PROPOSED IMF PROGRAMME WOULD SUPPORT ARMENIA’S RATINGS

ArmInfo
2009-03-05 23:11:00

ArmInfo. Fitch Ratings says today that a proposed IMF loan facility for
USD540m would support the adjustment of Armenia’s economy in the face
of a global and regional economic shock, and support the outlook for
its sovereign ratings. Armenia’s foreign and local currency Issuer
Default Ratings (IDRs) are ‘BB’ with Stable Outlooks. The Country
Ceiling is ‘BB+’ and the country’s Short-term rating is ‘B’.

Armenia’s decision to seek a precautionary IMF programme and allow a
freer float for the currency is a welcome signal of the authorities’
cautious approach to managing current difficulties," says Andrew
Colquhoun, Director in Fitch’s Sovereigns Group. "However, the
reserves loss to end-January indicates the scale of the shock, and
suggests there is little room for policy missteps which could undermine
macroeconomic stability and increase downwards pressure on the ratings.

IMF Managing Director Dominique Strauss-Kahn has requested that the
IMF’s Board approve a USD540m, 28-month Stand-By Arrangement for
Armenia, at a planned 6 March meeting. A programme approval would
follow a 24% fall in official reserves to USD1.26bn by end-January
2009, from USD1.66bn at end-2007. The central bank (CBA) has said it
spent USD360m supporting the Armenian dram (AMD) at around 305 to 1 USD
during 2008, to support confidence in the partly-dollarised financial
system amid global financial turmoil and political tensions. The
CBA says it will now permit greater exchange-rate flexibility, and
expects the AMD to settle around 370 to the USD. However, the CBA has
held back from formally committing to an AMD target or band. The IMF
programme will include support to Armenia’s banks, enabling them to
absorb the consequences of AMD depreciation for the 38% of loans in
the system denominated in foreign currency. With bank credit to the
private sector of only 17% of GDP at end-2008, any potential problems
in the still relatively well-capitalised banking sector should be
more manageable than for most of Armenia’s regional peers.

Armenia’s GDP growth slowed to 6.8% in 2008, from 13.8% in
2007. The economy contracted by 0.2% in Q408, hit by an 11% fall in
construction. The sharp downturn in the Russian economy in Q408 is
likely to have affected remittance receipts, an important source of
foreign exchange and demand. The IMF projects that Armenia’s economy
could shrink 1.5% in 2009, although the authorities expect growth
of around 2% driven mainly by fiscal stimulus, partly funded from
official sources. In addition to the likely IMF programme, Armenia is
expected to receive a USD500m credit from Russia, and up to USD525m
from the World Bank for SME financing over four years.

Securing and successfully implementing20the IMF programme and sustained
domestic policy discipline would support the ratings. Geopolitical
risk remains a background feature in a volatile region, although
there have been signs of progress towards a resolution of Armenia’s
frozen conflict with neighbouring Azerbaijan. Domestic political
risk appears to have eased after the election-related violence of
March 2008, although a downturn in the economy could spark further
unrest. The public finances remain a rating strength, with government
debt projected by Fitch at around only 14% of GDP by end-2008.