FITCH RATINGS REVISES OUTLOOK ON ARMENIA’S FOREIGN AND LOCAL CURRENCY ISSUER DEFAULT RATINGS TO POSITIVE FROM STABLE
Arminfo Agency
2007-05-02 21:13:00
Fitch Ratings today revised the Outlook on Armenia’s Foreign and
Local Currency Issuer Default Ratings to Positive from Stable, and
affirmed the ratings at ‘BB-‘ (BB minus), reports Fitch Ratings.
The agency has also affirmed the Country Ceiling at ‘BB’ and the
Short-term Foreign Currency rating at ‘B’.
The Positive Outlook reflects expectations that disciplined
macroeconomic policies and structural reforms will continue,
underpinning sustainable economic growth and a declining public and
external debt burden. However, the policy authorities face significant
challenges in sustaining strong and balanced economic growth against
the backdrop of strong upward pressures on the exchange rate, rapid
expansion of private credit and construction activity, while also
anchoring inflation expectations under the recently introduced direct
inflation targeting regime.
In addition, Armenia faces parliamentary elections in 2007 and a
race for the presidency in 2008. While Fitch does not expect material
changes in the country’s broad economic and foreign policies to arise
from the elections and a new administration, it could potentially
complicate macroeconomic policy management. "The risk of economic
volatility or of a political shock over the next twelve to eighteen
months cannot be wholly discounted," said Andrew Colquhoun, Director
in Fitch’s Sovereigns Group. "But if policy discipline and political
stability are maintained, the secular improvement in creditworthiness
will likely continue and exert upward pressure on the ratings, hence
the Positive Outlook."
The Armenian dram (AMD) appreciated 19% against the US dollar last
year, raising concerns over the competitiveness of the industrial
sector and the trade deficit on goods and services widened to an
estimated 14% of GDP. While the trade deficit and low domestic savings
rate are substantially offset by net transfers of almost 9% of GDP,
mostly from Armenians abroad, the extent of upward pressure on the
Armenian dram (AMD) and pace of appreciation prompted the Central
Bank of Armenia (CBA) to actively intervene in foreign exchange
markets and international reserves have reached a record level of
USD1.1bn. The upward pressure on the AMD was also fuelled by a steep
fall in the share of USD-denominated deposits in the banking system
(in favour of AMD). While the shift from US dollar to Armenian dram
assets is viewed as a positive trend, the pace of the adjustment also
poses policy challenges and risks that must be managed.
Armenia’s ratings are supported by an impressive economic performance
with the economy expanding by more than 11% per annum since 2000 while
annual consumer price inflation has remained below 3%. However, the
combination of a food price shock and robust domestic demand fuelled
by rising household incomes resulted in inflation accelerating to
its highest level since 2004. Inflation has begun to moderate and
is currently running at a little over 5%, inside the CBA’s revised
target of 4%+/minus 1.5% for end-2007. Sustaining rapid economic
growth necessary to raise incomes and reduce extreme poverty without
imperilling macroeconomic stability is key to improvements in Armenia’s
sovereign creditworthiness and ratings.
Armenia’s ratings and Positive Outlook are also supported by
a medium-term fiscal policy framework and prudent budgetary
policies. Gross government debt has fallen to 15% of GDP by end-2006
from 39% in 2000, well below the ‘BB’ range median of 40% and the debt
service burden remains light. However, government revenues remain low
at around 16% of GDP, well below the ‘BB’ median of 28%. While this
in part reflects a policy preference for a small government and free
markets, weak tax administration and widespread evasion are also to
blame, and raising the tax take will be required to fund increasing
social and capital spending needs over the medium term. Further
measures to deepen domestic capital markets would also broaden the
government’s financing options and assist with the graduation from
concessional lending from the international community.