2024-03-27 10:34:59
“Moody’s” rating agency left the RA sovereign rating unchanged at “Ba3”, but lowered the “stable” perspective of the rating, defining it as “negative”, reports 168.am.
The following 3 impulses underlie the formation of negative expectations regarding the RA sovereign rating.
1. Weakening of RA’s long-term economic growth potential is expected
According to Moody’s forecasts, economic growth in Armenia will decrease to 1.8% in 2022, and to 3% in 2023. Before 2022-2023 5-5.5% level of economic growth was predicted.
The main reason for the projected reduction in growth is the high dependence of the RA economy on the Russian economy (in the form of exports and transfers), which in the context of the escalation of the Russia-Ukraine armed conflict implies a number of negative consequences.
In particular, a 20-30% reduction in remittances to Armenia is predicted in 2022, which will lead to a reduction in household consumption. Moreover, against the background of the expected decline in domestic demand in the Russian Federation, the export volumes from Armenia will also be reduced, additionally penalizing the economic growth.
According to Moody’s forecasts, the international sanctions against Russia will be long-term, as a result of which it is expected that the remittances from Russia and the volumes of exports to Russia will not recover for a long time. As a result, RA’s long-term economic growth opportunities will also suffer.
2. The debt of the RA government will continue to be maintained at a high level
According to Moody’s forecasts, the deficit of the RA state budget in 2022-2023 will continue to be maintained at the level of 4-4.5% of GDP, while previously it was expected that the deficit would be reduced in 2022, fluctuating within 3% of GDP. The reason is the expectations of reduction of state revenues against the backdrop of negative economic developments.
As a result, instead of decreasing, the debt of the RA government will increase in 2022-2024 and will remain in the range of 62-63% of GDP in 2021. compared to 60.3%. Moreover, according to Moody’s assessment, although the government’s fiscal policy should be aimed at stimulating the economy (through the implementation of additional spending) and contribute to economic growth, this policy will once again delay fiscal consolidation.
On the other hand, according to Moody’s, the level of foreign currency risks of the government’s debt is a concern, as 70% of the debt is in foreign currency. It is assumed that in the event of a possible sharp devaluation of the dram, on the one hand, the trajectory of the government’s debt will worsen, on the other hand, the risks of the banking system will increase due to the still high level of dollarization of commercial banks.
3. Geopolitical risks may deepen
According to Moody’s assessment, the level of tension between Armenia and Azerbaijan may increase significantly in the near future due to the developments of the Russian-Ukrainian armed conflict. This could adversely affect consumption and investment as well as fiscal sustainability, particularly if currency pressures intensify and/or defense spending increases sharply.