ArmInfo.Fitch Ratings has downgraded the Armenian City of Yerevan's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B+' from 'BB-'.
The Outlook is Stable. As the Fitch Ratings informs, the downgrade follows a similar action on the sovereign ratings of Armenia ( 'Fitch downgraded Armenia to 'B+'; Outlook Stable' dated 5 October 2020), due to worse-than- expected economic deterioration caused by the coronavirus pandemic and the recent escalation of the large-scale military actions along the Line of Contact in the Nagorno-Karabakh conflict zone. According to Fitch, the city's ratings are being capped by the sovereign's.
The next scheduled review date for Fitch's rating on Yerevan City is 20 November 2020, but Fitch believes that recent developments in the country warrant such a deviation from the calendar and rationale for this is laid out below. ''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 related to the coronavirus pandemic are maintained or broadened. Fitch's ratings are forward-looking in nature, and we will monitor developments in the sector for their severity and duration, and incorporate revised base- and rating-case qualitative and quantitative inputs based on performance expectations and assessment of key risks.
Key Rating Drivers
Risk Profile: 'Weaker': Yerevan's risk profile reflects a 'Weaker' assessment for four key factors - revenue robustness and adjustability; expenditure adjustability; and liabilities and liquidity flexibility. The other attributes, expenditure sustainability and liabilities and liquidity robustness, are assessed as 'Midrange'.
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, which leads to our 'aaa' assessment. The secondary metrics, fiscal debt burden measured as net adjusted debt-to- operating revenue, and actual debt-servicing coverage ratio, support this assessment. This leads to the city's overall debt sustainability assessment at 'aaa'.
Derivation Summary
Yerevan's Standalone Credit Profile (SCP) is assessed at 'bbb-', reflecting a combination of a 'Weaker' risk profile and 'aaa' debt sustainability metrics under Fitch's rating-case scenario. The SCP also reflects peer comparison. Fitch does not apply any asymmetric risk or extraordinary support from the national government. The city's IDR remains capped by that of the sovereign.
Key Assumptions
Qualitative assumptions and assessments and their respective change since the last review on 22 May 2020 and weight in the rating decision: 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 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 2014-2018 figures and 2019-2023 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; - 15.4% yoy increase in operating spending on average in 2019-2023.
Figures as per Fitch's sovereign actual for 2019 and forecast for 2020, respectively: - GDP per capita (US dollar, market exchange rate): 4,623; 4,365 - Real GDP growth (%): 7.6; -6.2 - Consumer prices (annual average % change): 1.4; 1 - General government balance (% of GDP): -0.8; -7.6 - General government debt (% of GDP): 53.5; 63.9 - Current account balance plus net FDI (% of GDP): -4.3; -4.8 - Net external debt (% of GDP): 47.3; 54.4 - IMF Development Classification: EM
