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ARMENIAN EXTERNAL PUBLIC DEBT EASES IN 2014, BUT LEAVES FINANCIAL RISKS VERY HIGH
IHS Global Insight
March 12, 2015
by Venla Sipila
Armenia's already weak current account position is starting to look
increasingly precarious; even as external public borrowing fell, debt
ratios signal substantial financial risks, especially as all-important
remittance inflows are severely suppressed as a result of the Russian
downturn.
Public external debt edges down
According to the latest figures published by the Armenian National
Statistical Service, the country's gross external public debt ended
last year at USD3.8 billion, having decreased by 2.9% during the year.
This follows growth of 4.3% over 2013, and presents the first annual
fall in total debt since 2005. According to additional official
data quoted by ARKA, some 69% (USD2.6 billion) of external public
debt consisted of loans from multilateral creditors, such as the
World Bank. Meanwhile, bilateral loans amounted to USD504 million,
in a decrease of 8.1% from the beginning of the year. The Japanese
International Corporation Agency (JICA) was the leading bilateral
creditor. Armenia's Eurobond issue accounted for USD659 million of
external debt. Finally, total public debt at the end of last year was
worth USD4.4 billion, 3.5% lower than a year earlier, and equivalent
to around 40% of GDP. Meanwhile, the Central Bank of Armenia reports
that its gross international reserves excluding gold, ended the year
at USD1.5 billion, having dwindled 34% during 2014, and slid 11%
over the fourth quarter alone.
Remittance inflows collapsing
Meanwhile, figures on workers' remittances from CBA show that inflows
during 2014 dwindled by 26%, then collapsed by a further 56% in
January alone. Remittances from Russia, in particular, fell by 37%
in 2014 and by 64% in January 2015.
In further indication of the drastic impact of the Russian struggles
on Armenia, Russian inflows in 2013 and 2014 on the average accounted
for 73-74% of total remittance inflows, but only 53% of the inflows
in January. To some extent, FDI data are likely to show similar
developments.
Outlook and implications
Even as Armenian external public debt fell during last year, and
notwithstanding the recent narrowing of the trade deficit (seeArmenia:
4 February 2015:Q4 contraction in imports restricts Armenian 2014
trade deficit), the country's external financial position is very
precarious. Indeed, in light of the latest remittance figures, and
given that the outlook for exports and remittances remains extremely
weak, with the Russian economy likely to contract this year, the risk
has increased that the overall current account may deteriorate again
this year. Dram depreciation, largely affected by contagion from
the Russian rouble, should aid in suppressing the trade and current
account deficits, by making imports more expensive and also giving
some temporary supports to exports. However, this is not likely to
outweigh the negative impacts, whereas the support on the current
account of the lower oil prices will be counterweighed by the weaker
dram exchange rate and decreased world market prices of Armenian mining
exports. It also remains possible that the dram exchange rate may need
to depreciate still further, in order to keep the current-account gap
manageable. In any case, this impact would mainly work through imports;
given poor competitiveness and weak productivity, we do not expect that
even a still considerably weaker dram would have any markedly positive
impact on export demand, even if, in theory, this could be expected.
The vulnerability of Armenia's external financial position is shown
in the latest external public debt figures also by them implying that
around 85% of outstanding borrowing is nominated in foreign currency.
Moreover, deprecation of the dram has a negative impact on the banking
sector in the still very dollarised economy. In addition, although
not included in our baseline scenario at the moment, in light of the
latest figures of Armenian external reserves, a risk also exists that
import cover might even fall below or at least approach the critical
level of three months generally seen as just adequate.
We cut the outlook on our sovereign rating on Armenia to Negative
in the last review, and a downgrade in the current forecast round
certainly remains a possibility (seeArmenia: 27 January 2015:IHS
adjusts Armenian sovereign outlook to Negative as foreign currency
inflows are increasingly threatened). In particular, deterioration in
foreign currency inflows risks putting critical pressure on Armenian
liquidity, potentially relatively quickly. With less private investment
inflows, also the risk of increased need for borrowing remains, and
we see that this also could have a negative impact on solvency as
well. Indeed, we already project that the ratio of total external
debt to foreign currency inflows is likely to remain around 150%,
and in light of the latest developments and data, downward risks to
this forecasts have increased.
The sovereign has recently expressed hopes of a new international bond
issue. Although the currently low international interest rate levels
should generally aid in riskier issuers in their debt offers, we do not
see Armenia's chances of a successful Eurobond float at the moment as
very high. Then again, Armenia has a very good relationship with the
International Monetary Fund (IMF). Thus, it remains likely that, if
needed, the international lender would probably provide for additional
assistance for the country, before a full-blown balance of payments
crisis would materialise (seeArmenia: 12 January 2015:As expected,
IMF approves further support for vulnerable Armenian economy).
