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FITCH AFFIRMS ARMENIA AT 'BB-'; OUTLOOK STABLE
[ Part 2.2: "Attached Text" ]
http://armenpress.am/eng/news/729546/fitch-affirms-armenia-at-bb-;-outlook-stable.html
20:04, 16 August, 2013
LONDON, AUGUST 16, ARMENPRESS/FITCH: Fitch Ratings has affirmed
Armenia's Long-term foreign and local currency Issuer Default Ratings
(IDR) at 'BB-' with a Stable Outlook. The Country Ceiling has been
affirmed at 'BB' and the Short-term rating at 'B'.
KEY RATING DRIVERS The affirmation reflects the following factors:
The consolidated general government deficit fell to 1.4% of GDP in
2012, down from 2.8% of GDP in 2011, outperforming the target for
the second successive year. The government succeeded in meeting its
goal of increasing tax revenues, although under-execution of capital
spending also contributed, by 1.2pp of GDP. The deficit will increase
again in 2014 due to the costs of introducing a pension reform,
estimated at 0.5% of GDP in the first year.
General government debt rose 1.8pp of GDP to 44.1% of GDP in 2012, but
Fitch expects it to stabilise from 2013 onwards. Currency depreciation
is a risk to solvency given that over 80% of government debt is foreign
currency-denominated. External sovereign debt service is modest,
but rising. The government aims to deepen the local capital market.
Real GDP grew by 7.2% in 2012, faster than in any other rated sovereign
in Emerging Europe, driven by agriculture, mining and services.
Faster growth has accompanied a government drive to improve the
business climate, although qualitative weaknesses persist. Growth
slowed in Q213, but Fitch expects it to reach 5% in 2013-15,
higher than its previous forecasts. Consumption and net trade are
contributing, while investment is weak. Headwinds will come from
higher gas prices and slower growth in Russia.
A current account deficit (CAD) above 10% of GDP is still a rating
weakness, although it is gradually narrowing, driven by exports. The
CAD is forecast to fall below 10% of GDP in 2014, with FDI accounting
for an increasing share of CAD financing. Reserves will be flat as
Armenia starts to repay IMF lending.
Governance indicators are slightly below 'BB' medians. Serzh Sargsyan
won a second term as president in February 2013, completing a smooth
election cycle and pointing to policy continuity. However, an angry
popular response to a proposed rise in public transport fares in
Yerevan suggests dissatisfaction and latent political risks.
Armenia's rating is supported by a relatively strong macroeconomic
framework and a good inflation track record in comparison with the
peer group of 'BB' rated sovereigns. However, rising food prices
and a 15.1% rise in energy tariffs (stemming from higher gas import
costs) pushed up inflation to 8.5% year on year, in July 2013. By 2014
inflation should return to the target range, below 5.5%. The Central
Bank of Armenia (CBA) is allowing greater exchange rate flexibility,
although dollarisation is high at 63%.
Fitch previously highlighted the risks to the banking sector from
strong lending growth, albeit from a low base. Headline growth in
bank lending to the private sector slowed to 16% year on year in May
2013, from 27% at end-2012. The CBA has moved to dampen growth in
foreign currency lending. Bank risks to sovereign creditworthiness
are mitigated by loss absorption capacity and predominantly foreign
ownership of the banks.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside
risks to the rating are currently well balanced.
Consequently, Fitch's sensitivity analysis does not currently
anticipate developments with a high likelihood of leading to a
rating change.
The main factors that, individually or collectively, could lead to
positive rating action are:
Ongoing improvement in the CAD and a stronger reserve position.
Setting the debt/GDP ratio on a downward path. A track record of
sustainably low fiscal deficits while navigating the challenges of
the pension reform would improve creditworthiness, especially given
the forecast rise in sovereign external funding costs.
The main factors that, individually or collectively, could lead to
negative rating action are:
A fall in reserves and pressure on the dram originating from an
external shock or inconsistent economic policies. A sharp depreciation
would worsen solvency risks given the government's largely foreign
currency-denominated debt, and pose risks to the financial system in
view of the high level of dollarisation.
An upswing in political risk, which is less likely now that the
election cycle is complete.
Material slippage in the performance of public finances that led to
a rise in the debt/GDP ratio.
KEY ASSUMPTIONS
The ratings and Outlooks are sensitive to a number of assumptions:
Fitch assumes that real GDP growth and fiscal outturns do not deviate
greatly from its forecast, and that any spillover from slowing growth
in Russia is contained.
Fitch assumes that a further sharp downswing in metals prices is
avoided. Mining exports, especially copper, account for two-thirds
of goods exports.
Fitch assumes that Armenia continues to enjoy broad social and
political stability, and that there is no significant worsening in
tensions with Azerbaijan surrounding Nagorno-Karabakh.
Fitch assumes there will be progress in deepening fiscal and financial
integration at the eurozone level in line with commitments by policy
makers. It also assumes that the risk of fragmentation of the eurozone
remains low.
Contact: Primary Analyst Charles Seville Director +44 20 3530
1048 Fitch Ratings Limited 30 North Colonnade London E14 5GN
Secondary Analyst Michele Napolitano Director +44 20 3530 1536
Committee Chairperson Richard Fox Senior Director +44 20 3530 1444
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103,
Email: [email protected]. Additional information is
available on www.fitchratings.com Applicable criteria, 'Sovereign
Rating Methodology', dated 13 August 2012 and 'Country Ceilings'
dated 9 August 2013 are available at www.fitchratings.com. Applicable
Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS
AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY
FOLLOWING THIS LINK:here. IN ADDITION, RATING DEFINITIONS AND THE TERMS
OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE
'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES
ARE AVAILABLE FROM THIS SITE AT ALL TIMES.
FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST,
AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND
PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE
FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED
ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON
THE FITCH WEBSITE.
[ Part 2.2: "Attached Text" ]
http://armenpress.am/eng/news/729546/fitch-affirms-armenia-at-bb-;-outlook-stable.html
20:04, 16 August, 2013
LONDON, AUGUST 16, ARMENPRESS/FITCH: Fitch Ratings has affirmed
Armenia's Long-term foreign and local currency Issuer Default Ratings
(IDR) at 'BB-' with a Stable Outlook. The Country Ceiling has been
affirmed at 'BB' and the Short-term rating at 'B'.
KEY RATING DRIVERS The affirmation reflects the following factors:
The consolidated general government deficit fell to 1.4% of GDP in
2012, down from 2.8% of GDP in 2011, outperforming the target for
the second successive year. The government succeeded in meeting its
goal of increasing tax revenues, although under-execution of capital
spending also contributed, by 1.2pp of GDP. The deficit will increase
again in 2014 due to the costs of introducing a pension reform,
estimated at 0.5% of GDP in the first year.
General government debt rose 1.8pp of GDP to 44.1% of GDP in 2012, but
Fitch expects it to stabilise from 2013 onwards. Currency depreciation
is a risk to solvency given that over 80% of government debt is foreign
currency-denominated. External sovereign debt service is modest,
but rising. The government aims to deepen the local capital market.
Real GDP grew by 7.2% in 2012, faster than in any other rated sovereign
in Emerging Europe, driven by agriculture, mining and services.
Faster growth has accompanied a government drive to improve the
business climate, although qualitative weaknesses persist. Growth
slowed in Q213, but Fitch expects it to reach 5% in 2013-15,
higher than its previous forecasts. Consumption and net trade are
contributing, while investment is weak. Headwinds will come from
higher gas prices and slower growth in Russia.
A current account deficit (CAD) above 10% of GDP is still a rating
weakness, although it is gradually narrowing, driven by exports. The
CAD is forecast to fall below 10% of GDP in 2014, with FDI accounting
for an increasing share of CAD financing. Reserves will be flat as
Armenia starts to repay IMF lending.
Governance indicators are slightly below 'BB' medians. Serzh Sargsyan
won a second term as president in February 2013, completing a smooth
election cycle and pointing to policy continuity. However, an angry
popular response to a proposed rise in public transport fares in
Yerevan suggests dissatisfaction and latent political risks.
Armenia's rating is supported by a relatively strong macroeconomic
framework and a good inflation track record in comparison with the
peer group of 'BB' rated sovereigns. However, rising food prices
and a 15.1% rise in energy tariffs (stemming from higher gas import
costs) pushed up inflation to 8.5% year on year, in July 2013. By 2014
inflation should return to the target range, below 5.5%. The Central
Bank of Armenia (CBA) is allowing greater exchange rate flexibility,
although dollarisation is high at 63%.
Fitch previously highlighted the risks to the banking sector from
strong lending growth, albeit from a low base. Headline growth in
bank lending to the private sector slowed to 16% year on year in May
2013, from 27% at end-2012. The CBA has moved to dampen growth in
foreign currency lending. Bank risks to sovereign creditworthiness
are mitigated by loss absorption capacity and predominantly foreign
ownership of the banks.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside
risks to the rating are currently well balanced.
Consequently, Fitch's sensitivity analysis does not currently
anticipate developments with a high likelihood of leading to a
rating change.
The main factors that, individually or collectively, could lead to
positive rating action are:
Ongoing improvement in the CAD and a stronger reserve position.
Setting the debt/GDP ratio on a downward path. A track record of
sustainably low fiscal deficits while navigating the challenges of
the pension reform would improve creditworthiness, especially given
the forecast rise in sovereign external funding costs.
The main factors that, individually or collectively, could lead to
negative rating action are:
A fall in reserves and pressure on the dram originating from an
external shock or inconsistent economic policies. A sharp depreciation
would worsen solvency risks given the government's largely foreign
currency-denominated debt, and pose risks to the financial system in
view of the high level of dollarisation.
An upswing in political risk, which is less likely now that the
election cycle is complete.
Material slippage in the performance of public finances that led to
a rise in the debt/GDP ratio.
KEY ASSUMPTIONS
The ratings and Outlooks are sensitive to a number of assumptions:
Fitch assumes that real GDP growth and fiscal outturns do not deviate
greatly from its forecast, and that any spillover from slowing growth
in Russia is contained.
Fitch assumes that a further sharp downswing in metals prices is
avoided. Mining exports, especially copper, account for two-thirds
of goods exports.
Fitch assumes that Armenia continues to enjoy broad social and
political stability, and that there is no significant worsening in
tensions with Azerbaijan surrounding Nagorno-Karabakh.
Fitch assumes there will be progress in deepening fiscal and financial
integration at the eurozone level in line with commitments by policy
makers. It also assumes that the risk of fragmentation of the eurozone
remains low.
Contact: Primary Analyst Charles Seville Director +44 20 3530
1048 Fitch Ratings Limited 30 North Colonnade London E14 5GN
Secondary Analyst Michele Napolitano Director +44 20 3530 1536
Committee Chairperson Richard Fox Senior Director +44 20 3530 1444
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103,
Email: [email protected]. Additional information is
available on www.fitchratings.com Applicable criteria, 'Sovereign
Rating Methodology', dated 13 August 2012 and 'Country Ceilings'
dated 9 August 2013 are available at www.fitchratings.com. Applicable
Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS
AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY
FOLLOWING THIS LINK:here. IN ADDITION, RATING DEFINITIONS AND THE TERMS
OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE
'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES
ARE AVAILABLE FROM THIS SITE AT ALL TIMES.
FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST,
AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND
PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE
FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED
ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON
THE FITCH WEBSITE.