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Rating Action:

Moody's downgrades Armenia's government bond rating to Ba3 from Ba2, and changes outlook to negative from stable

15 Jan 2015

New York, January 15, 2015 -- Moody's Investors Service has today downgraded Armenia's issuer and government bond rating to Ba3 from Ba2, and changed the outlook to negative from stable.

The key drivers for the downgrade are the following:

1) Armenia's increased external vulnerability due to declining remittances from Russia, an uncertain outlook for foreign direct investment (FDI), an elevated susceptibility to exchange rate volatility, and expected pressure on foreign exchange (FX) reserves;

2) The country's impaired growth outlook, compounded by negative growth spillovers from Russia, weak investment activity, and constraints on trade with countries outside the Eurasian Economic Union (EEU) that are expected from Armenia's recent EEU accession.

In a related action, Moody's has also lowered the local-currency bond and deposit ceilings to Ba1 from Baa3, the foreign-currency bond ceiling to Ba2 from Ba1, as well as the foreign-currency deposit ceiling to B1 from Ba3. The short-term foreign-currency bond ceiling and the foreign-currency deposit ceiling remain at NP.

RATINGS RATIONALE

RATIONALE FOR DOWNGRADE TO Ba3

The first driver of the downgrade is Armenia's increased external vulnerability driven by declining remittances from Russia and risks to expected FDI inflows. Remittances represent about 15% of GDP, with over 90% of the total stemming from Russia. Given the sharp recession expected in Russia, the adverse impact of reduced remittance inflows on the country's balance of payments will potentially put pressure on Armenia's FX reserves, which were at 4.5 months of import cover at the end of 2014.

Moreover, Armenia's position as a significant net international borrower exposes the currency to elevated depreciation risk. Approximately 83% of Armenia's government debt is denominated in foreign currency, mostly in Special Drawing Rights (SDR) and US dollars. The Armenian dram's depreciation of over 15% since November 2014 has the potential to put additional pressure on Armenia's FX reserves, which remain subject to intervention by the Central Bank of Armenia to counteract excessive volatility.

The second driver of the downgrade is pressure on Armenia's economic growth prospects, which is compounded by the negative growth spillovers from Russia's economic downturn. Moody's expects that Russia's GDP will contract by 5.5% in 2015, weakening Armenia's economic activity given its historically strong correlation with Russia's growth cycle via remittances and trade channels, with Russia accounting for 23% of total Armenian exports.

Further exacerbating the slowing dynamics for potential growth -- excepting some more active sectors such as the information technology industry -- are Armenia's weak investment activity and its slow productivity growth since the global financial crisis, in addition to its adverse net migration dynamics.

In addition, trade constraints with respect to non-EEU countries likely as a result from Armenia's EEU accession in January 2015 also affect the country's medium-term growth outlook. In this context, Moody's expects Armenia's integration process into the EEU to be more challenging than for Belarus, Kazakhstan or Russia, owing to (1) the lack of a common border to establish trade routes without customs checkpoints, even as "pass-through" rules with Georgia as Armenia's main transit route are being negotiated; and (2) the imposition of higher tariffs for non-EEU country imports, taking into account that temporary exemptions have been negotiated for a series of products, such as cars, medicines, basic food items, and agricultural and industrial inputs for a total of about 800 exemptions for the next five years.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook on Armenia's Ba3 government bond rating reflects the risk that the impact of Russia's economic downturn on Armenia's economy will be more significant than currently expected, with the balance of payments situation and the government's debt trajectory vulnerable to depreciation risk.

WHAT COULD DRIVE THE RATING UP/DOWN

Negative rating pressure would develop (1) if the anticipated growth slowdown were to be sustained and mirrored by a deeper contraction in remittances and FDI inflows than currently anticipated; (2) following a sustained deterioration in the balance of payments and in the debt ratio; and (3) if prices of export minerals, in particular copper, were to worsen, with a significant impact on the current account performance.

Moody's would consider changing the outlook back to stable if Armenia were to maintain adequate fiscal and external reserve buffers amid a weaker than expected economic fallout from Russia's economic downturn, and if debt levels were to stabilize. Upside rating pressure would result from an improved potential growth outlook as a result of structural reforms and enhanced competitiveness.

GDP per capita (PPP basis, US$): 7,034 (2013 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.5% (2013 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.6% (2013 Actual)

Gen. Gov. Financial Balance/GDP: -1.7% (2013 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -8% (2013 Actual) (also known as External Balance)

External debt/GDP: 83.4% (2013 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 12 January 2015, 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 decreased. The issuer has become more susceptible to event risks. Other views raised included: An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy 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 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 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

Alastair Wilson
MD-Global Sovereign Risk
Unknown Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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 downgrades Armenia's government bond rating to Ba3 from Ba2, and changes outlook to negative from stable
No Related Data.
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