Singapore, August 27, 2019 -- Moody's Investors Service ("Moody's") has today
upgraded the Government of Armenia's local and foreign currency
long-term issuer and foreign currency senior unsecured debt ratings
to Ba3 from B1. The outlook has been changed to stable from positive.
The decision to upgrade the rating is driven by Moody's assessment
that the increasing diversification of growth drivers, coupled with
a lengthening track record of stabilising macroeconomic policy,
raises Armenia's economic resiliency. Ongoing measures to
strengthen government finances will also likely gradually restore some
of the sovereign's fiscal strength that eroded over 2014-17.
The stable outlook reflects balanced risks. On the upside,
the strengthened commitment to and ongoing implementation of reforms,
supported by development partners, have the potential to raise Armenia's
institutional credibility and government effectiveness over time.
On the downside, notwithstanding increasing economic resilience
and a strengthening government balance sheet, still limited buffers
continue to expose Armenia's credit profile to external shocks.
Moody's has concurrently raised Armenia's long-term local
currency bond and deposit ceilings to Baa2 from Baa3. The long-term
foreign currency bond ceiling and long-term foreign currency deposit
ceiling have also been raised to Ba1 from Ba2 and B1 from B2, respectively.
The short-term foreign currency bond and deposit ceilings remain
unchanged at Not Prime. These ceilings typically act as a cap on
the ratings that can be assigned to the obligations of other entities
domiciled in the country.
RATINGS RATIONALE
RATIONALE FOR RATING UPGRADE TO Ba3
DIVERSIFICATION OF GROWTH DRIVERS RAISES ECONOMIC RESILIENCE
Armenia's economic growth drivers have become increasingly diverse,
which contributes to strengthen the economy's resilience to shocks.
Moody's expects real GDP growth in Armenia to remain high over the
medium term, hovering around 5.5-6% over the
next few years. The sectors that have contributed to 2018 growth
will continue expand solidly, such as tourism, information
technology (IT), and light manufacturing including of textiles.
In particular, ongoing investments in hotels will raise tourism
capacity, new textile factories are being built, and the number
of IT sector companies and projects are growing rapidly. The nature
and breadth of these growth drivers mark a departure from the traditional
sectors of mining and agriculture that have led economic activity over
past two decades.
Among the growth sectors, Moody's sees the IT sector,
which is increasingly geared towards research and development of high
and emerging technologies, both in software design and hardware
engineering, and servicing a wide region as a hub, as providing
a strong foundation for the development of a skills- and knowledge-based
economy. IT companies are attracted by Armenia's expanding
pool of technology specialists and entrepreneurs, aided by the partnership
of many of these companies with universities and high schools and increasing
availability of private funding across different stages for startups,
which create an ecosystem conducive for growth. Further development
of this sector is likely to contribute to higher value-added activities
and incomes over time, raising Armenia's economic strength.
Moreover, Moody's expects that the decline in growth volatility
will persist compared to the first half of the decade when economic activity
was largely reliant on mining, agriculture and remittance inflows.
This is in part the result of improved fiscal and monetary management,
including through adherence to fiscal targets and a credible fiscal rule,
effective use of flexible exchange rates, a transparent and effective
inflation targeting regime, and pre-emptive supervisory policies
for the banking sector.
ONGOING MEASURES TO STRENGTHEN GOVERNMENT FINANCES WILL GRADUALLY RESTORE
SOME OF THE SOVEREIGN'S FISCAL STRENGTH
Moody's expects Armenia's government debt burden to decline
steadily from currently moderate levels of around 51% of GDP as
of the end of 2018.
Government revenue increased by 25% year-on-year
over the first half of 2019, the fastest growth over the past decade,
in part boosted by the increased digitisation of invoicing and tax collection,
which enhanced the transparency of taxpayer revenue and raised revenue
efficiency. While Moody's expects the rate of increase to
slow, a range of measures are likely to maintain revenue growth
at a robust pace over the next few years.
