IHS Global Insight
January 27, 2015

IHS adjusts Armenian sovereign outlook to Negative as foreign currency
inflows are increasingly threatened

BYLINE: Venla Sipila

In its fourth-quarter 2014 sovereign risk review, IHS has cut the
outlook on its sovereign rating for Armenia to Negative from Stable.
The ratings themselves remain unchanged. The short-term rating stands
at 10, signalling “high quality” credit, while the medium-term
assessment of 50 (corresponding to BB- on the generic rating scale)
indicates “ongoing uncertainty” in the country’s creditworthiness. The
downward revision in the credit rating comes as foreign currency
inflows to Armenia are increasingly at risk, as the Russian downturn
has suppressed workers’ remittances paid by Armenians working in
Russia. Remittances are a key source of foreign currency for Armenia.
In addition, the Russian downturn also risks harming investment
inflows, while it also has a negative impact on export demand, given
that Russia is a key export market for Armenia.

Significance:The outlook revision implies that we now see a downgrade
in the Armenian sovereign rating likely with the next 12 months. In
particular, deterioration in remittance, FDI and export revenues risks
putting critical pressure on Armenian liquidity, potentially
relatively quickly. Without private transfers, Armenia’s current
account, which is currently estimated to run at around 6-7% of GDP,
would be still a great deal wider. Given that Armenia has a very good
relationship with the International Monetary Fund (IMF), however, the
international lender would probably provide for additional assistance
for the country, before a balance of payments crisis would be at hand.
However, with less private investment inflows and weaker exports, the
need for borrowing would increase, and for now, we see that this also
could have a negative impact on solvency as well. Thus, at present, a
downgrade in our Armenian sovereign rating looks likely enough to
warrant a Negative outlook. If the Russian economy starts showing
signs of recovery earlier than we currently expect, which would
necessitate also the oil prices reviving sooner or more strongly than
at present seems likely, the outlook could return to Stable.