IHS GLOBAL INSIGHT DOWNGRADES ARMENIA’S SOVEREIGN RATING AS FOREIGN CURRENCY INFLOWS THREATENED
by Venla Sipila
World Markets Research Centre
Global Insight
March 24, 2009
Armenian sovereign creditworthiness faces increased risks from the
rising ratio of external debt to foreign currency earnings, but the
concessionary nature of most of this lending should prevent further
considerable deterioration in the medium term.
Hit by Global Crisis After All
IHS Global Insight Perspective
Significance We have cut our medium-term rating for the Armenian
sovereign in the first-quarter sovereign risk review round, taking
our assessment deeper into the speculative grade to 60 (B- on the
generic rating scale), signalling very high payments risk.
Implications Sovereign risk is rising as it is becoming increasingly
clear that Armenia is not immune to the indirect negative effects
of the international credit crisis, even if its direct links to the
international financial system via its banking sector borrowing are
rather weak. However, the economy on the whole and its financial
ratios are negatively affected from the considerably weaker outlook
for investment and remittance inflows now that the global economy
has taken a sharp downturn.
Outlook The medium-term rating carries a stable outlook. The
sovereign’s financial stability remains supported by external
assistance, as most recently clearly indicated by the swift approval
of emergency funding from the IMF. However, the ratio of foreign debt
to foreign exchange earnings is now rising faster than previously
expected, marking rising risks related to the sovereigns solvency,
while also liquidity risks remain high as remittance inflows have
sharply cooled.
Risk Ratings Our sovereign rating for Armenia signals higher risk
than those assigned by Moody’s and Fitch, while Standard & Poor’s
does not rate the Armenian sovereign.
IHS Global Insight has downgraded its medium-term sovereign risk rating
for Armenia in the 2009 first-quarter review round. This move takes the
rating down one notch from 55 to 60 (equivalent to B- on the generating
scale), signalling very high payments risk. In addition, the short-term
risk rating is cut to 30 from 25, recognising rising pressure on the
sovereign’s immediate liquidity as financial stress increases.
Initially it seemed that due to the undeveloped nature of its financial
sector, Armenia would remain relatively isolated from the negative
impacts of the international credit crisis. However, with the global
financial crisis now having evolved in to a severe downturn in the real
economy in most parts of the world, Armenia cannot escape the indirect
impacts. Indeed, given its high dependence on foreign currency inflows
for investment, growth, budget financing and for covering its external
gap, the transition economy now seems to be considerably suffering
from the weakness of external inflows. With availability of foreign
investment and remittances sharply deteriorating, Armenia’s economic
prospects and its financial stability and sovereign creditworthiness
are subject to increasing risks. The economy’s financials are
particularly vulnerable to the sharp deterioration of Russian growth
prospects, as it relies heavily on workers’ remittances from Russia.
Ratio of Debt to Foreign Currency Rising
With weaker availability of non-debt-creating means for financing
the deep current-account gap, and remittance inflows significantly
weakened, the sovereign’s borrowing needs are sharply rising. At
the same time as debt is increasing, foreign currency inflows are
deteriorating, and thus, the outlook for the ratio of external debt
in relation to foreign currency earnings is now set to rise. This
implies rising risks on the sovereign’s creditworthiness from this
key solvency measure.
However, as most of Armenia’s debt has been extended on highly
concessionary terms, the country should be able to cope with the
increasing debt load, and no significant threat from debt servicing
costs on creditworthiness is likely. This holds as long as the sharply
deteriorating growth prospects or other issues such as political
tensions or security threats do no not divert attention from badly
needed further reforms.
Meanwhile, the recent loans from the International Monetary Fund (IMF)
and Russia give immediate liquidity support, and the negative impact
on external balances from falling exports is counteracted by easing
imports now as growth cools.
Outlook and Implications
At present we assign a stable outlook to the Armenian medium-term
rating. Although the debt load is rising, the concessionary nature
should keep debt servicing costs manageable.
However, the Armenian risk rating remains constrained by poor
competitiveness and weak economic base. Indeed, while the recent dram
devaluation will give some support for competitiveness in the near
term, it does not abolish the economy’s restructuring needs. Export
earnings potential remains weak, and the economy on the whole still
heavily dependent on the agricultural sector. Meanwhile, the wide
shadow economy erodes public finances.
In addition, Armenian sovereign creditworthiness is suppressed by weak
institutions and governance shortcomings, along with the persistent
threat of renewed flaring of regional geopolitical tensions.