ArmInfo. Fitch Ratings has revised Yerevan City's Outlook to Negative from Stable, while affirming the city's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB-'. As the Fitch report published on its website on April 17 informs, the revision of Outlook follows a recent similar action on the sovereign ratings of Armenia (to Negative; Affirms at 'BB-' dated 3 April 2020), due to expected negative impact of the coronavirus pandemic on the national economy.
According to Fitch, the city's ratings are capped by the sovereign's. The next scheduled review date for Fitch's rating on Yerevan City is 22 May 2020, but Fitch believes that recent developments in the country warrant such a deviation from the calendar. While Yerevan City's most recently available data may not have indicated performance impairment, material changes in revenue and cost profiles are occurring across the sector and likely to worsen in the coming months as economic activity suffers and government restrictions are maintained or broadened.
Key Rating Drivers
According to Fitch rating case, Yerevan's debt payback ratio (net direct risk-to-operating balance) - the primary metric of debt sustainability assessment - will remain strong over the next five years due to sufficient cash and expected low debt. The secondary metrics, fiscal debt burden measured as net adjusted debt-to-operating revenue, and actual debt- servicing coverage ratio, are assessed at 'aaa'. This leads to the city's overall debt sustainability assessment at 'aaa'. Under the new Rating Criteria for International Local and Regional Governments (LRGs), Fitch classifies Yerevan City as a Type B LRG, which is required to cover debt service from cash flow on an annual basis. The assessment of four 'Weaker' key factors and two 'Midrange' key factors resulted in overall assessment of the city's risk profile as 'Weaker' under the risk profile guidance in our criteria. Yerevan's SCP of 'bbb-' reflects a combination of a 'Weaker' risk profile and a 'aaa' debt sustainability. The SCP also factors in international peer comparison. Fitch does not apply any asymmetric risk or extraordinary support from the national government, while the city's IDR remains capped by that of the sovereign.
Key Assumptions
Qualitative assumptions: Risk Profile: Weaker, unchanged with Low weight Revenue Robustness: Weaker, unchanged with Low weight Revenue Adjustability: Weaker, unchanged with Low weight Expenditure Sustainability: Midrange, unchanged with Low weight Expenditure Adjustability: Weaker, unchanged with Low weight Liabilities and Liquidity Robustness: Midrange, unchanged with Low weight Liabilities and Liquidity Flexibility: Weaker, unchanged with Low weight Debt sustainability: 'aaa' category unchanged with Low weight Extraordinary Support: n/a Asymmetric Risk: n/a Sovereign cap: Yes, weakening with High weight
Quantitative Assumptions - Issuer-Specific Fitch's rating case is a "through-the-cycle" scenario, which incorporates a combination of revenue, cost and financial risk stresses. It is based on 2015-2019 figures and 2020-2024 projected ratios.
The key assumptions for the scenario include: - 5.7% yoy increase in operating revenue on average in 2019-2023, including a 4.2% increase in taxes, 6.3% increase in non-tax revenue and 6.7% increase in current transfers; and - 15.4% yoy increase in operating spending on average in 2019-2023.
Figures as per Fitch's sovereign forecast for 2020 and 2021, respectively: - Real GDP growth (%): -0.5, 5.5 - Consumer prices (annual average % change): 0.5, 3.5 - General government balance (% of GDP): -5.5, -3.5 - General government debt (% of GDP): 59.2, 56 - Current account balance plus net FDI (% of GDP): -7.1, -5.8 - Net external debt (% of GDP): 53, 52.9
Factors that may, individually or collectively, lead to negative rating action/downgrade: - A downgrade of Armenia's IDRs; and - A multiple-notch revision of the city's SCP below 'bb-', which could be driven by material deterioration of Yerevan's debt metrics, particularly a debt payback sustainably above 5x accompanied by fiscal debt burden overshooting 50% under Fitch's rating case. Factors that may, individually or collectively, lead to positive rating action/upgrade: - An upgrade/outlook revision to Stable of Armenia's IDRs.
To recall, on December 2, 2019, Fitch Ratings raised the rating of the capital of Armenia - the city of Yerevan from to (long-term issuer default rating (IDR) in foreign and national currencies), also changing the forecast from to . This was preceded by the same revision on November 22 of the same year of the sovereign rating of Armenia with a change in forecast.
