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Moody’s changes outlook on Armenia’s rating to positive from stable; B1 rating affirmed
New York City: Moody’s Investors Service has issued the following news release:
Moody’s Investors Service (“Moody’s”) has today changed the outlook on Armenia’s rating to positive from stable and affirmed the B1 long-term issuer and senior unsecured debt ratings.
The positive outlook is underpinned by macroeconomic policies that should reduce Armenia’s vulnerability to external shocks. Moreover, ongoing reforms of the fiscal framework may shore up fiscal strength over time.
Armenia’s B1 rating balances credit strengths from robust growth potential and improving institutional strength against credit challenges stemming from a small and low income economy that remains exposed to external developments, a moderately high debt burden that relies on external funding, and latent geopolitical tensions with neighbouring Azerbaijan.
Moody’s has also raised Armenia’s long-term local-currency bond and deposit ceilings to Baa3 from Ba2. Armenia’s long-term and short-term foreign currency bond and deposit ceilings remain unchanged at Ba2/”Not Prime” and B2/”Not Prime”, respectively.
RATINGS RATIONALE
RATIONALE FOR THE POSITIVE OUTLOOK
MACROCONOMIC POLICIES POINT TO REDUCED VULNERABILITY TO EXTERNAL SHOCKS
Given Armenia’s small size, low levels of incomes, open economy and significant reliance on external funding, the sovereign’s credit profile is vulnerable to external shocks. While some vulnerabilities remain, improvements in the effectiveness of macroeconomic policies should bolster Armenia’s resilience to potential external shocks.
In particular, effective monetary and prudential policies support relative macroeconomic and currency stability, an important feature given the government’s and banking system’s reliance on external and foreign currency funding.
This was illustrated during the 2014-16 regional economic shock, caused by the sharp drop in commodity prices. The Armenian dram depreciated the least among peers in the CIS region (by 22% between January 2014 and February 2016), while inflation expectations were anchored, preventing a flight to US dollars. Inflation peaked at 5.8% year-on-year in March 2015 and averaged 1.6% between 2014 and 2017. The deterioration in banks’ asset quality was limited and non-performing loans have fallen to 5.5% of total loans in December 2017, below the January 2014 level. In turn, this allowed bank credit to continue to expand, supporting economic activity.
Armenia’s fiscal metrics remain exposed to external shocks that weaken the currency and affect GDP growth. Indeed, general government debt increased markedly to 58.6% of GDP in 2017 from 40.8% in 2013. However, a continuation of monetary and prudential policies effective at mitigating the extent of the currency depreciation would limit that exposure.
Moreover, the full implementation in July 2018 of mandatory pension contributions will help raise domestic savings and reduce further the savings-investment gap, the source of Armenia’s external vulnerability. The pension reform requires mandatory contributions for employees born after 1 January 1974, which make up an estimated 60% of Armenia’s workforce. Moody’s expects that the formalisation of savings worth 10% of wage incomes — 5% by the employee with the state topping up another 5% — would, over time, reduce Armenia’s reliance on external funding and create a sizeable domestic institutional investor base for long-term dram assets.
REFORMS OF THE FISCAL FRAMEWORK MAY SHORE UP FISCAL STRENGTH OVER TIME
Armenia is reforming its fiscal framework with a view to reinforce fiscal discipline, while preserving some fiscal flexibility in response to cyclical shocks. Over time, consistent implementation of this framework may contribute to a gradual strengthening of fiscal metrics.
Fiscal discipline will be fostered through the implementation of budget allocation rules for projects and a new e-procurement system. Under the new rules, budgets for projects will only be allocated with explicit cost estimates, obtained through the e-procurement system, which imposes restrictions on single source tenders and ensures transparency of data. These should reduce the scope for corruption and enhance fiscal discipline.
A further key component is the introduction of a new and modernised fiscal rule effective 2018, which, if adhered to, will keep current expenditures in check should debt levels exceed pre-specified thresholds of 50% and 60% of GDP, while allowing the government to implement counter-cyclical policies through capital spending. Specifically, if government debt exceeds 50% of GDP, growth in current expenditures would be capped at the rate of nominal GDP growth over the past several years; if government debt exceeds 60% of GDP, current expenditures cannot exceed tax revenues. The new rule also requires a debt reduction plan when debt levels exceed 50% of GDP, although the authorities will only flesh this out in the next update of the medium-term expenditure framework in July 2018.
The impact of these measures on Armenia’s fiscal strength will only materialise over time and through economic cycles. Taking into account the government’s fiscal plans, Moody’s expects the government’s fiscal deficit to narrow to 2.6% of GDP in 2018 and 2.5% in 2019, from 4.7% in 2017. Moody’s also expects Armenia’s general government debt to gradually decline to 56.5% of GDP by end-2018 and 54.2% by end-2019.
RATIONALE FOR AFFIRMING ARMENIA’S RATING AT B1
The affirmation of the B1 rating reflects Moody’s view that the rating appropriately balances Armenia’s credit strengths owing to robust GDP growth and the government’s strengthening track record of effective economic and financial management, against credit challenges stemming from a small and low income economy that remains exposed to external developments, including in Russia, a moderately high debt burden that relies on external funding, and persistent latent geopolitical tensions with neighbouring Azerbaijan.
In particular, Armenia will remain vulnerable to external shocks over the medium term given the high level of dollarisation in the economy. The central bank has introduced differentiated prudential requirements for foreign currency loans and deposits to disincentivise dollarisation — including higher reserve requirements and risk-weights for foreign currency deposits and loans, respectively. Although these, together with monetary policy credibility, have contributed to lower dollarisation levels (measured by the ratio of foreign currency deposits to total deposits), they remain high at around 60% at end-2017.
WHAT COULD CHANGE THE RATING UP
Upward pressure on Armenia’s rating would stem from further economic and/or institutional reforms that point to sustained improvements in economic competitiveness and institutional strength. In particular, these reforms could be fostered by the Comprehensive and Enhanced Partnership Agreement (CEPA) that Armenia signed with the European Union in November 2017, although any tangible impact would likely materialise over the medium term. Indications that Armenia’s debt burden is falling durably and markedly faster than Moody’s currently expects would also be credit positive in rebuilding some of the fiscal buffers that eroded in 2014-16.
WHAT COULD CHANGE THE RATING DOWN
The positive outlook signals that a rating downgrade is unlikely over the next 12-18 months. However, the outlook could be changed to stable if there was a loss of reform momentum, fiscal slippage removing prospects that the government debt burden will decline over the medium-term, and/or an escalation of the conflict with Azerbaijan over the Nagorno-Karabakh territory.
GDP per capita (PPP basis, US$): 8,637 (2016 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.2% (2016 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): -0.9% (2016 Actual)
Gen. Gov. Financial Balance/GDP: -5.5% (2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.3% (2016 Actual) (also known as External Balance)
External debt/GDP: 94.1% (2016 Actual)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
SUMMARY OF MINUTES FROM RATING COMMITTEE
On 6 March 2018, 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 not materially changed. The issuer’s institutional strength/framework have materially increased. 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 December 2016. Please see the Rating Methodologies page on 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 .
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 for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.