Singapore, August 31, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the Government
of Armenia's Ba3 local and foreign currency long-term issuer ratings
and foreign currency senior unsecured rating. The outlook remains
stable.
The affirmation of the Ba3 ratings is driven by the credit profile's
resilience to the significant shocks of the coronavirus pandemic and geopolitical
and domestic political tensions, and Moody's expectations
that growth and fiscal strength will recover over the medium term.
The fiscal profile in particular has proven resilient and will stabilize
over the medium term, with debt consolidation expected from 2021
onward as growth and revenue rebound, and as the government adjusts
expenditure downward in line with fiscal rules. Meanwhile,
Moody's assesses that the 2020 ceasefire agreement with Azerbaijan
and the June snap parliamentary election have reduced near-term
political risks, supporting economic recovery and minimizing the
impact to Armenia's fundamental growth outlook. External
deficits drive currency valuation risks that can transmit to fiscal strength
and financial stability, although external buffers have increased
to withstand these potential shocks.
The stable outlook reflects balanced risks to the Ba3 rating. While
a developing track record of policy effectiveness supports the development
of a diversity of higher productivity sectors, growth potential
remains constrained by demographic pressures and the small scale of the
economy. Upside risk stems from more effective reforms that contribute
to sustained growth at higher rates than Moody's currently assumes
over the medium term. Event risk remains the key source of downside
risk due to geopolitical tensions with neighboring countries, and
external vulnerability and banking system risks resulting from the high
share of foreign-currency debt, structural current account
deficits, and a highly dollarized banking system.
Armenia's local and foreign currency country ceilings remain unchanged
at Baa2 and Ba1, respectively. The four-notch gap
between the local currency ceiling and the sovereign rating reflects a
balance between the government's small footprint in the economy
and strong institutions, and geopolitical tensions with neighboring
countries and external deficits that expose the economy to external shocks.
The two-notch gap between the foreign currency ceiling and the
local currency ceiling incorporates Moody's assessment of Armenia's
policy effectiveness and transfer and convertibility restrictions in times
of stress.
RATINGS RATIONALE
RATIONALE FOR THE RATING AFFIRMATION AT Ba3
DEBT CONSOLIDATION TO RESUME, DEMONSTRATING RESILIENCE TO IMPACT
OF PANDEMIC AND GEOPOLITICAL STRAINS
The pandemic-induced shock to domestic and external demand led
to a 7.4% contraction in real economic output in 2020,
among the most severe downturns among sovereigns in Central Asia and the
Caucasus region. With declining revenue and higher expenditure
on coronavirus-related relief measures, the government triggered
an escape clause in its debt management framework and suspended a fiscal
rule that prescribes public debt reduction to below 60% of GDP
within five years. Armenia's fiscal deficit widened to more
than 5% of GDP while government debt rose to 63.5%
of GDP in 2020 from 50.1% in 2019.
Moody's expects a recovery in the economy and an adherence to the
authorities' expenditure plan to support a lowering of debt to below
60% GDP by 2022, in line with the median for Ba3-rated
peers. Moody's expects the authorities to gradually reduce
expenditure to 28% of GDP by 2022 from 31% of GDP in 2020
to reflect lower costs associated with pandemic-related social
assistance and the re-allocation of expenditure savings from unspent
funds for capital investment. Revenue is likely to be stable as
a share of GDP around 25% of GDP over the medium term, reflecting
pre-pandemic revisions to the tax code that are likely to increase
income and property tax collections, and will benefit from grant
assistance from international partners including the European Union.
While not Moody's baseline scenario, there remains some risk
of fiscal slippage depending on contingencies such as the further flare-up
in geopolitical risks or rising demands for social expenditures to address
subsequent waves of coronavirus infections. However, Moody's
expectation is for the authorities to prioritize debt consolidation through
2024, with debt to GDP declining to 54% of GDP by 2024.
While the level of public debt has increased, the fiscal profile
will be underpinned by a continued emphasis on long-dated external
concessional borrowing, occasional Eurobond issuance, and
increasingly, a focus on domestic financing sources, that
will support lower interest costs relative to Ba3 peers. Accordingly,
Moody's expects debt affordability to remain a credit strength,
with interest payments as a share of GDP remaining low at below 2.5%,
and interest payments as a share of revenue at around 10%.