The government recently legislated changes to the tax code in June,
which will be effective January 2020, aimed at lowering the tax
burden for businesses and reducing tax evasion. Key changes include
a reduction in the corporate income tax rate and harmonisation of the
dividend tax rate for both residents and non-residents, an
increase in the income tax threshold for entrepreneurs and small businesses,
and the introduction of a flat income tax rate at the lowest marginal
rate currently, offset by higher excise and gambling taxes and the
removal of selected exemptions. Moody's expects the changes
to have a modest positive impact on investment and spending given the
lower tax burden and be largely revenue neutral in the near term.
Over the medium term, a simpler tax code will foster tax adherence.
The government is also planning to roll out an automatic income filing
system over the next year. Moreover, it is introducing property
tax reforms, which involves changing the methodology to calculate
the cadastral value of real estate in order to reflect market valuation,
targeting implementation by 2021. Moody's expects the automatic
income filing system to further reduce the scope for tax evasion,
while the property tax reform has the potential to raise government revenue
longer term.
The revenue enhancements are supported by the government's adherence
to its fiscal rule, which came into effect in 2018 and limits the
growth of government expenditure while requiring a debt reduction plan
at current debt levels exceeding 50% of GDP.
Moody's expects the government's fiscal deficit to average
around 1.5% over 2019-21, which will allow
the debt burden to fall below 50% of GDP over 2019-20 and
remain on a downward trajectory, towards 45% of GDP by 2021-22.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's view that risks to Armenia's
credit profile are broadly balanced.
On the upside, the strengthened commitment to and ongoing implementation
of reforms have the potential to raise Armenia's institutional credibility
and government effectiveness. The new government that was elected
in December 2018 is focusing on reducing corruption, increasing
transparency, and reforming the judiciary as its top priorities
over its five-year term. It is aiming to institutionalise
its control of corruption agenda by setting up an anti-corruption
tribunal and reforming the registry of beneficial ownership for public
officials, and is receiving technical assistance from the International
Monetary Fund under its new Standby Arrangement and the European Union
(EU) under the EU-Armenia Comprehensive and Enhanced Partnership
Agreement, with associated implementation timelines. Further
institutional reforms are also in progress, including in public
sector administration, sectoral regulatory policies, and education.
The government has already streamlined the number of ministries to reduce
overlaps and increase efficiency.
If effective, these reforms will raise Armenia's institutional
strength further. However, control of corruption and judicial
reforms are also challenging for any government to implement given vested
interests, and tangible effects are likely to take time to materialise.
On the downside, notwithstanding increasing economic resilience
and a strengthening government balance sheet, still limited buffers
continue to expose Armenia's credit profile to external developments.
In particular, more than 80% of government debt is denominated
in foreign currencies, the level of foreign direct investment is
also low as share of GDP compared to regional peers, and dollarisation
in the banking system remains high, with around 60% of deposits
denominated in foreign currencies. This leaves Armenia reliant
on more volatile portfolio flows to fund its structural current account
deficits, and the government debt burden and banking sector exposed
to sharp local currency depreciations that may arise from external imbalances.
WHAT COULD CHANGE THE RATING UP
Upward pressure on Armenia's rating would stem from further reforms
that were to raise economic competitiveness and institutional credibility
and effectiveness beyond Moody's current expectations. This
would in part materialise through greater levels of private investment
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.
WHAT COULD CHANGE THE RATING DOWN
Downward pressure on Armenia's rating would emerge 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, would additionally contribute to downward
pressure on the rating. An escalation of the conflict with Azerbaijan
over the Nagorno-Karabakh territory would also put negative pressure
on the rating.
GDP per capita (PPP basis, US$): 10,176 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 5.2% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.8%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -1.6%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -9.4% (2018 Actual)
(also known as External Balance)
External debt/GDP: 87.8% (2018 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 22 August 2019, 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 increased.
Other views raised included: The issuer's institutional strength/
framework, have not materially changed. The issuer's fiscal
or financial strength, including its debt profile, has not
materially changed. The issuer's susceptibility to event risks
has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. 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 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.
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.
Christian Fang
Asst Vice President - 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: 852 3758 1350
Client Service: 852 3551 3077
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
