Frankfurt am Main, March 18, 2016 -- Moody's Investors Service, ("Moody's") has today downgraded Armenia's
long-term issuer and senior unsecured debt ratings to B1 from Ba3.
Concurrently, Moody's has changed the outlook to stable from
negative.
The key drivers for the downgrade to B1 are:
1. Armenia's increasing external vulnerabilities stemming from
(a) declining remittances from Russia that have not yet bottomed out,
(b) an uncertain outlook for foreign direct investment (FDI) inflows that
collapsed in 2015 and (c) an elevated susceptibility to renewed pressures
on the local currency and the country's foreign exchange reserves;
2. Armenia's worsening fiscal and government debt metrics
and the expectation that Armenia's general-government-debt-to-GDP
ratio will rise above 50% in 2017 under the baseline assumption
of a growing economy.
The stable outlook reflects Moody's expectation that downside and
upside risks to Armenia's credit profile are broadly balanced at
the new, lower rating level of B1.
In the same action, Moody's has also lowered Armenia's
long-term foreign-currency deposit ceilings to B2 from B1
and the long-term local-currency bond and deposit ceilings
to Ba2 from Ba1. At the same time, the long-term and
short-term foreign-currency bond ceiling and the short-term
foreign-currency deposit ceilings remain unchanged at Ba2/NP and
NP, respectively.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADING THE RATING TO B1 FROM Ba3
FIRST DRIVER: ARMENIA'S HIGH DEGREE OF EXTERNAL VULNERABILITY
The first driver for downgrading Armenia's issuer and government
bond ratings to B1 (from Ba3) is the country's increasing external
vulnerabilities stemming from (a) declining remittances from Russia that
have not yet bottomed out, (b) an uncertain outlook for foreign
direct investment (FDI) inflows that collapsed in 2015, as well
as (c) an elevated susceptibility to renewed pressures on the local currency
and the country's foreign exchange reserves.
Russia remains Armenia's largest single export market destination
as well as the major originator of gross money transfers (remittances)
and FDI inflows into the country. Russia's ongoing economic
crisis has not only weighed on Armenia's export sector, but
also, and more importantly, depressed domestic private consumption
through a drastic decline in remittances from Russia. Remittances
from Russia, which had already contracted by 10% in US$
terms or 8.6% in local-currency (Armenian Dram;
AMD) terms in 2014, declined by a further 35.6% in
2015 US$ terms (or 26% in AMD terms). Increased remittances
from other countries, including the US, were not able to compensate
for the deep fall in remittances from Russia. As a result,
total gross remittances into Armenia decreased by 23.5%
in 2015 in US$ terms (or 12.1% in AMD terms),
addition to the contraction of 7.8% (or 6.3%)
that had already occurred in 2014.
Despite recent declines, remittances from Russia still account for
more than 60% of Armenia's total remittances (or 9.5%
of Armenia's GDP). Given Russia's ongoing economic
problems, Armenia's remittances will likely decline further
this year and continue to depress private consumption. The collapse
in FDI inflows also means that Armenia's gross capital formation
will remain weak, weighing on the economy in the near term and constraining
Armenia's medium-term growth potential. While Armenia's
gross capital formation continued to contract for the third consecutive
year in 2015 (latest number is as of Q3 2015: -13.2%
Y-o-Y), annualized FDI inflows (as measured by the
4 quarter moving sum) decreased by almost 80% Y-o-Y
in US$ terms in the third quarter of last year.
Meanwhile, Armenia's gross external debt level has remained
high both relative to Armenia's GDP as well as current account receipts,
leaving the country vulnerable to a further worsening of external conditions.
While Armenia's gross-external-debt-to-GDP
ratio increased to more than 80% in 2015 (according to latest available
data for Q3 2015) from 73.3% in 2014, the country's
ratio of gross external debt to current account receipts rose further
to an estimated 168% from roughly 153% in 2014. Although
Armenia's external vulnerability indicator (EVI, the ratio
of short-term external debt in the previous year plus currently
maturing long-term external debt in the current year and total
non-resident deposits over one year in the current year to official
foreign exchange reserves of the previous year) declined to an estimated
153% for this year -- mainly due to an increase in foreign
exchange reserves in 2015 -- from more than 190% in 2014,
it remains very high both in absolute terms as well as relative to the
median EVI ratios of around 40% and 65% for Ba3 and B1 rated
sovereigns, respectively.
SECOND DRIVER: ARMENIA'S WORSENING FISCAL AND GOVERNMENT DEBT
METRICS
The second driver captures Armenia's worsening fiscal and government
debt metrics in the recent past and the likely upward debt trend trajectory
over the coming two years. Armenia's fiscal and government
debt metrics are today much weaker than prior to economic crisis in 2009
when the country's construction boom came to an end with real GDP
contracting by roughly 14% and the fiscal deficit widening to 7.5%
of GDP. Only in 2009, Armenia's government-debt-to-GDP
ratio spiked to 40.4% from just 16.4% (+24
percentage points of GDP).