Even with a greater emphasis on domestic borrowing, the authorities
will likely maintain access to a broad array of external financing sources,
primarily on concessional terms from multilateral and bilateral lenders.
GROWTH POTENTIAL RESILIENT TO PANDEMIC AND POLITICAL TURMOIL
Moody's expects a broad-based growth recovery over the next
12-18 months resulting from reduced lockdown measures driving private
consumption and investment, robust external demand and the return
to pre-pandemic levels of remittance inflows that will support
consumption and savings. Moody's forecasts real GDP growth
of 4.5% in 2021, reflecting a rebound in activity
in manufacturing, agriculture and mining, offset by continued
weakness in services sectors such as tourism, which accounts for
13% of GDP, according to the World Travel and Tourism Council.
Downside risks also relate to the risk of additional waves of coronavirus
infections that would weigh on domestic activity, as well as reducing
the prospects of a rapid rebound of the tourism sector. As of late
August, just 5% of Armenia's population has received
at least one vaccine dose, risking future spikes in infections.
An uptick in inflation has also prompted several policy rate hikes by
the Central Bank of Armenia since late 2020. However, these
pressures are likely to dissipate in 2022 through base effects and moderation
of inflation expectations, fostering a more pronounced recovery
in real growth to 7.5%.
Investments will also continue in nascent, higher productivity sectors
that will reduce Armenia's reliance on physical commodities,
including tourism and information and communication technology (ICT).
These sectors are poised to drive productivity and income growth over
the medium term, although they may encounter labor and skills shortages
due to Armenia's small population and declining labor force.
ICT in particular remained a stable source of services export revenue
through the pandemic. The industry intends to pivot toward increasing
technical capacity in higher value offerings including artificial intelligence
and semiconductor design.
Despite near-term headwinds, Moody's expects tourism
to be a key source of growth over the medium term. Accordingly,
the government has announced plans to launch a national discount airline
that will be part of a broader strategy to encourage tourism as well as
improve Armenia's broader connectivity, given its landlocked
geography and the limited transportation and economic ties with several
of its neighboring countries.
EXTERNAL DEFICITS, INFLATION AND BANKING SYSTEM DOLLARIZATION CONTINUE
TO POSE EXTERNAL VULNERABILITY RISKS
Moody's expects Armenia to sustain current account deficits of between
4% and 5% of GDP through 2022, resulting from improving
domestic demand, rising oil prices and the real appreciation of
the dram acting as a drag on exports. Deficits are likely to remain
predominantly financed by debt portfolio inflows, both commercial
and concessional, and bank liabilities, while foreign direct
investment (FDI) inflows will rebound gradually. FDI inflows have
been volatile and low as a share of GDP relative to Ba3 peers, at
1.9% of GDP on average between 2014 and 2019. The
significant share of external public debt (75% of total public
debt) and dollar-denominated bank loans will keep Armenia's
External Vulnerability Indicator, the measure of short-term
external liabilities as a share of total foreign exchange reserves,
above 100% through 2023.
Moody's expects Armenia's large external deficits to drive
the credit profile's susceptibility to event risk. These
risks can manifest from a sudden depreciation of the dram exchange rate
or shifts in geopolitical risks, which can result in inflation volatility
and affect the debt trajectory and financial stability, due to the
sensitivity of government debt to currency fluctuations and the high level
of dollarization in the banking system. While the ongoing economic
recovery is set to stabilize asset quality and liquidity conditions,
the ongoing risk of foreign-currency deposit outflows will continue
to pose banking system risks. Nevertheless, Moody's
expects a healthy reserves position and a moderate level of external debt
service over the next four years to ease pressures on the foreign exchange
reserves buffer. The International Monetary Fund's increased
SDR allocation, along with the February 2021 issuance of a $750
million Eurobond, will also boost Armenia's reserves in 2021.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects balanced risks to the rating. Diverse
growth drivers will underpin a gradual economic recovery, although
growth potential remains constrained by demographic pressures and the
small scale of the economy. Moody's assesses that while recent
political uncertainty has abated, the residual effects of geopolitical
tensions and social polarization are likely to act as a drag on institutional
reform momentum in the near term, with a stronger rebound in FDI
conditional on continued political stability over the medium term.
