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.
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.
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.