An extraordinary influx of tens of thousands of migrants into Armenia since the start of the Ukraine conflict has added dynamism to the small nation’s economy, according to Fitch Ratings, which on July 28 upgraded the country to ‘BB’, with a stable outlook.
Said Fitch: “Armenia has had a strong rebound from successive shocks in recent years since its downgrade [to ‘B+’] in 2020, and Fitch expects this dynamism to continue in light of an extraordinary inflow of migrants.
“Since the start of the Ukraine conflict in 2022, an estimated 50,000-65,000 immigrants (equivalent to 2.2% of Armenia's pre-conflict population) from Russia, Ukraine and Belarus have settled in the country. This supported strong growth of 12.6% in 2022, and Fitch expects the economy to grow by 7.2% in 2023, 5.9% in 2024 and 4.5% in 2025.”
In further comments on the impoverished South Caucasus country’s prospects, Fitch said: “Consumption will remain solid while the outlook for goods-and-services exports is also positive despite a strong appreciation of the Armenian dram, mainly due to a resurgence in tourism and re-exports to Russia. If current economic trends continue, Armenia's already favourable medium-term potential growth (estimated at 4.5%) could receive a further boost from expansion of the labour force and improvements in productivity. Fitch expects income per capita (at market exchange rates) to nearly double from 2021 levels by 2025.”
The ratings agency noted that Armenia’s debt was stabilising at a low level, observing that government debt/GDP fell sharply to 46.7% in 2022 from 60.2% in 2021 due mainly to currency appreciation, but also the strong nominal GDP rebound and fiscal consolidation. Fitch expects stabilisation at around 44.6% in 2023-25, below its pre-pandemic 2019 level of 53.7% and the current 'BB' median of 54.1%.
“The share of FX-denominated debt of 60.5% as of 1Q23 is above the 'BB' median of 55%, although this has declined from 71.2% at end-2021 due to sharp dram appreciation as well a shift to greater local borrowing,” said the ratings firm, adding: “Risks to debt dynamics are mitigated by the relatively large share of concessional debt, and the high proportion of fixed rate debt (84.1% as of May).”
Fitch added that it expected that robust nominal economic growth and higher spending would result in a moderate increase in the general government deficit (cash basis) to 2.5% of GDP, from 2.2% in 2022.
Armenia’s current account posted a surplus of 0.8% of GDP in 2022 compared to a 2021 deficit of 3.7%. That, said Fitch, was a result of solid demand for services and goods exports and money transfers, including remittances. “We expect the current account to fall back into a deficit of 1.1% of GDP on average in 2023-2025 on strong domestic demand, but remain below historical averages in light of these positive factors. The stronger external position reduced net external debt to 24.6% of GDP in 2022 from 44.5% in 2021, and we expect a further decline to 16.1% of GDP by 2025, in line with peer medians. The external liquidity ratio is expected to peak at about 150% in 2024,” it added.
Fitch also pointed to some inherent risks from high reliance on the Russian market (49% of exports and 25% of imports in January-May), although in the short term, Armenia, it said, would benefit from the sharp increase in re-exports to the country that is occurring as a result of closure of other trade routes to Russia due to sanctions.
Fitch also assessed geopolitical risks to Armenia from its unresolved territorial dispute with Azerbaijan.
Those, risks, it said have increased since the start of the year, adding: “As of July, a seven-month long Azerbaijani blockade of the Lachin Corridor in the disputed Nagorno-Karabakh region is ongoing, and there have been multiple deadly military clashes on the border. Peace talks between the two countries continue, but in our view, are unlikely to yield a lasting peace agreement in the absence of territorial adjustments that may be politically difficult for Armenia to accept.
“Fitch believes that in the event of a military conflict with Azerbaijan over Nagorno-Karabakh, fighting will largely be limited to the disputed region, and broader macroeconomic implications for Armenia will be limited.”
Fitch also looked at how lower inflation and a strong currency were key rating drivers for Armenia, saying: “Sharp increases in money transfers and movement of migrants from Russia have contributed to a sustained strengthening of the dram since mid-2022. The strong dram and the easing of global commodity prices caused inflation to fall into negative territory in June (-0.5% yoy) from a peak of 8.1% in January-February.
“Core inflation is also declining, from an average of 8% in 1Q23 to 1.5% yoy in June, notwithstanding strong wage growth (18% yoy as of May 2023), reducing concerns over economic overheating. Fitch expects the dram to moderately depreciate in 2023-24, albeit still to levels stronger than before the start of the Ukraine conflict.”
In its assessment of Armenia’s stable, dollarised banking sector, the ratings agency said: “The Armenian banking sector has favourable profitability (return on equity of 18%), asset quality (non-performing loan ratio of 2.6%) and capitalisation (Tier 1 capital ratio of 18.7% as of May). Deposit dollarisation levels have been stable, at 52.3% as of May 2023, while loan dollarisation declined slightly to 34.8% as of May.
“There are signs of overheating in the property market, with residential property prices rising by an average of 10% yoy in 1H23, owing mainly to the heightened demand from the population surge. However, Fitch sees risks of a disorderly correction as relatively low, and any spill over on the broader economy will likely be limited, given strong household and corporate balance sheets. Banks have adequate dram and US dollar liquidity, and a destabilising outflow of deposits is not seen as likely.”