Rating Action Commentary
ֳ Affirms Armenia at 'BB-'; Outlook Stable
Fri 24 Jan, 2025 - 5:04 PM ET
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Armenia
ֳ - London - 24 Jan 2025: ֳ Ratings has affirmed Armenia's Long-Term (LT) Foreign-Currency (FC) Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook.
A full list of rating actions is at the end of this Rating Action Commentary.
Key Rating Drivers
Credit Fundamentals: Armenia's 'BB-' rating reflects per-capita income and governance indicators that are in line with peers, stable growth prospects and a robust macroeconomic policy framework. Set against these strengths are the small size of the economy, large fiscal deficits relative to peers, relatively weak external finances, high financial sector dollarisation and geopolitical risks.
Higher Fiscal Deficits: We project the general government deficit to increase to 5.5% of GDP in 2025 (2024: 4.7%; current 'BB' median: 3%), reflecting an expansionary fiscal policy. This incorporates the costs of integrating about 65,000 refugees from Nagorno-Karabakh (since 2023) and higher military expenditure. The planned introduction of a universal health insurance programme from 2026 will increase expenditure by about 1.3% of GDP/year, keeping the deficit at 5.4% of GDP in 2026.
Adherence to Fiscal Rules: ֳ assumes the authorities will comply with fiscal rules that are triggered when gross general government debt (GGGD)/GDP exceeds 50%, including moderating current expenditure (excluding interest payments) growth to below historic nominal economic growth rates. While planned capex will be larger than the fiscal deficit (both as a percentage of GDP) as per the fiscal rules, ֳ expects capacity constraints to continue to limit project execution.
Rising Debt Trajectory, FX Risk: The fiscal loosening is projected to increase GGGD from an estimated 49.7% in 2024 to 55% by end-2026, in line with projected peer medians. Debt dynamics are highly exposed to currency risk, given that, as of October 2024, 48.6% of GGGD was foreign-exchange (FX)-denominated. However, market risks are mitigated by the fixed interest-rate structure of 85.7% of outstanding debt, and the high (75%) proportion of concessional debt owed to multilateral and bilateral lenders within external government debt.
The authorities plan to issue a Eurobond in 1Q25 to redeem a maturing USD313 million Eurobond in March 2025. They also plan an overfinancing on external (including through borrowing from multilateral organisations) and domestic markets in 2025-2026, anticipating budgetary and project finance needs.
Negotiations with Azerbaijan: Armenia and Azerbaijan have reportedly reached an agreement on certain key points for an eventual peace treaty, including border delimitation. The flexibility and willingness from both parties to resolve the outstanding issues and the timing for a potential resolution remain uncertain. ֳ does not expect a sustained military re-escalation of the conflict. A comprehensive peace treaty could potentially unlock trade routes to Turkiye and benefit Armenia's long-term growth potential.
Worsening Relations with Russia: Armenia's relations with Russia appear to be worsening, as Armenia is considering EU membership, which may be incompatible with its membership in the Russian-led Eurasian Economic Union. Prime Minister Nikol Pashinyan has reportedly expressed his desire to leave the Russia-led Collective Security Treaty Organization. In our view, a fundamental breakdown in relations is unlikely given Armenia's dependence on Russia for energy and trade (24% of exports and 56% of imports). We expect Armenian banks to continue to comply with Western sanctions on Russia.
Moderating Growth: We estimate the economy to have grown by 6% in 2024 (vs 8.3% in 2023; 12.6% in 2022) as the spillovers of the large increase in migration from Russia and Ukraine, as well as the refugee influx from Nagorno-Karabakh, have abated. ֳ has reduced its growth expectations for 2025 to 4.8% from 5.5%, given that the opening of the Amulsar gold mine has been pushed back to at least 4Q25 (from 1Q25). We expect growth to ease to 4.5% in 2026, as the services sector growth may be difficult to sustain, and as credit growth moderates, although production from Amulsar could provide an upside.
Weak External Balance Sheet: External finances are a rating weakness for Armenia, given its record of large current account deficits (CADs) and high net external debt relative to rating peers. The CAD was 4.2% of GDP in 1Q24-3Q24 (current 'BB' median: 2.2%). The large flow of gold re-exports (USD4.9 billion, equivalent to 47% of total Armenian goods exports) from Russia to the United Arab Emirates, in 1Q24-3Q24 has significantly moderated, and is not likely to recur. ֳ expects the CAD to average 4.3% of GDP in 2025-2026, characterised by continued large goods deficits and services surpluses.
