Pashinyan presented only the positive factors of Moody’s decision, but not everything

Armenian Prime Minister Nikol Pashinyan, referring to Moody’s Ratings international rating agency’s assessment of Armenia’s sovereign rating at the government meeting on July 30, stated: “Moody’s revised Armenia’s rating outlook from “stable” to “positive” and reconfirmed the long-term sovereign rating at Ba3 level.”

Referring to the improvement of the rating perspective and the maintenance of the sovereign rating at the Ba3 level, the Prime Minister presented the positive changes recorded in the agency’s assessment, pointing out the reduction of political and geopolitical risks, the improvement of economic growth prospects and the strengthening of the structural potential of the economy.

The “Fact Checking Platform” compared the statements made at the government meeting with the full decision of Moody’s Ratings and noted that the prime minister’s official presentation did not include a number of key risks and reservations pointed out by the agency. FIP writes about this.

Risks not presented at the Cabinet meeting

The uncertainty of concluding a peace treaty

Among the reasons for the improvement of the outlook, Moody’s indeed mentions the weakening of geopolitical and political risks caused by the decrease in the probability of a large-scale military conflict with Azerbaijan. At the same time, however, the agency warns that the conclusion of a full peace agreement is still unlikely.

“Conclusion of a full peace treaty is unlikely in the foreseeable future, as Azerbaijan continues to demand that Armenia change its Constitution, which remains a politically sensitive and domestically difficult issue for Yerevan,” the decision states.

Economic risks arising from relations with Russia

The agency also referred to the changing foreign policy orientation of Armenia and the ongoing uncertainty surrounding relations with Russia. According to Moody’s assessment, in the conditions of close economic relations between the two countries, this uncertainty may affect the economic security of Armenia.

“Although geopolitical risks have decreased, uncertainties surrounding Armenia’s changing foreign orientation and relations with Russia continue to create risks for Armenia’s economic security, given the two countries’ close economic ties,” the decision states.

Economic risks and double-digit unemployment

Looking at the structure, the positive impact of high economic growth indicators on the large-scale improvement of economic fundamentals is not yet evident. The impact on labor market indicators is apparently weak. The unemployment rate has declined but remains in double digits, partly reflecting a narrow base of growth, concentrated in a few sectors, as well as structural constraints such as skills mismatches and high shadowing.

Domestic savings have also remained low, hampered by underdeveloped domestic capital markets and shadowing, which limits the mobilization of household savings.

As a result, Armenia continues to run a significant current account deficit, largely financed by foreign capital inflows, and foreign direct investment (FDI) contributions remain modest at around 2% of GDP. The low level of domestic savings in turn leads to a relatively high cost of domestic borrowing.

Demographic challenges and emigration of highly qualified professionals

In its assessment, Moody’s also highlights Armenia’s socio-demographic risks, which may limit the country’s long-term economic growth potential.

Among the main challenges, the agency mentions the small number and aging of the population, the high level of unemployment among young people and the emigration of highly educated Armenians.

According to Moody’s assessment, emigration contributes to the inflow of remittances, mitigating its negative consequences to some extent, but on the other hand, it exacerbates demographic problems.

According to the agency, a shift to higher productivity service sectors, including information technology, can help mitigate these risks.

The structure also referred to the points that can contribute to the further increase of Armenia’s rating.

Moody’s noted that consistent reforms in the directions of promoting exports, improving the business environment and expanding employment can contribute to the improvement of Armenia’s rating. The strengthening of regional stability, the progress of normalization of relations with Azerbaijan and Turkey, the implementation of projects expanding Armenia’s connectivity and trade opportunities with the support of the EU and the US, and greater clarity regarding relations with Russia can also have a positive impact.

The agency also emphasized the improvement of labor market indicators and the development of domestic capital markets, which can reduce the cost of borrowing and strengthen the ability to service public debt.

Thus, at the government meeting, Prime Minister Nikol Pashinyan presented to the public only the positive factors behind Moody’s decision. Meanwhile, the agency’s report also points out a number of risks: the ongoing uncertainty surrounding the peace treaty, economic risks arising from relations with Russia, double-digit unemployment, low levels of foreign direct investment and demographic challenges.

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