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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.
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.