International reserve coverage fell to just 2 months of current external payments (CXP) in 2024, although this was skewed by the large increase in re-exported gold imports. Excluding these, coverage was 2.7 months of CXP, and ֳ expects it to average 3.2 months in 2025-2026 (current 'BB' median: 4.9). ֳ expects that authorities will not draw down the USD121 million available under the IMF Stand-By Arrangement (expiring this year), and will treat it as a precautionary buffer. Net external debt will be about 2x the projected 'BB' median, averaging 26.8% of GDP in 2025-2026.
Stable Inflation; High Dollarisation: Inflation averaged 0.3% yoy in 2024, driven partly by base effects, food prices, as well as zero growth in core inflation. Inflation will average 3.3% in 2025-2026 given ֳ's expectation of a depreciation of the Armenian dram, and fiscal policy loosening. Policy rates were cut by a cumulative 225bp in 2024; the scope for further cuts is limited.
New Inflation Target: Effective January 2025, the Central Bank of Armenia reduced its medium-term inflation target to 3% (with a variation band of +/-1 pp). Armenia has a record of low inflation relative to rating peers, but also has an inconsistent record of meeting the previous inflation target of 4% with a tolerance band of +/-1.5pp, which was introduced in 2006. We expect the authorities to remain largely committed to a floating exchange rate.
Armenia has an ESG Relevance Score of '5' for Political Stability and Rights, and '5+' for the Rule of Law, Institutional and Regulatory Quality, and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Armenia has a medium WBGI ranking at the 45th percentile, reflecting a moderate level of rights for participation in the political process, relatively high geopolitical risks, moderate levels of political stability, moderate institutional capacity and rule of law and a moderate level of corruption.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Public Finances: Macroeconomic or policy developments that result in a rapid increase in general government debt/GDP.
- External Finances: Increased external vulnerabilities, for example as a result of a sustained decline in international reserves or wider CADs.
- Structural: A materialisation of geopolitical risks that undermines political and economic stability.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Macro: Increased confidence in the sustainability of high growth rates relative to peers, for example, due to a durable decline in geopolitical risks that results in a sustained increase in GDP per capita.
- Public Finances: Fiscal consolidation that supports a decline in general government debt/GDP, and deepening of local-currency funding sources that durably reduces the FX proportion of government debt.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
ֳ's proprietary SRM assigns Armenia a score equivalent to a rating of 'BB' on the LT FC IDR scale.
In accordance with its rating criteria, ֳ's sovereign rating committee decided not to adopt the score indicated by the SRM as the starting point for its analysis because, in our view, the SRM output has migrated to 'BB', but, in our view, this is potentially a temporary deviation. Consequently, the committee decided to adopt 'BB-' as the starting point for its analysis, unchanged from the prior committee.
ֳ's sovereign rating committee did not adjust the output from the adopted SRM score to arrive at the final LT FC IDR.
ֳ's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to an LT FC IDR. ֳ's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable or not fully reflected in the SRM.
Country Ceiling
The Country Ceiling for Armenia is 'BB', one notch above the LT FC IDR. This reflects moderate constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting LC into FC and transferring the proceeds to non-resident creditors to service debt payments.
ֳ's Country Ceiling Model produced a starting point uplift of +1 notch above the IDR. ֳ's rating committee did not apply a qualitative adjustment to the model result.
Summary of Data Adjustments
n/a
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Armenia has an ESG Relevance Score of '5' for Political Stability and Rights as World Bank Worldwide Governance Indicators have the highest weight in ֳ's SRM and are, therefore, highly relevant to the rating and a key rating driver with a high weight. As Armenia has a percentile rank below 50 for the respective Governance Indicators, this has a negative impact on the credit profile.
Armenia has an ESG Relevance Score of '5+' for Rule of Law, Institutional & Regulatory Quality, and Control of Corruption as WBGI have the highest weight in ֳ's SRM and are, therefore, highly relevant to the rating and a key rating driver with a high weight. As Armenia has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.
Armenia has an ESG Relevance Score of '4+' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the WBGI is relevant to the rating and a rating driver. As Armenia has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.
Armenia has an ESG Relevance Score of '4+' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Armenia, as for all sovereigns. As Armenia has a record of 20+ years without a restructuring of public debt and captured in our SRM variable, this has a positive impact on the credit profile.
The highest level of ESG Credit Relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit .
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Country Ceiling Model, v2.0.2 (1)
- Debt Dynamics Model, v1.3.2 (1)
- Macro-Prudential Indicator Model, v1.5.0 (1)
- Sovereign Rating Model, v3.14.2 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Armenia | UK Issued, EU Endorsed |