ArmInfo. Rating-Agentur Expert RA GmbH confirmed the sovereign government credit rating (SGC) of Armenia at 'BB-' (Sufficient level of creditworthiness of the government) in national currency and at 'BB-' (Sufficient level of creditworthiness of the government) in foreign currency. The rating outlook is stable which means that in the mid-term perspective there is a high probability of maintaining the rating score, RAEX-Europe informed ArmInfo.
"The confirmation of Armenia's ratings at 'BB-' with a stable outlook is underpinned by a strong and resilient banking sector, consistent and solid economic growth, effectiveness of the monetary policy and improving fiscal consolidation efforts by the authorities. However, the creditworthiness of the sovereign remains constrained by high levels of financial dollarization, elevated government debt levels and high exposure to potential external shocks given the country's high dependence on remittances, imports and commodities' exports. Moreover, even though we consider that the recent political turmoil will not have a material impact on the long-term creditworthiness, it could hurt investor confidence adversely affecting investment in the economy", Hector Alvarez, responsible expert, Rating Associate of Rating-Agentur Expert RA GmbH considers.
The main factors influencing the ranking are as follows: Positive factors: 1. In 2017, the fiscal deficit was 1,5p.p. higher than expected at 4,8% of GDP due to the utilization of a Russian provided defense loan. Even though this number was out of target, it still narrowed as compared to 2016 when the deficit was 5,6% of GDP showing improving consolidating efforts. Going forward, and given the introduction of the new fiscal strategy, we anticipate deficits to reduce below the 3% mark;
2. The banking system remains fairly solid. Capitalization levels in the country are quite adequate as the capital adequacy ratio was 18,7% as of March 2018 and has remained stable. Moreover, as of the same date, NPLs to total loans stood at 5,4% showing a continued reduction for the last two years. Finally, profitability has also been steadily positive as shown by a ROA figure of 1,4% as of March 2018. Even though the amount of banks' assets to GDP remained unchanged, we did see an increase in domestic credit up to 58,2% of GDP in 2017.
3. The structure of the government's debt remains stable as it has practically not changed since last revision by the agency. As of May 2018, short-term debt accounted for 2,6% of total debt, 13,8% had floating interest rate and FX-denominated debt remained elevated at 81,8%; nevertheless, this type of debt is mostly at favorable conditions;
4. Armenia's economy has remained resilient. By end-2017 real GDP grew by 7,5%, a figure substantially higher than what we previously anticipated. The strong growth was mainly supported by higher industrial production, growth in overall trade, a hike in the services sector and increase in construction. Growth momentum carried over into 1Q 2018; however, we anticipate positive but lower real output in 2018;
5. The expansionary monetary policy of the government fueled the increase of inflation in 2017 slightly by 2.6% in Jan-Dec amid 1% y-o-y, versus the 4% target of the Central Bank of Armenia (CBA) in 2017. However, it has dipped down to 0,9% y-o-y as of June 2018. The experts anticipate a reduction in the refinancing rate of the CBA if this scenario were to persist. In general, the experts see a positive monetary policy with high credibility and an improved transmission mechanism which has contributed to the fall of lending rates, causing investment consumption to grow and the price level to increase.
Restricting factors: 1.The spread between the 10Y U.S. government bond and the USD-denominated Armenian government bond maturing in 2025 is acceptable at 3,3%;
2. International reserves have been in a rapidly declining trend since November 2017, despite this, they remain at adequate levels. As of May 2018, they stood at USD 2 bn which is equivalent to 32,6% of government debt and they cover short-term debt by more than 11x;
3.GDP per capita in PPP terms is estimated at USD 9,5 th in 2017, a moderately favorable metric figure as compared to the average of its regional non-oil dependent (RNOD) peers(Georgia, Kyrgyrstan and Tajikistan);
4. The price level in Armenia increased by 2,6% in 2017 (versus Dec 2016). However, it has resumed a declining trend in 2Q 2018; the y-o-y inflation as of June was 0,9%;
5. The quality of the fiscal policy is expected to improve substantially as a result of the introduction of the new fiscal framework aimed at improving fiscal discipline and augmenting flexibility with the aim to absorb potential unexpected shocks. The new fiscal rule should also keep government expenditures contained and prepare the authorities to reduce debt if needed;
6. 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:
1. Government debt increased in 2017 up to 53,5% of GDP and 252,2% of budget revenues and public debt stood at around 59% of GDP as of the same date. These figures, however, have remained stable in the current year: as of May 2018, government and public debt figures have both declined in absolute terms. This is a positive sign that the authorities are following their debt management strategy. The experts of the agency anticipate government debt to GDP to remain below the 55% threshold going forward;
2. The unemployment rate is still high and is estimated to have been 18,9% as of 2017; 3. The Armenian stock market remains highly underdeveloped. The market capitalization was as low as 2,56% of GDP showing just marginal improvement for the past six years; 4. 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: 1.Financial dollarization remains high, however, it continues to gradually decline; loans and deposits in FX were equivalent to 60% and 53,2% of total loans and deposits respectively as of May 2018 (weak stress factor); 2. The conflict with Azerbaijan for the Nagorno-Karabakh remains unresolved and escalation is still a latent risk (very weak stress factor). The full report is available at https://raexpert.eu/reports/Research_report_Armenia_20.07.2018.pdf To note, in Feb 2018 Rating-Agentur Expert RA GmbH upgraded the sovereign government credit rating (SGC) of Armenia at 'BB-' (Sufficient level of creditworthiness of the government) from 'B+' (Moderately low level of creditworthiness of the government) both in national currency and 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 foreign currency.