After remaining broadly stable between 2010 and 2014, Armenia's
government debt resumed its upward trajectory in 2015, primarily
as a result of fiscal easing to support the domestic economy amid severe
external headwinds and also because of the debt-raising effects
stemming from the currency depreciation on the government's large
share of foreign-currency debt. Specifically, the
government-debt-to-GDP ratio increased to 48.7%
in 2015 from 43.5% in 2014. At the same time,
the government-debt-to-revenue ratio rose to around
208% (from roughly 180%). Debt affordability as captured
by the ratio of interest payments to government revenues also deteriorated,
increasing to 6.5% in 2015, up from 5.2%
in 2014. Going forward, Moody's forecasts the ratio
of interest payments to government revenues to increase further to around
8.5% in 2016, more than double the level of 2013 (4.2%).
The government will face significant headwinds this year and beyond in
its efforts to gradually narrow the fiscal deficit as a result of weakening
economic conditions. After benefiting from one-time boosting
effects in the agriculture and mining sectors, Moody's expect
real GDP growth to decelerate to 2.2% in 2016 (from an estimated
3.0% in 2015) given the ongoing adverse external environment.
Beyond this year, economic growth is unlikely to pick up rapidly
given the latent and weak recovery expected in its main trading partner,
Russia. As a result, the rating agency expects the upward
debt trajectory to continue, with the debt-to-GDP
to rise above 50% in 2017. Our baseline scenario does not
foresee a reversal of this unfavorable trend in the coming years.
Therefore, the strength of the government's balance sheet
will remain much weaker than in the past, leaving the country more
vulnerable to the adverse impact of potential renewed economic shocks
in the future.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectation that downside and
upside risks to Armenia's credit profile are broadly balanced at
the new, lower rating level of B1.
Downside risks mainly relate to worsening economic situation in Russia,
which would adversely hit Armenia's economy more sharply than expected,
mainly through the remittances, trade and investment channels,
and which could prompt significant downward pressures on the local currency
and the country's foreign exchange reserves. Moreover,
further major downside risks stem from lower prices for Armenia's
major commodity export items (such as copper or metals), which would
further affect the country's terms of trade. Under this adverse
macro-economic scenario, the budgetary and debt trajectory
would likely worsen significantly and further erode the country's
fiscal strength.
Major upside risks stem from a faster-than-expected improvement
in the external environment and the related positive spill-over
to the Armenian economy as well as rising prices for Armenia's major
commodity export items (such as copper or metals), which would lead
to an improvement in the country's terms of trade and would make
foreign direct investment into Armenia's commodity sector more attractive.
Stronger- than-expected growth could pave the way for more
favorable budgetary outcomes and general government debt trends.
WHAT COULD MOVE THE RATING UP
Upward pressures could be exerted on Armenia's issuer and government
bond ratings following a reduction in Armenia's high degree of external
vulnerability and/or the prospects that Armenia's government-debt-to-GDP
ratio will show a firm downward trajectory over the medium term.
A reduction in Armenia's external vulnerability could be triggered,
for instance, by a faster-than-expected economic stabilization
of Russia, Armenia's largest single export market destination
and key source of remittances and foreign direct investment, and
the related positive spill-overs to the Armenian economy.
Also, a decrease in geopolitical risks could lead to upward pressures
on Armenia's sovereign bond rating. Furthermore, significant
improvements in the country's institutional framework and business environment,
sustained economic diversification and a rise in Armenia's medium-term
growth potential could create upward pressure on the sovereign rating.
WHAT COULD MOVE THE RATING DOWN
Downward pressures could develop on Armenia's issuer and government
bond ratings following a worsening economic situation in the Russian economy,
which would adversely hit Armenia's economy more sharply than expected,
mainly through the remittances, trade and investment channels,
and which could prompt significant downward pressures on the local currency
and the country's foreign exchange reserves. Moreover,
the rating could come under downward pressures if Armenia's government
debt metrics deteriorated faster and more pronounced than expected over
the near term and diminishing prospects for an ultimate stabilization
and/or reversal of the country's high government debt burden over
the medium term. Also, an increase in geopolitical risks,
for instance, related to the unresolved conflict with neighboring
Azerbaijan over the disputed territory of Nagorno-Karabakh could
lead to downward pressures on Armenia's sovereign bond rating.
GDP per capita (PPP basis, US$): 8,164 (2014
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.4% (2014 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): -0.1%
(2015 Actual)
Gen. Gov. Financial Balance/GDP: -1.9%
(2014 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -7.3% (2014 Actual)
(also known as External Balance)
External debt/GDP: 73.3 % (2014 Actual)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 15 March 2016, 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
institutional strength/ framework, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has materially decreased. The issuer has become increasingly susceptible
to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2015. Please see the Ratings 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 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 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.
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.
Sebastian Becker
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Armenia's government bond rating to B1, changes the outlook to stable from negative
