IHS GLOBAL INSIGHT REVISES ARMENIAN SOVEREIGN OUTLOOK TO NEGATIVE AS LIQUIDITY PRESSURES KEEP INTENSIFYING
Venla Sipila

World Markets Research Centre
Global Insight
June 15, 2009

In our second-quarter sovereign risk review round, IHS Global Insight
has adjusted the outlook on our Armenian medium-term sovereign
rating to negative from stable. The rating itself is kept at 60 (B-
in the generic rating scale), signifying a very high payments risk
in lending to the sovereign. In addition, we downgraded Armenia’s
short-term sovereign rating by two notches to 30 from 40, as lower
foreign currency inflows have resulted in ever-tightening liquidity
pressure on the economy. Moreover, the outlook for the short-term
sovereign rating was also retained at negative. The rating revisions
follow a one-notch downgrade in our Armenian sovereign rating only
last round, when the rising risks to creditworthiness became evident
amid weakened supply of foreign currency (seeArmenia: 24 March 2009:).

Significance:The downward outlook revision highlights intensifying
financial pressures from the sovereign’s external financing gap, now
that the availability of foreign investment remittance inflows are
considerably suffering under the global economic downturn, leading to
rising challenges in financing the wide external gap and covering
the rising fiscal spending needs, and increasing needs to seek
external loans (seeArmenia 3 June 2009: ). Armenia is particularly
strongly dependent on workers’ remittances from Russia. According
to figures from the Central Bank of Armenia (CBA) quoted by ARKA
News, these have declined by nearly 36% in annual comparison for the
January-April period. With Russian remittances making up nearly 80%
of total non-commercial remittance inflows, this drop has a severe
negative impact on Armenian external finances. However, official data
on remittances received through the local banking system may somewhat
underestimate inflows.

In addition, another mitigating factor in assessing Armenian
sovereign risk is that, while external debt is rising, mostly it
has been extended by multilateral creditors, thus carrying very
soft terms. Thus, Armenia still is likely to be able to service its
external obligations.