Saturday, March 27 2021 17:41

ArmInfo.Fitch Ratings confirmed the long-term default rating of the Emitent (EDR) of Armenia in foreign currency at the level of "B +" with a stable forecast. This  is stated in the message posts on the site.

Key rating factors

RDE Armenia at the level of "B +" reflects a rather high state and  external debt, relatively weak foreign finances and geopolitical  tensions, which can potentially grow into a military conflict. They  are balanced with high per capita income; indicators of management,  development and ease of doing business, which are superior to the  median rating "in"; and institutions that contributed to ordered  political transitions and withstood pandemic shock 2020g and a  six-week war with Azerbaijan. There is also a robust basis for  macroeconomic and fiscal policy and reliable commitment to reforms  that are supported by the IMF Reserve Financing Agreement (RFA).

Fitch expects the Alliance of Prime Minister Nikol Pashinyan "My  Step" will be able to preserve the working coalition of the majority  in Parliament at the extraordinary elections on June 20, 2021. After  November 9, 2020, with the mediation of Russia, Pashinyan signed an  agreement on the cease-fire, to put an end to the Nagorno-Karabakh  conflict, a period of enhanced protests and political interventions  on the part of military, calling for his resignation began in the  country. "Despite the fact that we expect to preserve the power of  Pashinyan, the support of his government decreased after the war, and  may aggravate the problems of the implementation of structural  reforms and combat corruption," Fitch is reported.  According to  Fitch, the consequences of Armenia's defeat in the Nagorno-Karabakh  war are likely to continue, since the influx of refugees in Armenia  is calculated by dozens of thousands, and there is also the need to  restore diplomatic efforts within the previously failed process of  the OSCE Minsk Group. Despite the presence of Russian peacekeeping  forces, tensions in Nagorno-Karabakh can again exacerbate due to the  lack of a demilitarized zone. The war also strengthened the  dependence of Armenia from Russia on security and economic relations.

Fitch forecasts

The effect of the re-pandemic COVID-19 and shocks of conflicts has  led to the fact that state debt has changed its previous downward  trend, and the settlement of public debt / GDP increased by 13.8 pp.  Up to 67.3% at the end of 2020, overtaking the current median "B"  (63.8%). Fitch predicts that the State Dolg / GDP ratio will reach  the peak of 67.6% by the end of 2021, and then gradually decrease to  63.5% by the end of 2025, since the government reiterates its  medium-term fiscal rules and plans to reduce this indicator to 60% by  the end 2026 Weaker growth due to economic scars from shock 2020 and  the pressure of expenses to support the economy constrain the  potential of a faster reduction in the public debt. The duty  nominated in foreign currency is 77% of the public debt (median "in":  61%), which increases the country's vulnerability to the depreciation  of the drama.

Consolidated budget deficit increased from 0.8% of GDP in 2019 to  5.1% of GDP in 2020g (against the forecast Fitch to 2020g 7.6%), due  to the growth of expenses, incl. In support of the economy during a  pandemic. Amendment to the budget in IV quarter. 2020g expanded the  deficit of the state budget and redesigned the cost of military  needs, but no longer understanding the capital expenditures limited  the growth of 2020 deficit. Fitch predicts a gradual reduction in the  state budget deficit to 4% in 2021 and 2.8% in 2022 due to the  continuation of a number of budgetary support measures under the  economic recovery plan in 2021 and the expectation of some  improvement in the performance of capital expenditures.  Potential  additional fiscal measures to support a weaker economic recovery are  key risk for Fitch's forecasts. The deficit of 2021 will be funded  mainly due to Eurobonds in the amount of $ 750 million issued in  February 2021, with 71% of annual financing needs completed by the  end of February.  Armenia has committed obligations on key structural  reforms related to government finance management under IMF, including  to maintain its medium-term budget trajectory, improving income  mobilization, tax risk management and budgeting efficiency and  capital expenditures. However, according to Fitch, additional needs  for economic recovery costs and a decrease in political support can  slow down the progress in implementing the reform program.

Weak and Strong Points

External finances are a key weak place of Armenia with a high  dependence on the export of commodity (41% of current external  revenues 2020g), which increases vulnerability to fluctuations in  copper prices and precious metals, as well as a rather weak influx of  foreign direct investment (DFI). Net foreign debt (NXD) is high -  55.1% of GDP at the end of 2020 (median "b": 32.3%), and Fitch  predict that by the end of 2022 this ratio will grow to 62.2%.

