YEREVAN, Mediamax—Moody’s Investors Service has today downgraded Armenia’s issuer and government bond rating to Ba3 from Ba2, and changed the outlook to negative from stable.
Moody listed the following as key drivers for the downgrade. First, Armenia’s increased external vulnerability due to declining remittances from Russia, an uncertain outlook for foreign direct investment (FDI), an elevated susceptibility to exchange rate volatility, and expected pressure on foreign exchange (FX) reserves.
And secondly, The country’s impaired growth outlook, compounded by negative growth spillovers from Russia, weak investment activity, and constraints on trade with countries outside the Eurasian Economic Union (EEU) that are expected from Armenia’s recent EEU accession.
In a related action, Moody’s has also lowered the local-currency bond and deposit ceilings to Ba1 from Baa3, the foreign-currency bond ceiling to Ba2 from Ba1, as well as the foreign-currency deposit ceiling to B1 from Ba3. The short-term foreign-currency bond ceiling and the foreign-currency deposit ceiling remain at NP, a Moody’s Investors Service press release says.
The first driver of the downgrade is Armenia’s increased external vulnerability driven by declining remittances from Russia and risks to expected FDI inflows. Remittances represent about 15% of GDP, with over 90% of the total stemming from Russia. Given the sharp recession expected in Russia, the adverse impact of reduced remittance inflows on the country’s balance of payments will potentially put pressure on Armenia’s FX reserves, which were at 4.5 months of import cover at the end of 2014.
Moreover, Armenia’s position as a significant net international borrower exposes the currency to elevated depreciation risk. Approximately 83% of Armenia’s government debt is denominated in foreign currency, mostly in Special Drawing Rights (SDR) and US dollars. The Armenian dram’s depreciation of over 15% since November 2014 has the potential to put additional pressure on Armenia’s FX reserves, which remain subject to intervention by the Central Bank of Armenia to counteract excessive volatility, the report from Moody’s says.
The second driver of the downgrade is pressure on Armenia’s economic growth prospects, which is compounded by the negative growth spillovers from Russia’s economic downturn. Moody’s expects that Russia’s GDP will contract by 5.5% in 2015, weakening Armenia’s economic activity given its historically strong correlation with Russia’s growth cycle via remittances and trade channels, with Russia accounting for 23% of total Armenian exports.
Further exacerbating the slowing dynamics for potential growth — excepting some more active sectors such as the information technology industry — are Armenia’s weak investment activity and its slow productivity growth since the global financial crisis, in addition to its adverse net migration dynamics, the Moody’s report said.