Monday, December 3 2018 18:54

ArmInfo.The American company  Fitch Ratings confirmed the long-term ratings of the issuer default  (IDR) of Armenia in foreign and national currency at the level of "B+" with a "Positive" forecast.

Fitch posted a message on the  confirmation of the sovereign rating of Armenia on its website on  November 30.Armenia's ratings reflect a robust monetary policy  structure, a reduction in external imbalances, an increase in per  capita income, but on the other hand, high budget deficits reflect  the growth of public debt, high external debt and tensions with some  neighboring countries.The positive outlook reflects higher growth  prospects in Armenia, the start of the fiscal consolidation process,  which, according to Fitch's expectations, will lead to a gradual  reduction in public debt in the medium term and a moderate current  account deficit. Monetary policy helped maintain macroeconomic and  financial stability, despite the political crisis in April.Fitch  forecasts a reduction in the state budget deficit in 2018 to 2.2% of  GDP from 4.8% in 2017 and a target of 2.7%. According to Fitch's  forecast, in 2019 and 2020, the state budget deficit will increase to  2.6% of GDP, slightly exceeding government forecasts (2.2% and 2.3%,  respectively), reflecting expectations of relatively slow income  growth and faster cost increases. "The government hopes to create a  budget space to allow higher, but deficit-neutral allocations for  social spending and public sector wages. The 2019 budget was the  first to comply with the new fiscal rules," the Fitch report says.The  report notes. that a gradual decrease in public debt in 2019-2020  according to the Fitch forecast will reduce the share of government  debt in GDP by the end of 2020 to 56.2% from 58.9% at the end of  2017. Debt is at risk of changes in the exchange rate: at the end of  October 2018, 80.8% of government debt was denominated in foreign  currency.This year, Armenia continued to demonstrate macroeconomic  and financial stability throughout political volatility, as well as  increased geopolitical tensions associated with Russia, and resisted  risks from developing countries, reflecting political credibility and  increased ability to absorb economic and political shocks. The  inflation of 2.8% recorded in October was below the medium- term  target threshold of 4%. From February 2017 to the present day, the  Central Bank has kept the refinancing rate at 6%, stating its  readiness to tighten policies with increasing pressure from growing  demand. Fitch expects inflation to average 2.7% in 2018 and approach  the mid-term goal in 2019.Economic growth is slowing, but remains  steady and is projected at 5% in 2018. Private consumption and  investment have increased this year. Moreover, the growth of private  consumption was due to an increase in lending and remittances, and  the growth of investment came from the construction sector, which  indicated an accelerated ascent. It is expected that in 2019, GDP  growth will slow down to 4.2%, and in 2020 - to 4%.  The cessation of  foreign-owned construction of a gold mine due to local residents  'protests over environmental issues has caused some uncertainty about  the prospects for this sector.High domestic demand has affected the  current account deficit, which, according to Fitch, will increase to  5.1% of GDP in 2018 from 2.4% in 2017. Continuing import growth in  line with higher planned public investments will support the average  current account deficit at 4.3% of GDP in 2019-2020, despite healthy  exports, remittances, and tourism. Public sector foreign borrowing  and foreign direct investment will finance the bulk of the deficit,  but Fitch reviews the existence of bilateral risks. According to  Fitch, by the end of 2018, net foreign debt to GDP will be 47.8%.The  international liquidity ratio is projected at 125.4% at the end of  2018. Foreign exchange reserves declined by 10% in January-October  2018 totaled $ 2.08 billion. "We predict that reserves at the end of  the year are equivalent to about 3.5 months of current external  payments.  Exchange rate flexibility, reduced external imbalances and  access to external financing reduce the risk short-term balance of  payments pressure. After the election, the authorities will continue  to work with the IMF and intend to work with the fund's preventive  instruments, the Fitch report says.  The banking system remains  stable and does not experience the destabilizing pressure of  liquidity. The level of capitalization is sufficient, and  non-performing loans (with a delay of up to 270 days) amounted to  6.3% in June, compared with 6.6% in April. Despite the gradual  downward trend, the dollarization of the financial market remains  high: 53% in deposits and 56% in loans at the end of October of this  year. The Central Bank, through the requirements for the  differentiation of reserves and risks, does not encourage loans in  foreign currency, thus requiring banks to maintain a balanced foreign  exchange position.  Changes in the political situation in Armenia are  nearing completion, taking into account the parliamentary elections  scheduled for December 9. A coalition led by Nikol Pashinyan, the  leader of the protest movement, by becoming a parliamentary majority  will smooth the implementation of an agenda focused on fighting  corruption and fighting monopolies and interconnected persons from  the previous administration.  Fitch notes that the transition process  is peaceful and consistent with constitutional mechanisms.

"The traditional foreign policy approach of Armenia, balancing  relations with Russia, the US, the EU and Iran, is preserved, and  external forces do not seem to exert undue influence on the new  administration. The borders are closed with two neighbors, and the  long-standing conflict with Azerbaijan over the Nagorno- Karabakh  issue keeps ground for escalation, "say Fitch analysts.