YEREVAN, July 13. /ARКА/. International rating agency Fitch Ratings has affirmed Armenia’s long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BB-‘ with a Positive Outlook.
The Positive Outlook reflects Armenia’s higher level of international reserves, continued strong growth, which will support debt stabilization over the medium term, and prospects for improvement in long-standing geopolitical risks. The US-backed peace framework with Azerbaijan has significantly reduced the risks of military escalation in the near term, but uncertainty remains about the path to a successful conclusion, including a potential constitutional referendum. Furthermore, heightened diplomatic tensions with Russia pose risks to the Armenian economy, particularly given its significant dependence on Russian energy imports,” the report states. Key Rating Factors
Election Results Support Policy Continuity
Prime Minister Pashinyan’s Civil Contract party won the June 2026 elections, signaling broad policy continuity, including closer ties with the West, but fell short of the two-thirds majority needed to unilaterally amend the constitution.
“Removing constitutional references to Karabakh is a condition of the agreement with Azerbaijan and will likely require a referendum, possibly in 2027, a source of ongoing uncertainty in the peace process,” Fitch analysts note.
Tensions with Russia
Russia is Armenia’s largest trading partner, supplying over 80% of its natural gas imports on preferential terms. Russia accounts for 35% of Armenia’s goods exports; it recently imposed restrictions on the import and transit of Armenian food products and threatened to end preferential trade in energy and rough diamonds in response to Armenia’s path to EU accession. “Since gas meets 61% of energy needs, supply disruptions or price increases could negatively impact macroeconomic, fiscal and external balances,” the report said.
Strong Growth Prospects
“Armenia’s economy expanded by 7.1% in 2025 after several years of similarly strong growth. We forecast real GDP growth to slow to 5.2% in 2026, but it will remain well above the ‘BB’ median of 2.9%. Armenia’s low dependence on oil limits its exposure to the war in Iran, but the impact of Russian import restrictions remains uncertain. The government and the EU are offering exporters financial support and tariff incentives to mitigate the impact,” the agency noted.
Fitch forecasts medium-term growth to stabilize at around 5% as recent supply shocks fade, supported by a vibrant ICT sector and the opening of the Amulsar gold mine. “Several large-scale infrastructure investment projects could provide additional long-term growth potential, including the Trump Route for International Peace and Prosperity—a corridor connecting Azerbaijan with its Nakhchivan exclave and further to Turkey,” the report states.
It also notes that plans to build a new artificial intelligence data center have been expanded, with investment potentially reaching 12% of GDP.
Sustainable implementation of the peace agreement and the reopening of the border with Turkey could provide additional impetus to growth by boosting investment, exports, and employment.
Near-Term Inflationary Pressures
Fitch expects inflation to average 4.4% in 2026, gradually returning to the 3% target thereafter.
“The upward inflation trend began before the war in Iran and was driven by food prices, services, and universal healthcare costs. Russian import restrictions could increase domestic supply of some goods, which would have a disinflationary effect. “We expect the Central Bank of Armenia (CBA) to temporarily raise its key monetary policy rate by 25 basis points to 6.75%,” the agency’s analysts note.
Fiscal overperformance, but risks remain
“The general government deficit in 2025 was 3.7% of GDP, below the budgeted level but above the ‘BB’ median of 2.8%. We forecast a slightly higher deficit in 2026, in line with the government’s revised budget target,” the report says.
Current expenditure growth remains high due to rising healthcare costs, driven by the introduction of universal health insurance, and higher pensions. This is partially offset by lower defense and security spending.
Over the medium term, Fitch forecasts the deficit to narrow to 3.4% of GDP by 2028, above the government’s medium-term deficit target of 2.8% of GDP.
Generally Stable Debt
“General government debt declined to 47.2% of GDP at end-2025, below the ‘BB’ median of 51.6%. We expect the debt-to-GDP ratio to remain broadly stable, as strong nominal GDP growth offsets small primary deficits, with some volatility possible from exchange rate movements. We expect financing needs in 2026–2028 to be covered by domestic sources, as well as bilateral and multilateral creditors,” the report notes.
Improving External Buffers Despite a Weaker External Position
The current account deficit widened to 7.2% of GDP in 2025 from 4.6%, more than double the ‘BB’ median. This reflects stronger domestic demand, normalization of transit trade, and weaker tourism revenues. Some of the financing of the current account deficit is related to some investments financed by external bank borrowing, but the participation of international financial institutions as sources of financing helps mitigate risks.
“We forecast the current account deficit to narrow in 2026–2028, but it will remain higher than that of peers,” Fitch analysts note.
Foreign exchange reserves reached a record $5.9 billion at the end of May, as the Central Bank purchased US dollars domestically. High import needs mean that the reserve coverage of current external payments will remain at 3.6 months by 2028, below the median for ‘BB’ rated countries (4.5 months).
Banking Sector Resilience
Private sector credit growth remained strong at 21.7% year-on-year in the first quarter of 2026. Risks to financial stability are mitigated by banks’ strong capital and liquidity positions. Profitability remained high despite the tapering of extraordinary financial inflows from Russia, providing an additional buffer against potential shocks. Deposit dollarization continues to decline, reaching 42.4% in May as a result of regulatory measures, greater confidence in the dram, and currency appreciation.
Rating Sensitivity
Factors that could, individually or collectively, lead to negative rating action/downgrade:
• Structural: Geopolitical risks that undermine political and economic stability; for example, a breakdown in the ongoing peace process with Azerbaijan or an escalation of tensions with Russia.
• External Finances: Increased external vulnerability due to a persistently large current account deficit or a reversal of improvements in foreign exchange reserves.
• Public Finances: Macroeconomic or political developments that put general government debt on an upward trajectory.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
• Structural: Sustained reduction in geopolitical risks; for example, as a result of meaningful progress in the peace process with Azerbaijan and easing tensions with Russia.
• Public Finances: Continuing a fiscal stance that supports a stable or declining trajectory of general government debt.
• Macroeconomic: Maintaining high growth rates that increase GDP per capita and do not lead to macroeconomic imbalances.
