FITCH RATINGS HAS DOWNGRADED ARMENIA’S LONG-TERM FOREIGN AND LOCAL CURRENCY ISSUER DEFAULT RATINGS (IDR) TO ‘BB-‘ FROM ‘BB’ AND THE COUNTRY CEILING TO ‘BB’ FROM ‘BB+’
ArmInfo
2009-08-13 20:21:00
ArmInfo. Fitch Ratings has today downgraded Armenia’s Long-term
foreign and local currency Issuer Default Ratings (IDR) to "BB-"
from "BB". The outlook is stable. The agency has also downgraded
the Country Ceiling to "BB" from "BB+" and affirmed the Short-term
foreign currency IDR at "B", the message of Fitch Ratings Agency,
published on August 13, says. "Despite a strong policy response
supported by the international community, the severity of the shock
has materially weakened Armenia’s credit fundamentals and medium-term
prospects," said Andrew Colquhoun, Director in Fitch’s Sovereigns
Group. "Unlocking Armenia’s economic potential and restoring strong
and sustained growth necessary to reduce poverty and raise incomes
will be much harder as a result of the crisis."
The Stable Outlook reflects Fitch’s assessment that the near-term
risks to macroeconomic and financial stability are relatively
low given the policy response and support from the international
financial community. Armenia’s "BB-" ratings remain supported by
still moderate levels of public and external indebtedness and a more
favourable business environment than many "BB" rated peers. However,
the severity of the shock – Armenia’s economy is estimated to have
shrunk 16.3% year-on-year in the first half of 2009 – underscores the
narrow base of economic activity, exposure to economic volatility in
Russia in particular and very limited financing flexibility.
The re-dollarisation of bank deposits also highlights the damage the
crisis has wrought to the efforts of the authorities in recent years
to increase confidence in the Armenian dram.
Fitch projects GDP will contract 15% in 2009, the third-worst
outcome expected for any Fitch- rated sovereign, highlighting the
vulnerability of the small, narrowly-based and remittance- dependent
economy. Remittance inflows (worth some 9% of GDP in 2008) have
fallen sharply as the Russian economy, where many Armenians work,
has suffered a severe recession. Inflows of foreign direct investment
were just USD27m in Q109, less than one-quarter the level in Q108,
while exports almost halved in H109, despite a 20% devaluation of
the Armenian dram against the US dollar in March 2009.
The devaluation coincided with Armenia’s agreement with the IMF on a
stand-by arrangement, since augmented to about USD820m, supplemented
by fiscal support from other international financial institutions
and Russia worth a further USD1.2bn. This assistance mitigates the
risk to the economy and the sovereign in funding a fiscal deficit
projected to reach 7.5% of GDP in 2009, and a current account deficit
(CAD) projected at 13% of GDP.
However, this assistance will see Armenia’s public and external debt
ratios rise sharply in 2009, exacerbated by falls in GDP, exports
and tax revenues.
The country faces higher ongoing public and external financing needs
if, as Fitch expects, the budget deficit and CAD take time to narrow,
while higher debt levels will need to be serviced. Armenia’s funding
options beyond official-sector creditors are limited, partly owing
to the small size of the domestic financial system.
Although external official creditors helped Armenia to avoid a
full-blown balance of payments crisis in early 2009, the episode has
eroded financial stability and therefore sovereign credit- worthiness
by encouraging a re-dollarisation of the financial system; about 67%
of deposits in the banking system were FX-denominated by May 2009, up
from about 35% in September 2008. Re-dollarisation egatively affects
the sovereign credit profile by rendering macro-financial stability
more vulnerable to shocks and impairing the effectiveness of domestic
monetary and exchange rate policy.
Prolonged and severe balance of payments pressures or intensified
stress in the financial system could lead to a further negative
rating action.
Conversely, if evidence builds that the economy has embarked on a
balanced and sustainable recovery with a narrowing fiscal deficit and
CAD and stabilisation of public and external indebtedness, as well
as a reduction in dollarisation, Armenia’s ratings could be upgraded.
From: Emil Lazarian | Ararat NewsPress
