Tuesday, November 22 2011 18:51
Moody's changes Armenia's sovereign outlook to negative
ArmInfo. Moody's Investors Service has changed to negative from stable the outlook on Armenia's Ba2 foreign and local currency issuer ratings, Finmarket reported.
The outlook change reflects:
(i) Risks to Armenia's growth outlook in the coming years given the anticipated economic slowdown in Europe and Russia, its main trading partners, and the impact of potentially weaker commodity prices for the country's mining and metals industries.
(ii) Concerns about the deterioration of Armenia's debt metrics and external position following the 2009 recession and its impact on the country's shock-absorption capacity as it enters another period of heightened economic uncertainty.
Moody's decision to change the outlook on Armenia's sovereign ratings to negative is primarily driven by the country's ongoing economic vulnerability to the weaker growth prospects in Europe and Russia, which together account for 58% of Armenia's export market. In particular, Armenia's reliance on exports to, as well as remittances and foreign direct investment from, Russia poses risks to its external position. In addition, potentially lower commodity prices could further affect the Armenian economy as exports are concentrated on mining, precious stones and metals (representing 73% of exports in 2010). Although Moody's currently still expects moderate growth in the next two years, the rating agency believes that the downside risks are significant given the weak global economic growth outlook.
The second driver of the outlook change is the risk to Armenia's shock-absorption capacity as the country enters another economically challenging period with weakened debt metrics and a more vulnerable external position. Moody's notes that the country is now faced with a large current account deficit (estimated to be 11% GDP in 2011) and a government external debt ratio that has doubled to 35% in 2011 from 14% of GDP in 2008. Its total debt burden in relation of GDP is now 39% compared with 16% in 2008.
Despite the change in outlook, Moody's notes the government's commitment to fiscal consolidation, as illustrated by the measures contained in the draft 2012 budget law which are aimed at reducing the general government deficit to 3.1% of GDP next year. These measures are in addition to the government's efforts to enhance the efficiency of tax collection. The impact of such measures however will remain unclear for some time and the implementation risks to the fiscal consolidation plan are significant, particularly given the uncertainty surrounding Armenia's growth prospects. As discussed above, the expecteed economic slowdown in Europe and Russia poses risks to Armenia's growth outlook.
Concurrent with this action, we have revised to negative the outlook on the Ba3 country ceiling for foreign- currency deposits. At the same time, the country ceiling for local-currency debt was downgraded to Baa1 from A3, bringing it in line with the country ceiling for local-currency deposits, which was affirmed at Baa1. The country ceiling for foreign-currency debt was affirmed at Baa3 and its outlook remains stable.
Although unlikely in the short-to-medium term, Moody's would consider changing the rating outlook on Armenia back to stable in the event of a dissipation of the risks posed by the country's external vulnerability to low growth prospects among its main trading partners.
Moody's would consider downgrading Armenia's sovereign ratings in the event of (i) a failure to achieve its fiscal deficits reduction plan; and/or (ii) a continued large current account deficit caused by prolonged weakness in commodity prices and/or remittances; and/or (iii) a decline in FDIs, thereby eroding the sustainability of the country's external position.
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