NOTE: On May 26, 2022, the press release was corrected as follows: In the RATINGS RATIONALE section, the external debt/GDP disclosure was added as the sixth line of the Economic Data information. Revised release follows.
Singapore, March 24, 2022 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Armenia's Ba3 local and foreign currency long-term issuer ratings, as well as the foreign currency senior unsecured ratings. Concurrently, Moody's has changed the outlook to negative from stable.
The drivers of the negative outlook are Moody's assessment of increased risks that Armenia's near- and longer-term growth outlook deteriorates materially due to the impact of a sharp weakening of prospects for the Russian economy, which Armenia is linked to. In turn, weaker growth would have a negative impact on the sovereign's fiscal profile. In addition, Russia's invasion of Ukraine has increased geopolitical risks related to Armenia's unresolved territorial disputes with Azerbaijan.
The affirmation of the Ba3 ratings incorporates Moody's assessment that, taking into account the downside risks, Armenia's moderately high institutions and governance strength will support its economic resilience, buffering the impact of shock on its credit profile.
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 low transfer and convertibility risks even in times of stress.
RATINGS RATIONALE
RATIONALE FOR THE CHANGE IN OUTLOOK TO NEGATIVE FROM STABLE
LONGER-TERM GROWTH RISKS WEAKENING
Moody's expects near-term downward pressure on Armenia's growth outlook, with risks that this extends to the longer term.
Pressure reflects Armenia's relatively high economic linkages with Russia, whose economy Moody's expects to contract sharply in the aftermath of the country's invasion of Ukraine. Armenia's exports to Russia account for about 6% of GDP, while remittances from Russia also represent roughly 6% of GDP. Given the strong interlinkages, Moody's projects Armenia's real GDP growth to fall to 1.8% in 2022 and around 3% in 2023, compared to previous forecasts of 5-5.5% for each year.
The revised forecasts are driven by Moody's expectations that remittances will decline, amid an economic contraction in Russia and a depreciation of the ruble. Moody's expects total remittances (including from other sources) to contract by 20-30% in 2022, against earlier expectation for remittances to stay roughly flat. This will weigh on Armenian household consumption. In addition, export growth will also likely stall from lower demand from Russia, further weighing on real GDP growth.
In the longer term, Armenia's growth potential may weaken. This risk reflects Moody's view that international sanctions on Russia will remain for an extended period of time. As a result, remittances from Russia and exports to Russia are unlikely to recover to previous levels. Armenia's economic resilience to this shock will depend on the effectiveness of policies that may help absorb it.
DEBT LEVELS TO REMAIN SLIGHTLY HIGHER FOR LONGER, WITH RISKS SKEWED TOWARDS A LARGER FISCAL SHOCK
Moody's also expects fiscal consolidation to be on hold, with Armenia's debt burden stabilising at a higher level over the medium-term than previously expected given the more adverse economic outlook weighing on revenue. As a result of lower growth, Moody's expects the fiscal deficit to stay unchanged at 4-4.5% of GDP in 2022 and 2023, compared to previous expectation for the deficit narrow to 3% in 2022.
In tandem, Moody's expects the government debt to stabilise at a slightly higher level of around 62-63% of GDP over 2022 to 2024, from 60.3% of GDP in 2021. While the government has yet to announce any additional expenditures to support the economy, additional fiscal support, while supportive of growth, would further delay fiscal consolidation.
Armenia's fiscal profile is also exposed to currency risks, with 70% of its debt denominated in foreign currency. While not our baseline assumption, a sharp depreciation in the dram would worsen the government debt trajectory, while also increasing banking sector risks given the still-high levels of dollarisation.
GEOPOLITICAL RISKS MAY INTENSIFY
Geopolitical risks may also increase, particularly with Azerbaijan. In the near term, the Russia-Ukraine military conflict could destabilise the ceasefire agreement over the disputed territory between Armenia and Azerbaijan that Russia brokered in 2020. Should there be a significant increase in frequency and intensity of tensions between Armenia and Azerbaijan, it would weigh on consumption and investment, as well as fiscal strength especially if the currency was under pressure and/or defense spending increased markedly.
In the longer term, Moody's sees risks for Armenia stemming from greater uncertainty around how regional states are likely to re-assess relations with Russia in the wake of its invasion of Ukraine.
RATIONALE FOR THE AFFIRMATION OF THE Ba3 RATING
Armenia's Ba3 rating reflects Moody's assessment that the country's moderately high institutions and governance strength will help to support its economic resilience and buffer the impact of the shock. Moody's expects structural reforms to continue, which will at least partially offset the headwinds to Armenia's longer-term growth.
The government's 2021-2026 programme outlined an agenda to facilitate the rebalancing of Armenia's growth drivers from domestic to external demand. Armenia has achieved some success in diversifying its export basket. In particular, the country has built up a burgeoning information technology (IT) sector, albeit from a low base. The IT sector grew 20% annually on average from 2016-2020 and accounted for 11% of the country's services exports in 2019 from 8% in 2014. Continued growth in the higher value-added IT sector, and further diversification in its export basket and destinations, would augur well for Armenia's productivity growth and increase its resilience to shocks.
In addition, the government's debt structure, which is anchored by its large stock of multilateral and bilateral financing and borrowed on mostly concessional terms with long tenors and low interest rates, supports debt affordability and reduces government liquidity risk.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Armenia's ESG Credit Impact Score is moderately negative (CIS-3), driven primarily by moderately negative social and environmental risks, with 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$): 13,329 (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%
Economic resiliency: ba1
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 21 March 2022, 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 materially decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO AN UPGRADE
The negative outlook signals that a rating upgrade is unlikely over the near term. The outlook would likely be changed to stable if Armenia's growth outlook were to be better than Moody's current expectations, containing the deterioration in the government's fiscal and debt metrics. Signs of faster and sustained fiscal consolidation once the near-term pressures on growth fade would also be credit positive.
Ongoing and further reforms that translate into sustained improvements in economic competitiveness and the business climate, supporting economic diversification and resiliency, would also create conditions for a stable outlook.
FACTORS THAT COULD LEAD TO A DOWNGRADE
The rating would likely be downgraded if it looked increasing likely that Armenia's long-term growth prospects and/or fiscal strength were markedly weakened compared to Moody's current expectations. A renewed and lasting escalation of tensions with Azerbaijan into full-scale conflict, would also put downward 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 ratings in accordance with Moody's rating practices. For ratings 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 for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement 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 to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, 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 agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
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_1288235.
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 by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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Grace Lim
Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore, 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore, 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077