YEREVAN, January 21. /ARKA/. Rating-Agentur Expert RA GmbH confirmed the sovereign government credit rating (SGC) of Armenia at ‘BB-’ (Sufficient level of creditworthiness of the government) in national currency and at ‘BB-’ (Sufficient level of creditworthiness of the government) in foreign currency, the rating agency told ARKA News Agency.
The rating outlook is stable which means that in the mid-term perspective there is a high probability of maintaining the rating score.

Positive factors:

The rating agency analysts say the country’s budget deficit was lower than expected as a result of under-spending by the government due to the thorough review of the budget execution by the authorities.
“In 2019, the budget already includes the new fiscal rules aimed at managing public finances without affecting economic output negatively,” they say. “Also, in the mid-term perspective we still expect the fiscal policy to be contractionary and to swap current expenditures for capital expenditures to propel growth.”

In 2018, the banking sector remained quite stable. After the tense political situation, which developed along part of last year, the banking system remained solid with good capitalization and liquidity metrics.
As of September 2018, the capital adequacy ratio stood at 17.9% and the ratio of liquid assets to short-term liabilities was 126.5%.

In addition, the ratio of NPLs to total loans, despite having slightly increased since 2017, was also low at 6.9%.
Moreover, profitability was favorable as ROA stood at 1.5% and ROE at 9.5% as of the same date.
Credit to the economy has picked up: as of November 2018, loans in Armenia had grown by around 20.3% y-o-y and we project domestic credit to GDP to be in the range between 60%-62% at the end of 2018.
Government debt structure has remained nearly unchanged.
As of November 2018, shortterm debt accounted for 2.6% of total debt, 14.3% had floating interest rate and FXdenominated debt remained elevated at 80.7%; nevertheless, this type of debt is mostly concessional.
Real GDP growth is expected to have slowed down in 2018 as compared to 2017, albeit remaining robust at about 5.3%.
The analysts point out that robust private consumption and investment, higher copper prices, stable remittances and exports contributed positively to growth; however, public spending was weaker than anticipated.
“Moreover, toward the end of 2018 we have observed lower remittances inflow, which have hurt private consumption figures, and also a y-o-y decline in exports as a result of weaker external demand,” they say.
As inflation remains stalled (expected at 2,7% by end-2018) mainly due to steep declines in food prices and as private consumptions has shown signs of slowing down towards the end of the year, the Central Bank of Armenia (CBA) has left the refinancing rate at 6% continuing with its expansionary monetary policy.
Even though the inflation metric is well off the CBA target, the stability of the reading has been positive; between 2017 and 2018, the dynamic of the CPI index has been the smoothest in recent years.
“In general, we continue to observe a high quality of the monetary policy with high credibility and an improved transmission mechanism which has contributed to the fall of lending rates,” analysts say.
Armenia has a strong investment potential as showed by a projected net FDI inflows to GDP at around 2% in 2018.

Restricting factors:

The rating agency’s analysts say that after a rapid slide in international reserves in 1H 2018, these started to pick up again in 2H 2018 and reached USD 2.2 bn by year-end 2018.
Thus, short-term debt remains well covered (13x).
GDP per capita in PPP terms is expected to have finished 2018 at USD 10.3 th.

The inflation rate is expected to post a figure of around 2.7% in 2018 - very close to the reading from 2017, reflecting stability in the price level.
“The quality of the fiscal policy remains quite favorable as we have seen narrowing budget balances and lower public debt confirming a positive path for the consolidation process,” the analysts say. “As already mentioned, the new fiscal rules were already implemented in the new budget for 2019. Moreover, the government plans a new tax policy where the profit and dividend tax rates will be reduced and sales tax rates will be increased to compensate for the cuts.”
Institutional development in the country remains bearable as there are good conditions in the country for business as shown by the Doing Business rating, with a moderate rule of law and government transparency.
Nonetheless, corruption remains a drag for economic growth.
The spread between the 10Y U.S. government bond and the USD-denominated Armenian government bond maturing in 2025 remains acceptable at 3.3p.p.

Negative factors:

Government debt is expected to have remained quite stable in 2018.

“We project this metric to have declined by around 2p.p. in the last year down to around 51% of GDP,” the analysts say. “Public debt, which includes obligations from the CBA, is also expected to have declined. Moreover, government debt to budget revenues, according to our projection, will stand at around 235% of GDP showing a decrease of about 17p.p. as compared to 2017.”

These figures support the strategy of the government to consolidate public finances and reduce debt.
Levels of unemployment in Armenia are expected to remain fairly high in 2018 at around 18%. The underdevelopment of the stock markets is still a negative factor affecting the creditworthiness of Armenia.
Market capitalization in the country declined slightly in 2018 down to 2.4% of GDP.
The country’s position in the global competitiveness ranking of the World Economic Forum improved slightly in 2018 as the country was ranked 70th of 140 countries (73rd in 2017).

However, business remains dominated by oligopolies and the economy relies heavily on imports.

Stress factors:

Financial dollarization remains high but stable; loans and deposits in FX were equivalent to 55.6% and 53% of total loans and deposits respectively as of November 2018 (weak stress factor).
The conflict with Azerbaijan for the Nagorno-Karabakh remains unresolved and escalation is still a latent risk (very weak stress factor). 1 Non-oil dependent peers include Georgia, Kyrgyzstan and Tajikistan

Sensitivity assessment:

The rating agency analysts think the following developments could lead to an upgrade: Materialization of the consolidation efforts of public finances for a substantial period of time: narrowing of the fiscal balance and drop of government and public debt levels.
Consistent reduction in the dependence on external factors combined with a steep decrease in levels of financial dollarization.
As developments that could lead to a downgrade, the analysts point out the following: Opposite behavior in regard to our estimated fiscal expectations; i.e. further widening of the fiscal balance and a sustained increase on government debt in the mid- to long-term perspective.

“The confirmation of Armenia’s ratings at ‘BB-’ with a stable outlook reflects a well-managed, effective and credible monetary policy, successful consolidation efforts of public finances, as well as robust and stable economic growth,” Hector Alvarez, Rating Associate of Rating-Agentur Expert RA GmbH. Responsible expert, is quoted in the agency’s report.
“Moreover, the structure of government debt remains quite favorable despite most of the obligations being of external nature. Also, we consider that the political risk has been reduced as the new government won by a high margin in the past December elections. Despite this, government debt is still elevated and the country remains highly exposed to external factors as the economy is still highly dependent on remittances inflows, imports and commodities’ exports. Moreover, despite financial dollarization and government debt having decreased, they remain fairly high.” -0---