Wednesday, February 7 2018 20:03
Karine Melikyan

Rating-Agentur Expert RA GmbH upgraded to `BB-` the sovereign government rating and to `B+` the credit climate rating of Armenia

Rating-Agentur Expert RA GmbH upgraded to `BB-` the sovereign government rating and to `B+` the credit climate rating of Armenia

ArmInfo. Rating-Agentur Expert RA GmbH upgraded the sovereign government credit rating (SGC) of Armenia from 'B+' (Moderately low level of creditworthiness of the government) to 'BB-' (Sufficient level of creditworthiness of the government) in national currency and from 'B+' (Moderately low level of creditworthiness of the government) to 'BB-' (Sufficient level of creditworthiness of the government) in foreign currency.

Rating-Agentur Expert RA GmbH upgraded the country credit environment rating (CCE) of Armenia from 'B' (Moderately low quality of credit environment of the country) to 'B+' (Moderately low quality of credit environment of the country) in national currency and from 'B' (Moderately low quality of credit environment of the country) to 'B+' (Moderately low quality of creditworthiness of the government) in foreign currency.

Rating-Agentur Expert RA GmbH upgraded the sovereign government credit rating (SGC) of Armenia from 'B+' (Moderately low level of creditworthiness of the government) to 'BB-' (Sufficient level of creditworthiness of the government) in national currency and from 'B+' (Moderately low level of creditworthiness of the government) to 'BB-' (Sufficient level of creditworthiness of the government) in foreign currency.

Rating-Agentur Expert RA GmbH upgraded the country credit environment rating (CCE) of Armenia from 'B' (Moderately low quality of credit environment of the country) to 'B+' (Moderately low quality of credit environment of the country) in national currency and from 'B' (Moderately low quality of credit environment of the country) to 'B+' (Moderately low quality of creditworthiness of the government) in foreign currency.

 

MAJOR FACTORS THAT INFLUENCED BOTH TYPES OF RATINGS: 

Positive factors:

The fiscal balance is set to stand at -3,3% of GDP in 2017 showing the results of the consolidating efforts by the government. As of end-2017, an important increase in tax revenues and a slight decrease in current expenditures was registered which caused the deficit to shrink. We expect this trend to continue going forward;

Banking sector metrics remain stable. Capital adequacy ratio was at 18,8%, NPLs to total loans ratio at 6,8% and ROA once again positive at 1,1% as of November 2017. Furthermore, despite a slightly slower credit growth pace by end-2017, we expect this metric to have grown once again to around 56% of GDP as well as the amount of banks' assets to 80,7% of GDP in 2017;

The government debt structure remains favorable with short-term debt accounting for 3% of the total debt and floating interest rate debt representing 13,5% as of end-2017. Even though the amount of FX-denominated debt is high at 81,6%, it is mostly at concessional terms;

We anticipate real GDP to grow at around 3,8% in 2017, a higher figure than initially expected. This positive reading is mainly due to strong growth in industrial production and the services sector as well as a hike in remittances causing better consumption figures; investment metrics were also positive in 2017;

The loose monetary policy has helped to bring inflation towards the CBA's target of 4%. The improved transmission mechanism of the policy contributed to the fall of lending rates, causing investment consumption to grow and the price level to increase. Given the accommodative policy and currently high inflation expectations, we anticipate the inflation rate to continue in an upward trend;

Armenia has a strong investment potential as showed by a projected net FDI inflows to GDP figure of 3,6% in 2017.

Restricting factors:

International reserves stood at USD 2,17 bn by November 2017 which is 35% of gross government debt and they cover short-term debt by more than 11x;

GDP per capita in PPP terms is projected to have finished 2017 at USD 9,1 th which is an acceptable figure when compared to the average of its regional non-oil dependent (RNOD) peers1;

After posting deflation figures in 2015 and 2016, inflation was positive in 2017 when it stood at 2,6% by year-end driven mostly by higher food prices;

The fiscal policy effectiveness continues to progress. Even though the fiscal balance target was slightly missed, the deficit is expected to have shrunk substantially in 2017. At the same time, the government is planning more capital expenditures in 2018, which is key to the sustainable growth of their economy;

Institutional development in the country remains acceptable as there are good conditions in the country for business, with a moderate rule of law and government transparency. Nonetheless, corruption remains a drag for economic growth.

Negative factors:

We anticipate government debt to have risen to 55,3% of GDP and to have slightly reduced down to 241% of budget revenues in 2017 given the increase in external loans and higher than expected tax income. Moreover, public debt, including debt from the Central Bank of Armenia (CBA), reached 60% of GDP. We still expect debt figures to stabilize in the mid-term perspective as outlined in the debt management strategy of Armenia; The yield on the USD denominated 10Y government bond has decreased to 4,6% as of January 2018;

Unemployment rate is forecast to remain practically unchanged at around 18,9% in 2017; The market capitalization of the stock exchange remains low at 2,5% of GDP as of end-2017 with still highly concentrated trading among the top issuers;

Competitiveness in the economy remains low dominated by oligopolies. The country's position in the global competitiveness ranking of the World Economic Forum was 73rd out of 138 countries and the economy relies heavily on imports.

Stress factors:

Financial dollarization remains high, however, it has gradually declined; loans and deposits in FX were equivalent to 61,6% and 57,5% of total loans and deposits respectively as of November 2017 (weak stress factor);

Conflict with Azerbaijan for the Nagorno-Karabakh remains unresolved (very weak stress factor).

ADDITIONAL FACTORS THAT INFLUENCED CCE RATINGS:

Positive factors:

Spread between the interest rate on loans and deposits remained acceptable at 418b.p. in November 2017;

The external debt load of the private sector is moderate estimated at around 92% of GDP by end- 2017.

Negative factors:

High real interest rate estimated at 10,9% in 2017; however it has been declining.  SENSITIVITY ASSESSMENT:

The following developments could lead to an upgrade:

Lower than expected government debt levels in the mid-term perspective combined with a consolidated government balance sheet over the same period;

Consistent reduction in the dependence on external factors combined with a steep decrease in levels of financial dollarization.

The following developments could lead to a downgrade:

Opposite behavior in regard to our estimated fiscal expectations; i.e. further widening of the fiscal balance and a sustained increase on government debt.

"The upgrade of Armenia's SGC ratings to 'BB-' and CCE ratings to 'B+' reflects the consistent and sustained improvement in fiscal metrics, better economic growth prospects and prolonged stability of the banking system. Moreover, the monetary policy has had better transition to the economy and the external sector metrics have slightly improved, despite the economy remaining highly dollarized.

However, government debt remains high, although expected to decline, the competitiveness of the economy remains subdued and the economy remains highly exposed to external shocks. Going forward, Armenia's monetary policy effectiveness could be further harmed if the current levels of dollarization persist." - Clarified Hector Alvarez, Rating Associate of Rating-Agentur Expert RA GmbH.

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