Fitch Ratings-Moscow-02 December 2016: Fitch Ratings has assigned Armenian City of Yerevan Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of ‘B+’ and a Short-Term Foreign Currency IDR of ‘B’. The Outlooks on the Long-Term IDRs are Stable.
Yerevan’s ratings reflect a weak institutional framework for Armenian sub-nationals, as reflected by the sovereign rating (B+/Stable) constraint. The ratings also reflect Yerevan’s status as Armenia’s capital, satisfactory budgetary performance, supported by steady transfers from the central government, and a debt-free status.
KEY RATING DRIVERS
The rating action reflects the following key rating drivers and their relative weights:
High
In its base case scenario, Fitch expects the city to maintain satisfactory fiscal performance with an operating margin of 2%-3% in 2016-2018 (2011-2015: average 7.5%). The lower than historical margins will be driven by continued adjustment of the city’s operating revenue to negative shocks resulting from the protracted slowdown of Armenia’s economy in 2014-2015. We also expect Yerevan to run a slight surplus before debt variation of 1%-2% of total revenue in 2016-2018, after an average deficit of 1% in 2011-2015.
Fitch projects Yerevan city’s operating revenue will total AMD78bn in 2016, up 3% yoy. Yerevan receives current transfers from the central government, which averaged 74% of operating revenue in 2011-2015. Over the medium term, current transfers are likely to remain stable at about 75% of the city’s operating revenue, while locally collected taxes will contribute about 15% of operating revenue, in line with its average in 2011-2015.
Capital spending is likely to decrease slightly to about AMD7bn-AMD8bn in 2016-2017 (2015: AMD9bn) before rising to about AMD10bn in 2018. It will likely remain at below 10% of total expenditure, significantly below the average of 22% in 2011-2015, when the city made material infrastructure investment funded by state transfers and donor grants. Fitch expects the city will continue funding capital spending predominantly with asset sales and capital transfers from the central government.
Fitch views Armenia’s institutional framework for local and regional governments (LRGs) as a constraint on the city’s ratings. It has a shorter track record of stable development than many of its international peers. Weak institutions lead to lower predictability of Armenian LRGs’ budgetary policies, narrow their planning horizon and hampering long-term development plans. The main challenge facing Yerevan is the low predictability of medium- and long-term policies, which are subject to central government decisions.
The ratings also consider the following rating factors:
The city is free from any debt or guarantees, since forming a community in 2008. Statutory provisions of the national legal framework guiding debt or guarantees issuance restrict the city from incurring significant debt.
The city’s liquidity position weakened in 2015 to AMD175m, from AMD941m in 2014 as Yerevan used its cash to fund capital spending. However, its average monthly cash balance improved to AMD3.2bn at end-9M16 from AMD175m in 2015, underpinned by a steady inflow of revenue sources. Yerevan holds its cash in treasury accounts as deposits with commercial banks are prohibited under the legal framework. Fitch expects the city’s cash holdings to rise to AMD1.5bn-AMD3bn in 2016-2018, surpassing the five-year average of AMD1bn in 2011-2015.
Yerevan benefits from its capital status. It’s the country’s economic and financial centre and largest market with a developed services sector. Yerevan is the country’s largest metropolitan area, where 36% of Armenia’s population resides. However, the city’s wealth metrics are low in the international context; Fitch estimates Yerevan’s GRP per capita was AMD1.8m in 2015 (USD3,770). The city’s unemployment rate is high, averaging at 17.6% in 2011-2015, as measured by ILO-compliant assessment of the national statistics service.
The country’s economy grew 3% yoy in 2015, underpinned by strong net exports. Fitch expects Armenia’s economy to grow 3.5% in 2016 and 3.6% p.a. in 2017-2018. Armenia’s economy was negatively affected by severe external shocks in 2014-2015, following a collapse in commodity prices, which depressed the country’s major trade partners and reduced remittances inflows and exports.