Fitch Ratings has affirmed Armenia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-'.

The Outlook on the Long-term IDRs is Stable. At the same time, Fitch has affirmed the Short-term local currency IDR at 'B' and Country Ceiling at 'BB', Reuters reported.

"The affirmation of Armenia's ratings reflects the fact that the authorities are reducing fiscal and external imbalances in line with their IMF-backed economic policy program," says Charles Seville, Director in Fitch's Sovereign group. "However, the economy is vulnerable to external shocks. Government debt and gross external debt are materially higher than they were before the 2008-2009 crisis."

Fitch expects the government to reduce the fiscal deficit to 3.9% of GDP in 2011. Withdrawing fiscal stimulus, the government narrowed the deficit to 5% of GDP in 2010. Consolidation plans rely on a mixture of restraining spending and increasing tax collection - a perennial challenge.

Fitch forecasts real GDP growth of 4%-5% in 2011-2013, close to medium-term potential growth. Economic activity expanded by an average 5% in January-July 2011, driven by industry, agriculture and services, as well as higher commodity exports and remittance inflows. The government is seeking to improve the business environment and rebalance the economy towards productive and export-generating activities.

Growth at this level is sufficient to stabilize general government debt at around 40% of GDP, barring further fiscal or exchange rate shocks. However, as almost 90% of government debt is foreign-currency denominated, the solvency ratio is unusually sensitive to exchange rate movements.

Pressure on reserves or the dram - following a global slowdown or shock to Russian growth - would weaken the external balance sheet and could lead to negative rating action. Armenia's ability to absorb further external shocks has been weakened by the crisis, which pushed up government debt to 40% of GDP (in line with the 'BB' median) and GXD. Renewed domestic or external (surrounding Nagorno-Karabakh) political tension could also lead to negative rating action.

If Armenia follows through with fiscal reforms and narrow the twin deficits sustainably, this would put upward pressure on the ratings. A sustained reduction in dollarisation would also be positive.