Armenia's economy to be affected by Russia slowdown: Moody’s

PanARMENIAN.Net - Armenia's (Ba2 stable) economy will continue to be adversely affected by an economic slowdown in Russia (Baa1 negative) due to the economic linkages between the two countries, says Moody's Investors Service in a report published Tuesday, Sept 16.

Following a stronger than expected decline in net exports and slowing remittances in H1 2014, Moody's has revised Armenia's growth forecast down to 2.1% in 2014 and 2.3% in 2015 from 3.2% and 3.6%, respectively. The revised figures are based on Moody's forecast for the Russian economy to contract by 1.0% in 2014, followed by stagnation in 2015.

"Declining net exports and slowing remittances in the first half of 2014 underscore Armenia's significant trade and financial exposure to Russia, with further spillover risks stemming from the U.S.' and the EU's tighter sanctions regime against Russia," says Moody's Investors Service. "Nevertheless, the government's commitment to fiscal prudence and macroeconomic stability, support Armenia's Ba2 rating with a stable outlook," continues the rating agency.

Moody's notes that Armenia's material exposures to Russia are via both direct and indirect channels. Russia accounts for nearly a quarter of Armenia's total imports and exports as well as an average of almost 45% of FDI in 2008-2012, while remittances from Russia represent 90% of the total received. A sharp slowdown in remittances, which contribute 15% of Armenia's GDP, in addition to lower FDI inflows, could lead to negative rating pressure if combined with sustained deterioration in fiscal and external buffers.

However, Armenia's Ba2 rating with a stable outlook is supported by the government's commitment to fiscal prudence and macroeconomic stability, which mitigate risks stemming from its significant exposure to external shocks and reduce its vulnerability to changes in global energy, food and commodities prices. The stable outlook also reflects the country's ongoing, albeit gradually diminishing, access to concessional borrowing under favorable terms.

The country's new Extended Fund Facility (EFF) agreement with the IMF aims to further strengthen revenue-generating capacity and bring the debt ratio to a declining path starting 2017. Additionally, Armenia intends to continue benchmarking against EU standards in order to establish the country's role as a gateway between the Western Hemisphere and the Eurasian region.

Moody's could consider assigning a positive outlook and eventually upgrading Armenia's rating if structural reforms, which the government is in the process of implementing, propel the economy toward more balanced economic growth and a significant reduction in the current account deficit.