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Rating Action:

Moody's changes outlook on Armenia's Ba2 rating to stable from negative, affirms rating

20 Aug 2013

New York, August 20, 2013 -- Moody's Investors Service has today changed the outlook on Armenia's Ba2 government bond rating to stable from negative and affirmed the rating.

RATINGS RATIONALE

The key drivers of the change in the outlook are:

1) Armenia's commitment to multi-year fiscal consolidation, driven partly by a steady revenue mobilisation;

2) A gradual reduction in Armenia's still large current account deficit at 11.1% of GDP at year-end 2012, supported by an improving income balance; and

3) Access to external funding sources on favourable terms, including significant private remittances, FDI inflows and official lending sources.

Moody's has also changed the local-currency ceiling in Armenia to Baa3 from Baa1.

RATIONALE FOR THE OUTLOOK CHANGE

The first driver of Moody's decision to stabilise the outlook and affirm Armenia's Ba2 rating is the authorities' commitment to fiscal consolidation, as reflected in the reduction of its deficit to 1.5% in 2012 from 7.5% in 2009. This was partly achieved through improved revenue mobilisation, but also by cuts to capital expenditures. Moody's expects a fiscal deficit of 2.6% and 2.1% in 2013 and 2014, respectively, to reflect the costs of pension-reform implementation starting next year and resumed capital expenditure. At 44% of GDP, Armenia's general government debt at the end of 2012 falls close to the median of Moody's Ba-rated universe.

The second driver of the outlook change is the further expected gradual reduction in Armenia's still large current account deficit at 11.1% of GDP in 2012, which has been underpinned by private transfers from abroad (including employee compensations) -- 92% of which originate from Russia -- that cumulated at almost 14% of GDP as of year-end 2012. That being said, Moody's notes that the country's external shock-absorption capacity is bound to weaken given (1) its economic and financial exposure to the economic slowdown in Russia; (2) the supply side shock stemming from the natural gas and energy tariff increase in July 2013; and (3) large official loan repayments due over the next two years.

The third driver of the outlook change to stable is Armenia's continued access to external funding sources on favourable terms, including via private remittances, foreign direct investment (FDI) and official lending sources. As of end-2012, multilateral and bilateral loans accounted for 83% of Armenia's government debt and Moody's expects steady net FDI inflows, albeit at a more moderate level than the 6.3% of GDP average during 2008-2012.

Although Armenia's international reserve buffer -- at 3.9 months of import coverage in 2012 -- provides limited cover in case of a foreign-currency funding shortfall in the economy or in the banking system, this concern is somewhat mitigated by the large share of concessional funding and in view of the central bank's macro-prudential measures deployed as a safeguard against the banking system's high dollarization level at 63% as of end-2012. Graduation from concessional funding is bound to drive increased diversification in financing sources, with market-based funding one option as the domestic market—albeit evolving rapidly --remains constrained.

WHAT COULD DRIVE THE RATING UP/DOWN

Moody's would consider assigning a positive outlook and eventually upgrading Armenia's rating if the initiated structural reforms propel the economy towards more balanced economic growth and a significant reduction in the current account deficit.

Negative rating pressure could develop (1) following a sustained deterioration in fiscal and external buffers; (2) if the current economic slowdown in Russia were to be sustained and mirrored by a sharp slowdown in remittance inflows to Armenia; (3) if adverse export minerals price movements were to persist, with significant impact on the current account performance.

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Elisa Parisi-Capone
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Bart Jan Sebastian Oosterveld
MD - Sovereign Risk
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes outlook on Armenia's Ba2 rating to stable from negative, affirms rating
No Related Data.
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