August 18
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Fitch Ratings has affirmed Armenia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+' with a positive outlook.

Armenia's ratings balance a credible macro policy mix and stronger income per capita and governance indicators relative to peers against high public and external debt and tense relations with some neighbouring countries.

The Positive Outlook reflects institutions that have underpinned macroeconomic and financial stability through a period of significant political change, a stronger growth outlook relative to peers, and a commitment to a medium-term programme of government debt reduction. External vulnerabilities have re-emerged following a sharp widening of the current account deficit in 2018, although this may partly reflect statistical issues.

Fitch forecasts the general government deficit to widen to 2.3% of GDP in 2019, much lower than the current 'B' median of 4.3%, as expenditure execution accelerates. A planned tax reform package will cause revenue losses, which might be offset by strong tax administration measures. The government over-performed its 2018 deficit target of 2.7% of GDP, recording a deficit of 1.6%, as spending reviews by the new government led to an under-execution of capex, while robust economic growth and improved tax administration boosted revenues.

According to Fitch forecast, gross general government debt will decrease to 55.5% of GDP in 2019 and 54.5% in 2020.

High investment activity and private consumption, supported by robust credit growth, led to a 5.2% economic expansion in 2018, despite a contraction in the agriculture and mining sectors. Fitc forecasts real GDP growth to decelerate in 2019 to 4.6% and 4.5% in 2020, still higher than the five-year average of 3.9% and the forecast current 'B' median of 3.3%. Lower remittances will likely lead to lower private consumption, although contractionary effects of fiscal policy gradually fade. Potential resumption of the construction of the foreign-owned Almusar gold mine provides upside risks to our economic forecast.

Fitch experts say the new administration appears committed to implementing structural reform, including fighting corruption, improving governance and public finance management and tackling monopolies. The recent release of former president Kocharyan has led to tensions between the prime minister and the judiciary, and may lead the government to prioritise reform of the judicial system. The long-standing conflict with Azerbaijan over Nagorno-Karabakh has the potential to escalate and borders are closed with two of Armenia's neighbours.

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