From: A. Papazian
IHS Global Insight
March 12, 2015
by Venla Sipila
Armenia's already weak current account position is starting to look
increasingly precarious; even as external public borrowing fell, debt
ratios signal substantial financial risks, especially as all-important
remittance inflows are severely suppressed as a result of the Russian
downturn.
Public external debt edges down
According to the latest figures published by the Armenian National
Statistical Service, the country's gross external public debt ended
last year at USD3.8 billion, having decreased by 2.9% during the year.
This follows growth of 4.3% over 2013, and presents the first annual
fall in total debt since 2005. According to additional official
data quoted by ARKA, some 69% (USD2.6 billion) of external public
debt consisted of loans from multilateral creditors, such as the
World Bank. Meanwhile, bilateral loans amounted to USD504 million,
in a decrease of 8.1% from the beginning of the year. The Japanese
International Corporation Agency (JICA) was the leading bilateral
creditor. Armenia's Eurobond issue accounted for USD659 million of
external debt. Finally, total public debt at the end of last year was
worth USD4.4 billion, 3.5% lower than a year earlier, and equivalent
to around 40% of GDP. Meanwhile, the Central Bank of Armenia reports
that its gross international reserves excluding gold, ended the year
at USD1.5 billion, having dwindled 34% during 2014, and slid 11%
over the fourth quarter alone.
Remittance inflows collapsing
Meanwhile, figures on workers' remittances from CBA show that inflows
during 2014 dwindled by 26%, then collapsed by a further 56% in
January alone. Remittances from Russia, in particular, fell by 37%
in 2014 and by 64% in January 2015.
In further indication of the drastic impact of the Russian struggles
on Armenia, Russian inflows in 2013 and 2014 on the average accounted
for 73-74% of total remittance inflows, but only 53% of the inflows
in January. To some extent, FDI data are likely to show similar
developments.
Outlook and implications
Even as Armenian external public debt fell during last year, and
notwithstanding the recent narrowing of the trade deficit (seeArmenia:
4 February 2015:Q4 contraction in imports restricts Armenian 2014
trade deficit), the country's external financial position is very
precarious. Indeed, in light of the latest remittance figures, and
given that the outlook for exports and remittances remains extremely
weak, with the Russian economy likely to contract this year, the risk
has increased that the overall current account may deteriorate again
this year. Dram depreciation, largely affected by contagion from
the Russian rouble, should aid in suppressing the trade and current
account deficits, by making imports more expensive and also giving
some temporary supports to exports. However, this is not likely to
outweigh the negative impacts, whereas the support on the current
account of the lower oil prices will be counterweighed by the weaker
dram exchange rate and decreased world market prices of Armenian mining
exports. It also remains possible that the dram exchange rate may need
to depreciate still further, in order to keep the current-account gap
manageable. In any case, this impact would mainly work through imports;
given poor competitiveness and weak productivity, we do not expect that
even a still considerably weaker dram would have any markedly positive
impact on export demand, even if, in theory, this could be expected.
The vulnerability of Armenia's external financial position is shown
in the latest external public debt figures also by them implying that
around 85% of outstanding borrowing is nominated in foreign currency.
Moreover, deprecation of the dram has a negative impact on the banking
sector in the still very dollarised economy. In addition, although
not included in our baseline scenario at the moment, in light of the
latest figures of Armenian external reserves, a risk also exists that
import cover might even fall below or at least approach the critical
level of three months generally seen as just adequate.
We cut the outlook on our sovereign rating on Armenia to Negative
in the last review, and a downgrade in the current forecast round
certainly remains a possibility (seeArmenia: 27 January 2015:IHS
adjusts Armenian sovereign outlook to Negative as foreign currency
inflows are increasingly threatened). In particular, deterioration in
foreign currency inflows risks putting critical pressure on Armenian
liquidity, potentially relatively quickly. With less private investment
inflows, also the risk of increased need for borrowing remains, and
we see that this also could have a negative impact on solvency as
well. Indeed, we already project that the ratio of total external
debt to foreign currency inflows is likely to remain around 150%,
and in light of the latest developments and data, downward risks to
this forecasts have increased.
The sovereign has recently expressed hopes of a new international bond
issue. Although the currently low international interest rate levels
should generally aid in riskier issuers in their debt offers, we do not
see Armenia's chances of a successful Eurobond float at the moment as
very high. Then again, Armenia has a very good relationship with the
International Monetary Fund (IMF). Thus, it remains likely that, if
needed, the international lender would probably provide for additional
assistance for the country, before a full-blown balance of payments
crisis would materialise (seeArmenia: 12 January 2015:As expected,
IMF approves further support for vulnerable Armenian economy).
From: A. Papazian