduced pressure on the exchange rate and helped bring down inflation in August to 4.8%, within its target range, the upper limit of which is 5.5%. The CBA is reducing dollarisation and strengthening the role of the dram. Dram depreciation would aid competitiveness and external adjustment but remains a risk to the external balance sheet and inflation.

Emerging from the 2009 recession without requiring solvency support, the small, well-capitalised financial sector does not pose a major risk to sovereign creditworthiness. Write-offs have reduced non-performing loans to 3% of assets from a 2009 peak of over 10%. CBA is tightening regulation and encouraging local currency lending.

Pressure on reserves or the dram - following a global slowdown or shock to Russian growth - would weaken the external balance sheet and could lead to negative rating action. Armenia's ability to absorb further external shocks has been weakened by the crisis, which pushed up government debt to 40% of GDP (in line with the 'BB' median) and GXD. Renewed domestic or external (surrounding Nagorno-Karabakh) political tension could also lead to negative rating action.

If Armenia follows through with fiscal reforms and narrow the twin deficits sustainably, this would put upward pressure on the ratings. A sustained reduction in dollarisation would also be positive.

RUB	4.56	0.06
USD	383.47	0.72
EUR	449.96	2.75
GBP	519.91	2.59
CAD	277.17	1.47
JPY	25.95	0.08
CNY	53.85	0.12
CHF	481.44	2.76

News

Fitch affirms Armenia at 'BB-'; outlook stable