YEREVAN, July 31. /ARKA/. Sharp increases in money transfers and movement of migrants from Russia have contributed to a sustained strengthening of the dram since mid-2022, Fitch Ratings said as it has upgraded Armenia's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BB-' from 'B+'. The Outlook is Stable.

It says the strong dram and the easing of global commodity prices caused inflation to fall into negative territory in June (-0.5% yoy) from a peak of 8.1% in January-February. Core inflation is also declining, from an average of 8% in 1Q23 to 1.5% yoy in June, notwithstanding strong wage growth (18% yoy as of May 2023), reducing concerns over economic overheating. Fitch expects the dram to moderately depreciate in 2023-24, albeit still to levels stronger than before the start of the Ukraine conflict.

Armenia benefits from strong support and technical assistance from a range of multilateral and bilateral creditors.

As of May 2023, an estimated 78% of external public debt was owed to official lenders, offering favorable financing conditions. Armenia is also the beneficiary of a 36-month USD172 million stand-by arrangement with the IMF, although authorities are currently treating this as precautionary.

The Armenian banking sector has favorable profitability (return on equity of 18%), asset quality (non-performing loan ratio of 2.6%) and capitalization (Tier 1 capital ratio of 18.7% as of May). Deposit dollarization levels have been stable, at 52.3% as of May 2023, while loan dollarization declined slightly to 34.8% as of May.