ArmInfo. The international Fitch Ratings agency affirmed Armenia's long-term foreign currency issuer Default Rating (IDR) in foreign currency at "BB" with a stable outlook. This is stated in a report on the agency's website. Continued High Growth: Economic growth continues to benefit from spill-overs from strong inward migration from Russia, Belarus, Ukraine and now Nagorno-Karabakh. Real GDP grew 8.7% in 2023 and remained strong at 9.2% yoy in 1Q24. The tourism and information and communication technology sectors are expected to be important drivers of growth, while commencement of the Amulsar gold mine's operations from 2025 will be positive for exports and growth. Fitch expects growth to reach 6% in 2024, 5.5% in 2025 and 5.1% in 2026.
Fiscal Expansion: Authorities have increased expenditure to meet the needs of the refugee population, as well as on defence and other capex projects (where there has been historical under-execution). Fitch therefore expects the general government deficit to widen to 4.5% of GDP in 2024 (2023: 1.9%; current 'BB' median: 2.6%). In 2025, the introduction of a universal healthcare system will lead to additional expenditure pressures, causing the deficit to increase to a projected 5.4% of GDP. We expect the deficit to moderate to 4.2% of GDP in 2026 as refugee-related expenses taper off and new taxes boost revenue.
Rising Debt, High FX Risk: Fitch expects wider deficits will lift general government debt/GDP to 48.7% by end-2024 from 48.1% in 2023, and stabilise at 50.5% by 2026. This is higher than previously projected, but remains below the 'BB' median of 55.2%. Fitch expects the authorities will refinance a USD313 million Eurobond maturing in 1H25 in international markets, and raise the bulk of larger financing requirements with official creditor support and in the local market. Currency risk is the largest medium-term risk to debt dynamics, given that as of May 2024, 53% of debt was foreign-currency-denominated.
Weakening External Finances: We expect the current account deficit (CAD) will widen to 4.3% of GDP in 2024 and 4.5% in 2025, from 2.1% in 2023, given fiscal loosening, a significant capex pipeline and strong domestic consumption. Fitch believes that the large influx of remittances and other money transfers from migrants seen in 2021-22 will not be repeated, although a meaningful outflow is also not expected. Foreign-currency reserves stood at USD3.3 billion as of June 2024, below the August 2023 peak of USD4.2 billion. This is equivalent to 2.8 months of projected current external payments, below the 'BB' median of 4.5 months, although Armenia's flexible exchange rate is a buffer to shocks.
Banking Sector Dollarisation: The banking sector is marked by relatively high dollarization, although as of May 2024, deposit dollarisation had fallen by 4.6pp from end-2022 to 50.4%. Loan dollarisation remains largely stable at around 34%, despite the Central Bank of Armenia phasing out new foreign-currency mortgages in 2023. Banks have adequate dram and foreign-currency liquidity (liquid assets making up 33% of total assets), strong asset quality (regulatory non-performing ratio of 1.1%), and high capitalisation (regulatory capital adequacy ratio of 20%) and good profitability (return on equity of 28%) as of May 2024.
Low but Rising Inflation: The economy emerged from six months of deflation in May 2024, when prices grew by 0.3% yoy and further to 0.8% in June. Fitch expects inflation to rise to 1.3% by year-end (2024 average: 0.3%), and reach the 4% target in 2026, given our expectation of dram depreciation. Authorities have cut the refinancing rate by 75bp to 8% since the start of 2024; in Fitch's opinion, the loosening cycle has ended. Pass-through of monetary policy is somewhat constrained by relatively high dollarisation. Armenia has an ESG Relevance Score (RS) of '5' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality, and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Armenia has a medium WBGI ranking at the 44th percentile, reflecting a moderate level of rights for participation in the political process, relatively high geopolitical risks, moderate levels of political stability, moderate institutional capacity and rule of law, and a moderate level of corruption.
To recall that the World Bank forecasts a decline in GDP growth in Armenia to 5.5% in 2024 and to 4.9% in 2025 The EBRD forecasts Armenia's GDP growth by 6.2% in 2024 with a slowdown in 2025 to 4.8%. For the current year, S&P Global Ratings expects a slowdown in growth to 6.2%. In 2024, the Central Bank of Armenia, with its new analytical framework (FPAS MARK II), started to calculate the GDP forecast for several scenarios, henceforth indicating not a specific forecast rate, but the expected range. Thus, according to the CB updated June forecast, GDP growth in 2024 will be within 6.8-6.1% and will slow to 6.1-3.8% in 2025
