Wednesday, August 21 2013 14:17
Rating Action: Moody's changes outlook on Armenia's Ba2 rating to stable from negative, affirms rating
ArmInfo. Moody's Investors Service has changed the outlook on Armenia's Ba2 government bond rating to stable from negative and affirmed the rating.
According to Moody's report, the key drivers of the change in the outlook are: Armenia's commitment to multi-year fiscal consolidation, driven partly by a steady revenue mobilization; a gradual reduction in Armenia's still large current account deficit at 11.1% of GDP at year-end 2012, supported by an improving income balance; and access to external funding sources on favorable terms, including significant private remittances, FDI inflows and official lending sources.
Moody's has also changed the local-currency ceiling in Armenia to Baa3 from Baa1.
The first driver of Moody's decision to stabilize the outlook and affirm Armenia's Ba2 rating is the authorities' commitment to fiscal consolidation, as reflected in the reduction of its deficit to 1.5% in 2012 from 7.5% in 2009. This was partly achieved through improved revenue mobilization, but also by cuts to capital expenditures. Moody's expects a fiscal deficit of 2.6% and 2.1% in 2013 and 2014, respectively, to reflect the costs of pension-reform implementation starting next year and resumed capital expenditure. At 44% of GDP, Armenia's general government debt at the end of 2012 falls close to the median of Moody's Ba-rated universe.
The second driver of the outlook change is the further expected gradual reduction in Armenia's still large current account deficit at 11.1% of GDP in 2012, which has been underpinned by private transfers from abroad (including employee compensations) -- 92% of which originate from Russia -- that cumulated at almost 14% of GDP as of year-end 2012. That being said, Moody's notes that the country's external shock-absorption capacity is bound to weaken given (1) its economic and financial exposure to the economic slowdown in Russia; (2) the supply side shock stemming from the natural gas and energy tariff increase in July 2013; and (3) large official loan repayments due over the next two years.
The third driver of the outlook change to stable is Armenia's continued access to external funding sources on favorable terms, including via private remittances, foreign direct investment (FDI) and official lending sources. As of end-2012, multilateral and bilateral loans accounted for 83% of Armenia's government debt and Moody's expects steady net FDI inflows, albeit at a more moderate level than the 6.3% of GDP average during 2008- 2012.
Although Armenia's international reserve buffer -- at 3.9 months of import coverage in 2012 -- provides limited cover in case of a foreign-currency funding shortfall in the economy or in the banking system, this concern is somewhat mitigated by the large share of concessional funding and in view of the central bank's macro-prudential measures deployed as a safeguard against the banking system's high dollarization level at 63% as of end-2012. Graduation from concessional funding is bound to drive increased diversification in financing sources, with market-based funding one option as the domestic market—albeit evolving rapidly -- remains constrained.
Moody's would consider assigning a positive outlook and eventually upgrading Armenia's rating if the initiated structural reforms propel the economy towards more balanced economic growth and a significant reduction in the current account deficit.
Negative rating pressure could develop (1) following a sustained deterioration in fiscal and external buffers; (2) if the current economic slowdown in Russia were to be sustained and mirrored by a sharp slowdown in remittance inflows to Armenia; (3) if adverse export minerals price movements were to persist, with significant impact on the current account performance.
The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008.
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