Monday, April 20 2020 16:53

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.