Global Insight
January 28, 2008

External-Debt-to-GDP Ratio Falls in Armenia over 2007

by Venla Sipila

Armenian external debt amounted to $1US.36 billion at the end of
2007, ARIMNFO reports, quoting the country’s Finance and Economy
Minister Vardan Khachatryan. This level marks an increase compared
with the end-2006 total of 1.3 billion, but still indicates a fall in
the debt-to-GDP ratio to 14.8% in 2007 from 18.9% in 2006. Further,
figures from the Finance and Economy Ministry showed that domestic
debt stood at 66.3 billion dram ($216US million) at the end of last
year, with the debt-to-GDP ratio falling to 2.1% from the end-2006
share of 3%.

Significance:Armenia’s relatively convincing reform progress has
secured unproblematic access to soft loans for the sovereign.
However, Armenia’s creditworthiness is still characterised by high
payments risk, notably reflecting the relatively heavy total debt
burden and the widening current-account deficit (see Armenia: 2
January 2008: ). Nevertheless, debt servicing is not likely to pose
any difficulties in the medium term. However, in order to achieve
continued improvement in its sovereign creditworthiness in the
medium-to-long term, Armenia needs to progress further in economic
restructuring to diversify its economy, especially the production
base of its export sector, and to strengthen its export earnings
capacity. Armenia’s reliance on private transfers and remittances
leaves it vulnerable to external shocks. On the other hand, strong
FDI inflows still finance a large part of the overall current-account
deficit, reducing the need to increase foreign borrowing.