Amid regional conflict, Fitch has downgraded Armenia to B+ from BB-, saying it expects government debt will peak at a much higher level.
"Despite a relatively robust macroeconomic framework, there are also material and growing downside risks to our revised forecasts," the credit rating agency said in a statement, citing a resurgence of COVID-19 cases, or a more prolonged escalation in the Upper Karabakh (Nagorno-Karabakh) conflict.
Fitch projected Armenia’s economy will shrink 6.2% this year and the general government deficit will widen to 7.6% of GDP, from 0.8% last year, driven by higher expenditures.
"General government debt are forecast to rise from 53.5% of GDP at end-2019 to 63.9% at end-2020, above the 'B' median of 58.1%," it indicated.
Fitch said government debt will continue to rise to 65.6% of GDP in 2021 and remain elevated over the medium term.
The ongoing clashes began on Sept. 27, when Armenian forces targeted civilian Azerbaijani settlements and military positions in the region, leading to casualties.
Relations between the two former Soviet republics have been tense since 1991, when the Armenian military occupied Upper Karabakh or Nagorno-Karabakh, an internationally recognized territory of Azerbaijan.
Multiple UN resolutions, as well as many international organizations, demand the withdrawal of the occupying forces.
By Aysu Bicer