FITCH UPGRADES ARMENIA TO ‘BB’; OUTLOOK STABLE

ArmInfo
2008-07-03 17:45:00

Fitch Ratings has today upgraded Armenia’s Long-term foreign and local
Issuer Default ratings (IDRs) to ‘BB’ from ‘BB-‘ (BB minus). The
Outlooks have been changed to Stable from Positive. The agency has
also upgraded the Country Ceiling to ‘BB+’ from ‘BB’ and affirmed
the Short-term IDR at ‘B’, says Fitch Ratings’ press release provided
to ArmInfo.

Fitch’s upgrade of Armenia’s sovereign ratings reflects the economy’s
rapid growth, rising incomes and strong policy framework, which
the agency cited as potential triggers when it placed the ratings
on Positive Outlooks in May 2007. The Armenian economy grew 13.8% in
2007, extending a five- year rolling average of 13% annual growth. This
buoyed average incomes to around the ‘BB’ median of USD3,000 in 2007,
easing a previous rating weakness.

Armenia scores relatively favourably on the World Bank’s Doing
Business survey, where the country ranks 39th out of 178 economies,
well above the ‘BB’ median of 98th place.

The policy framework remains disciplined, despite elections in
2008. The budget deficit has run at or below 2% of GDP since 2003,
contributing to a drop in general government debt to 65% of fiscal
revenues by 2007 from 139% in 2004, helping to make Armenia’s public
finances a clear rating strength.

The central bank has allowed the dram to appreciate, driven by
remittance incomes and increasingly by strong capital inflows,
helping to contain inflationary pressure. Average annual inflation
in 2007 of 4.4% was below the ‘BB’ median of 7.9%.

Armenia faces some risk of overheating, although pressures are
moderate relative to ‘BB’ peers, as noted in Fitch’s May 2008
report "Inflation and Emerging Market Sovereign Risk" (available
on ).

Inflation was 9.9% yoy in May 2008, boosted by rising food prices
(54% of the basket). Armenia’s central bank cites the strong seasonal
component to inflation, and 275bps of policy rate hikes since June 2007
(to 7.25%), in support of its view that inflation will fall back to
around 6% by end-year.

Credit growth of 79% in 2007 is concerning, although Fitch bank
analysts note improvements in system quality, while the banks’
small size remains the key weakness; total credit to the private
sector was just 14% of GDP at end-2007. Strong bank credit expansion
contributed to the widening of the CAD to 6.2% in 2007 from 1.8%
in 2006, although strong capital inflows drove an improving external
liquidity position. The violent crackdown on post-election protests
in March 2008 has made political risk more salient in the credit
profile. However, tensions appear to have eased and the government has
promised some structural reforms to help address social grievances,
while political risk in Armenia is not out of line for the ‘BB’ range.

"Sustained growth and disciplined macroeconomic policies, and concrete
action on the new government’s reform agenda, could exert more upward
pressure on Armenia’s ratings in the long term. A failure to contain
overheating pressures, problems in the banking system, or signs of a
breakdown of political stability could be negative for the ratings,"
said Andrew Colquhoun, Director in Fitch’s Sovereigns Group.