The overall commitment of the authorities of the exchange rate  flexibility led to the fact that the drama was depreciated by 9% in  2020. The Central Bank of Armenia (CBA) maintains its obligation to  intervene only to prevent indiscriminate adjustments in the financial  markets, providing interventions for the sale of foreign currency  (FX) in 2020 in the amount of $ 147 million (against $ 566 million in  2014 intervention.).  The wide compliance with the exchange rate  framework under SBA IMF underlies wide access to international  financial institutions (MFI) and external trading financing.   According to Fitch estimates, the balance of the current account in  2020 remained generally sustainable, despite the shock, improved  before the deficit of 4.3% of GDP (against a deficit of 7.2% of GDP  in 2019).  It was associated with a sharp compression of imports of  goods and services, as well as a significant increase in non-resident  transfers from the II kV. 2020, caused by large transfers of the  diaspora, akin to growth during the crises of 2008 and 2013.

Fitch predicts that the current account deficit will increase to 6.1%  in 2021, followed by tall up to 6.8% in 2022 (against the average  value of the median "B" of 4.3%) as private consumption and capital  expenditures are restored, as well as Reducing the anti-crisis  transfers of the diaspora, which more than compensates for the effect  of stronger trade conditions from the ten-year high copper prices.  Fitch expects a clean influx of DFI only a quarter of 2021 deficit,  and the main part of the financing will be February Eurobonds and MFI  loans.

GDP will restore growth

Two shocks led to the fact that real GDP decreased by 7.6% in 2020  (Mediana "V": a reduction of 4.5%), and the construction sector and  the real estate market were most affected, the sector of trade and  tourism services in The time of public services, health care and  financial services supported production. Fitch predicts that real GDP  growth will recover up to 3.2% in 2021 and accelerate to 4% in 2022,  partially due to the basic effects and support of expansionist  policies, especially in the field of state investment. The ongoing  third COVID-19 pandemic wave, with reference to official data, turned  out to be stronger than the first wave of II kv. 2020, but still  below the peak of the second wave of IV quarter. 2020 Despite the  growing level of infection and slower than that of regional  colleagues, the vaccination program, Fitch does not expect to restore  significant economic restrictive measures and travel restrictions.  A  trustworthy approach to targeting inflation retained inflation at a  much low level (on average for five years: 0.9%, against historical  median "in" 7.3%) and more stable. Inflation accelerated over the  past three months, rising to 5.3% in February 2021, which was caused  by food prices, falling the ruble rate and the growth of price  expectations. Fitch predicts that short-term inflation will be  moderate to the second half of the year. And averaged 3.5% in 2021,  which is slightly lower than the target threshold of 4%.  In response  to the growing inflation, the CBA has raised a key rate by 125 bp. up  to 5.5% by two actions from December 2020 to February 2021. Fitch  predicts that CBA will further tighten a policy in 2021 to keep  inflation.

Banking system will endure the consequences of shocks 2020

Armenian banks are in good position to withstand the consequences of  the shocks of 2020. The banking system is well capitalized compared  with comparable rating analogues (the capital adequacy ratio is 16.6%  at the end of January 2021), and the deterioration of the quality of  assets (the coefficient of non-working loans) as a result of the  pandemic will slightly deepen (from 7.3% at the end of January 2021)  Due to the fact that the authorities preferred only a short two-month  debt service vacation, while no regulatory measures were applied to  recognize problem loans and creating reserves.

The banking risk of the region of the Nagorno-Karabakh conflict is  limited: the loans from the region account for approximately 3% of  GDP (5.3% of bank loans) at the end of 2019, and the deposits of the  region are estimated at 1% of GDP or 1.5% of banking obligations. By  the state subsidized lending to banks helped support the growth of  the private sector lending, by an average of 18.3% in 2020, but since  then the pace slowed down to 11.4% in February 2021. An indicator of  macropreential risk, according to Fitch, for Armenia is "2", which  indicates a moderate level of risk due to a positive loan break in  2019-2020. The dollarization of deposits of residents is high - 42.3%  at the end of 2020, which partially reflects significant translations  of foreign currency with non-residents.

Rating Sensitivity 

The main factors that can individually or cumulatively lead to a  positive rating effect / rated rating are:

- Public Finance: Return of the National Department / GDP ratio on a  steady-downward trajectory in the medium term, for example, thanks to  a reliably defined budget consolidation plan.

- External finances: Sustainable improvement in external indicators,  such as a decrease in external debt, improving the current account  deficit, or approaching the inflow of DFI to the median "BB".

- Structural: Further improvement of structural indicators, such as  management standards, leading to approximation with median  "explosives" and improving political stability.  The main factors  that can, individually or collectively, lead to negative rating  effects / lower rating:

- External finances: deterioration of external imbalances, which may  indicate a higher level of external debt or a higher current account  deficit, or repetition of external financing pressure, leading to  sending reserves and growth of percentage.

- structural / macroeconomic: renewal of the escalation of military  conflict with Azerbaijan due to Nagorno-Karabakh or an increase in  internal political instability, which leads to the weakening of  macroeconomic and fiscal policy or confidence in it.

- Public Finance: A steadily ascending trajectory of the State debt /  GDP ratio in the medium term, for example, due to the structural  weakening of the fiscal policy and / or further lethargy of GDP  growth prospects.