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 medium term there is a high probability of maintaining the rating. This is stated in the official press release of the agency received by ArmInfo.
"The confirmation of Armenia's ratings at 'BB-' with a stable outlook reflects a well- managed, effective and credible monetary policy, successful consolidation efforts of public finances, as well as robust and stable economic growth. Moreover, the structure of government debt remains quite favorable despite most of the obligations being of external nature. Also, we consider that the political risk has been reduced as the new government won by a high margin in the past December elections.
Despite this, government debt is still elevated and the country remains highly exposed to external factors as the economy is still highly dependent on remittances inflows, imports and commodities' exports. Moreover, despite financial dollarization and government debt having decreased, they remain fairly high", Clarified Hector Alvarez, Rating Associate of Rating-Agentur Expert RA GmbH noted.
The rating report, in particular, noted that, on average, the level of domestic consumption and investment was stable during the whole of 2018.
Moreover, higher copper prices, stable remittances and exports also contributed positively to growth. However, government expenditures were lower than anticipated as the authorities held off many planned expenses as a result of a thorough review of the structure of public finances. In addition, towards year-end 2018, we have seen remittances inflow decline, which have hurt private consumption figures, and also a y-o-y reduction in exports as a result of weaker external demand.
"As we previously expected, the interim government of prime minister Nikol Pashinyan maintained economic stability in 2018 all the way into the snap election where his party obtained the majority of votes. In this regard, we anticipate political risks to be lower and investor confidence to have picked up. In general we anticipate growth to remain robust for the next years under the assumption of robust external demand, favorable macroeconomic policies of the new government and low inflation environment."
According to analysts from RAEX-Europe, financial soundness indicators of the system reflect stability. Financial dollarization levels in the country have declined for both loans and deposits. Nevertheless, the banking system remains concentrated as the top-3 banks account for around 41% of total assets.
The Agency continues to assess the structure of the state debt of Armenia as positive. First of all, the structure of the government's obligation has remained nearly unchanged for the past year. As of November 2018, short-term debt accounted for 2,6% of total debt, 14,3% had floating interest rate and FX-denominated debt remained elevated at 80,7%; nevertheless, conditions of this type of debt are mostly favorable.
"Overall, we continue to observe an effective monetary policy. The level of inflation remained practically unchanged from 2017 to 2018. This is the most stable the metric has been in recent years. The improvement in the credibility of the policy is partly due to the steps the CBA is taking towards reducing financial dollarization and the fact that the exchange rate has remained fairly stable. However, despite levels having decreased, we still consider dollarization in Armenia to be elevated.
The budget approved for 2019 already includes the new fiscal rules the goal of which is to stabilize debt without hurting economic growth (e.g. issued debt will only be used for capital expenditures and not current). Also, in the mid-term perspective we still expect the fiscal policy to be contractionary.
At the same time, we anticipate a substantial revamp of the tax reform which we expect will spur the development of SMEs and attract foreign investments. The new policy consists of reducing the profit and dividend tax rates and increasing sales tax rates to compensate for the cuts.
External exposure still a source of risk for Armenia. Despite the fact that Armenia's growth has been solid and the general economy has been resilient to external shocks, as shown by stable inflation figures and a solid banking sector, latent risks from abroad remain a concern for the country.
Armenia's expanding trade deficit, expected at around 13% of GDP in 2018, reflects the country's high dependence on imports. In addition, remittances and commodities exports are important pillars for the economy. In this sense, the country can be negatively affected in 2019 as we have already observed price decreases in minerals such as cooper. Moreover, towards the end of 2018 we have seen a slowdown in exports of goods and services, as a result of lower external demand (see graph 7). Imports have been also increasing at a declining pace as domestic consumption was modest in 2H 2018. Also, remittances grew by almost nil y-o-y in 2Q 2018 and they declined by 7% in 3Q 2018. This contributed to lower domestic consumption and declining aggregate demand.
Finally, as a result of the new government elected back in December 2018 we do not expect any disruption or deviation in the Russia-Armenia relations. However, the conflict with Azerbaijan for the Nagorno-Karabakh remains unresolved and escalation is still a latent risk".
The full sovereign rating calendar can be found at http://raexpert.eu/sovereign/#conf-tab- 5
