On 6 April, the American credit rating agency “Fitch” revised the Outlook on Armenia's Long-Term Issuer Default Ratings (IDR) to Negative from Stable and affirmed the IDRs (default credit rating) at 'BB-', reported aysor.am.
The rating organization said that the coronavirus shock negatively affected the Armenian economy due to its exposures to commodities (a majority of exports), the Russian economy (for remittances, trade and FDI) and to tourism, only partially offset by the benefit of a lower oil price. This is in the context of Armenia's relatively high net external debt and structural current account deficit, which is only partly financed by non-debt creating capital inflows. Despite a robust macroeconomic policy framework and continuing commitment to reform, the economic shock has put public debt on a markedly higher trajectory,
The agency forecasted the coronavirus shock will drag down GDP growth from 7.6% in 2019 to 0.5% in 2020. Fitch projected that the GDP growth would partially recover in 2021, to 5.5%, supported by a rebound in external demand, investment catch-up, and revival of private consumption and employment growth, with a moderate drag from fiscal tightening. However, the pace of recovery will be highly dependent on the path of the health crisis and the extent to which the coronavirus outbreak can be contained in 2020. If a second wave of infections materialises and lockdown measures have to be re-introduced, the economic and fiscal forecasts for Armenia could be subject to change.
It was highlighted that the Armenia government's coronavirus stimulus package had a focus on social support, subsidised lending, loan refinancing and risk-sharing, with a high degree of uncertainty over how much will ultimately fall on the government balance sheet. They forecasted the general government deficit will narrow to 3.5% of GDP in 2021, on the back of stronger GDP growth and a partial unwinding of support measures, underpinned by the government's strong commitment to its medium-term fiscal targets.
The coronavirus shock has also increased external risks to the Armenian economy. Fitch forecasted the current account deficit remains high, at 8.5% of GDP in 2020 and 8.1% in 2021. The forecast further noted that the net external debt will increase to 52.9% of GDP in 2021 from 46.7% in 2019, well above the 'BB' median of 19.4%, and the relatively high bank deposit dollarization ratio, at 52%, adds to risks.
The banking sector fundamentals would also weaken as a result of the coronavirus shock, captured by the negative banking sector outlook for 2020. Fitch anticipated a marked worsening in asset quality, although regulatory forbearance should help banks manage NPL and capital metrics and avoid statutory limit breaches.
Fitch Ratings Inc. is an American credit rating agency and is one of the “Big Three credit rating agencies”, the other two being Moody's and Standard & Poor’s. It is one of the three nationally recognized statistical rating organizations (NRSRO) designated by the U.S. Securities and Exchange Commission in 1975.