However, upside risk stems from more effective reforms that contribute
to sustained growth at higher rates than Moody's currently assumes
over the medium term.
Event risk remains the key source of downside risk due to geopolitical
tensions and external vulnerability and banking system risks resulting
from the high share of foreign-currency debt, structural
current account deficits, and a highly dollarized banking system.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Armenia's ESG Credit Impact Score is moderately negative (CIS-3),
driven primarily by moderately negative social and environmental risks,
and low governance risk that is underpinned by a track record of policy
effectiveness and institutional reforms.
Armenia's exposure to environmental risks is moderately negative
(E-3), reflecting the country's moderate exposure to
heat and water stress, sizeable agricultural sector and its landlocked
geography and small land area, with low exposure to pollution,
water constraints, and carbon transition risk, given the economy's
low dependence on hydrocarbon revenue and exports. Armenia's
score is largely in line with regional neighbors.
Armenia's social risk exposure is moderately negative (S-3)
and is driven by demographic challenges including a small, aging
population and a high level of youth unemployment that may act as a drag
on long-term potential growth. High emigration by higher
skilled Armenians supports inbound remittances, a mitigating factor,
but also exacerbates demographic dynamics. The pivot to higher
productivity services sectors including information technology may help
to mitigate these risks. Moderate risks stem from similar levels
of housing and health care provision, life expectancy, and
access to basic services observed in other sovereigns in the region.
Armenia's governance risk exposure (G-2) is neutral to low,
reflecting the relative strength versus peers in economic policymaking,
with a track record of fiscal and monetary prudence, and initial
progress toward institutional reforms. Ongoing challenges include
the control of corruption and rule of law compared to peers, although
perceptions have recently improved and institutional reforms to address
these issues, in large part with international technical assistance,
are among the government's top priorities. The banking system's
large size and significant dollarization level pose challenges to the
effectiveness of macroprudential and regulatory policies to mitigate risks
to financial stability.
GDP per capita (PPP basis, US$): 13,261 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -7.4% (2020
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.7%
(2020 Actual)
Gen. Gov. Financial Balance/GDP: -5.1%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.8% (2020 Actual)
(also known as External Balance)
External debt/GDP: 102.1% (2020 Actual)
Economic resiliency: ba1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 26 August 2021, a rating committee was called to discuss the
rating of the Armenia, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutions and governance strength, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed. The issuer
has become increasingly susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO AN UPGRADE
Moody's would likely upgrade the rating in the event of further
reforms that were to raise economic competitiveness and institutional
credibility and effectiveness beyond Moody's current expectations.
This would in part materialize through greater levels of private investment,
reduced banking system risk, and increased transparency of and trust
in institutions, including in the judiciary.
A structural narrowing of the current account deficit and improvement
in Armenia's external position, including through higher competitiveness
and foreign direct investment, would also contribute to upward pressure
on the rating. An increase in government revenue arising from fiscal
reforms beyond Moody's expectations, that would support the government's
debt carrying capacity, would additionally put upward pressure on
the rating.
A durable easing of tensions with neighboring countries that leads to
a material reduction in geopolitical risks and greater economic connectivity
would also be credit positive.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Moody's would likely downgrade the rating if there was a loss of
reform momentum, which would likely transpire through weaker confidence
in institutions and fiscal slippage removing prospects that the government
debt burden will decline over the medium term.
An increase in external vulnerability risk, such as a sustained
increase in current account deficits that resulted in declining foreign
exchange reserve adequacy and/or significant depreciation of the local
currency, would additionally contribute to macroeconomic and financial
stability risks and put downward pressure on the rating. An escalation
of tensions with Azerbaijan over the Nagorno-Karabakh territory
and border demarcation into full-scale conflict would also put
negative pressure on the rating.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
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provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
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For any affected securities or rated entities receiving direct credit
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the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
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for Designating and Assigning Unsolicited Credit Ratings available on
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
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for additional regulatory disclosures for each credit rating.
Nishad Harshit Majmudar
AVP-Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
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Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
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Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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