Fitch warns on Armenia's exposure to Russia

ANKARA

 Credit rating agency Fitch warned on Friday of risks threatening the Armenian economy.

"The country remains heavily exposed to the severe economic downturn in Russia," Fitch warned in a note.

Armenia’s exposure to Russia -- particularly as a source of remittances by expatriate Armenian workers -- appears to be a key risk for Yerevan’s economy.

The country’s tense regional position, including a simmering conflict with Azerbaijan, is also serving as a risk factor for the economy.

"Armenia's large exposure to Russia increases risks to its growth prospects and balance of payments and weighs on the rating as a result. Russia is an important source of Armenia's net receipts of workers' remittances (80 percent, 2014) and export revenues (20 percent, 2014).

“Remittances, which accounted for 13 percent of Armenia's GDP in 2014 and are a key driver of private consumption, fell 40 percent year-on-year in the first five months of 2015," the note reported.

Fitch also expressed concern about Armenia's external finances, which the agency said are weaker than those of its rating peers: "Net external debt to GDP is high (42.6 percent), and the current account deficit plus net foreign direct investment is large (-4.6 percent).”

However, Fitch affirmed the country's credit rating at 'B+' and forecast slightly higher economic growth than had previously been predicted:

"We have revised upwards our real GDP forecast for 2015 to +1.5 percent from -0.5 percent, followed by growth of 2.5 percent and 2.9 percent in 2016 and 2017, respectively. Growth will be mainly constrained by weak private consumption against a lower trend in net remittance receipts."

A rising government deficit for 2015 is a drag on the economy, the note said: "It is likely to come in at 3.5 percent of GDP, compared with the objective of 2.3 percent of GDP in the original budget, reflecting the weakening of the economy.

“A major objective is to increase government revenues, which are currently low, and an increase in excise duties is currently before parliament. However, tax increases and similar measures will likely face strong social and political challenges, as the recent protests against higher consumer electricity charges demonstrate."

Fitch warned that Armenia's geopolitical environment is a constraint on its economy: "The latent conflict with Azerbaijan over the disputed Nagorno-Karabakh region entails the tail risk of escalating into a full-scale conflict. No resolution is expected in the short term."