YEREVAN, January 28./ ARKA/. Fitch 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: Fitch 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, Fitch 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. Fitch 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. Fitch 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. Fitch 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 Fitch expects it to average 3.2 months in 2025-2026 (current ‘BB’ median: 4.9). Fitch 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% of GDP 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 Fitch’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.-0-
