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Fitch affirms Armenia at 'BB-'; Outlook stable

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  • Fitch affirms Armenia at 'BB-'; Outlook stable

    Fitch affirms Armenia at 'BB-'; Outlook stable

    tert.am
    18:14 - 23.08.12


    Fitch Ratings has affirmed Armenia's Long-term foreign and local
    currency Issuer Default Ratings (IDR) at 'BB-'. The Outlook on the
    Long-term IDRs is Stable. At the same time, Fitch has affirmed the
    Short-term foreign currency IDR at 'B' and Country Ceiling at 'BB,'
    Reuters reports.

    The rating affirmation reflects the fact that Armenia is gradually
    reducing its fiscal and external imbalances. The government narrowed
    the fiscal deficit to 2.8% of GDP in 2011, from 5% of GDP in 2010,
    through tax collection improvements, revenue surprises and spending
    restraint. The fiscal deficit is converging on the medium term target
    of 2% of GDP, although not all supporting measures have been spelled
    out. This would allow public debt to stabilise at around 45% of GDP.
    However, this ratio is unusually sensitive to exchange rate movements,
    given that 84% of public debt is in foreign currency, mainly from
    multilateral lenders. External and fiscal sustainability are therefore
    closely linked.

    Real GDP grew 4.6% in 2011, driven by consumption and exports, and a
    rebound in agriculture. Fitch expects growth of around 4% in 2012-14,
    with risks to the upside in 2012. Mining production could outperform,
    but exposure to metals prices and the Russian economy are sources of
    vulnerability. Improvements in the investment climate would lead to
    more rapid growth in the medium-term.
    External finances are a weakness relative to peers. The current
    account deficit (CAD) narrowed to 11% of GDP in 2011, but was still
    the second largest in Emerging Europe and the third widest among 'BB'
    rated sovereigns. It is well above its pre-crisis level. Slowing
    growth in export earnings, linked to falling metals prices, will limit
    further progress in 2012. With only half of the CAD financed by
    foreign direct investment, the remainder is financed by external
    borrowing, pushing up net external indebtedness.

    The Central Bank of Armenia (CBA) allowed greater exchange rate
    flexibility in H112 during a lull in foreign exchange earnings. The
    size of its interventions has declined although it has been a net
    seller of foreign exchange in 2011-2012.

    Armenia will start to make net repayments to the IMF in 2013. CBA and
    government repayments to the IMF are to peak in 2013 at USD279m (2.6%
    of forecast GDP or one-sixth of CBA reserves). Reserves will therefore
    stay flat or decline. Fitch expects the government to seek a successor
    agreement to the Extended Fund Facility/Extended Credit Facility
    expiring in June 2013. The government expects to refinance its direct
    obligations to the Fund from multilateral sources.

    Armenia's ability to absorb further external shocks is weaker than in
    2008, as government and external debt have multiplied.

    Pressure on reserves or the dram - following an external shock - would
    lead to negative rating action. Any shortfall in capital inflows would
    increase risks of currency devaluation. A lower CAD, lower
    dollarization and more buoyant reserves would be positive for the
    ratings.

    Further progress in reducing the fiscal deficit, preferably via tax
    collection improvements rather than spending restraint, would help
    bolster creditworthiness. While government debt service ratios are
    still low, funding costs will rise over the medium-term, increasing
    the importance of stabilising or reducing public debt. Pension reform
    in 2014, though a net fiscal cost in the short term, could help
    develop local capital markets and reduce reliance on external and bank
    borrowing.

    Fitch has previously highlighted the relative strengths of Armenia's
    banking system. However, real bank lending growth was the fastest in
    Emerging Europe in 2011 at 25%, and the second fastest among 'BB'
    rated sovereigns, raising some macro-prudential concerns. Rapid growth
    has continued in 2012, with lending to corporates and in foreign
    currency the main growth areas. Risks to sovereign creditworthiness
    are mitigated by banks' loss absorption capacity, in the shape of high
    capital adequacy ratios, and the relatively small size of the banking
    system.

    Policy continuity is the most likely outcome of presidential elections
    in February 2013. Fitch believes President Serzh Sargsyan is likely to
    win a second term, assuming he stands again. The improved conduct of
    parliamentary elections in May 2012, which gave the ruling Republican
    Party an enhanced majority, suggests that the result will be broadly
    accepted, averting the risk of a disputed result and violence, as seen
    in 2008.

    Political unrest, triggered by a disputed presidential election in
    February 2013, or worsening tensions with Azerbaijan surrounding
    Nagorno-Karabakh - neither of which are part of Fitch's core forecast
    - could lead to negative rating action.

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