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Armenia sovereign government credit rating at BB-

posted onAugust 1, 2020

Frankfurt-based Rating-Agentur Expert (RAEX) confirmed Armenia's sovereign government credit rating (SGC)  at 'BB-' (sufficient level of creditworthiness of the government) in national currency and foreign currency. 

The credit rating agency, however, changed the Armenia outlook from positive to stable which means that in the mid-term perspective there is a high probability of maintaining the rating score. 

“The change of the rating outlook for Armenia from positive to stable reflects our expectations about a widening of the budget deficit and an increase in debt levels by end-2020, together with the anticipated contraction of the economy” said Vladimir Gorchakov, Associate Director of Rating-Agentur Expert.

“However, the sovereign government credit ratings were confirmed at ‘BB-’, due to the fact that most of the debt increase is related to donor support at concessional terms. The ratings also remain supported by adequate quality of the fiscal and monetary policies, low inflation and a stable stance of the banking system. Nevertheless, government debt levels and its currency structure, together with a high exposure to external shocks, high dependence on imports and negative current account balance, continue to be the factors constraining the rating” he clarified.

Identifying positive factors  that influenced both types of ratings the report noted:

-The banking sector of Armenia showed a healthy stance at the pre-crisis point. By the end of 1Q 2020 the regulatory capital to risk-weighted assets was 17,0%, NPLs to total loans stood at 5,3%, ROA and ROE were 1,8% and 12,6% respectively, while the ratio of liquid assets to demand deposits was 118,1%.

-Government debt structure remains favorable.  As of May 2020, short-term debt accounted for 4,8% of total debt, 16% had floating interest rate and FX-denominated debt remained elevated at 77%; however, this type of debt remains mostly concessional; 

-The inflation rate in 2019 continued its decline and reached 0,7% by the end of the year as compared to 1,8% in 2018. The reading, however, stood well below the initial target of 4% set by the Central Bank of Armenia. Such a low level of inflation, allowed the CBA to lower its policy interest rate three times during 1H 2020.

-In response to the COVID-19 crisis the fiscal authorities turned to a counter-cyclical loose fiscal policy with accelerated budget support of the economy, at the same time the government keeps improving the quality of such policy by implementing public investment management reforms, Medium-Term Expenditure Framework and programbased budgeting. 

-Armenia remains attractive for foreign investors, as shown by stable levels of FDI net inflows, which stood at around 2% of GDP over the last two years (1,9% in 2019 as compared to 2,0% in 2018); however, we can expect sharp decrease of FDI in 2020 driven by the current turbulence in the global economy.

Armenia Interest Rate

(The Central Bank of Armenia left its key refinancing rate steady at 4.5 percent on July 28th 2020)

Listing negative factors impacting Armenia the report said:

-The level of public and publically guaranteed debt reached 53,6% of GDP in 2019, while the central government debt dropped below 50%, which is in line with the government’s objective. However, due to the current economic crisis, significant fiscal support of the economy and under-performance of the tax collection, we expect a sharp debt increase up to 64% of GDP and 275% of budget revenues by end-2020.

-Levels of unemployment in Armenia remained high in 2019 at 18,9% and are expected to increase slightly up to 19% in the face of the COVID-19 economic crisis.

-The stock market continues to be underdeveloped, as total market capitalization in the country has remained practically unchanged for the last five years and stood at 2,3% of GDP as of December 2019.

-Armenia is ranked 47th out of 190 countries in World Bank Doing Business report 2020, a drop of six places in the comparison with the 2019 results due to very low score on protecting minority investors rights. In addition, the economic competitiveness of Armenia remains limited, as shown by a persistent trade deficit, which stood at 15% of GDP in 2019 and expected to be around 13,6% in 2020.