Fitch Ratings have confirmed the Long-Term Foreign-Currency Issuer Default Rating (IDR) of Armenia at "B+" with a Stable Outlook.

According to the report, Armenia has good per-capita income, governance, and business environment indicators relative to peers. "It also has a solid macroeconomic and fiscal policy framework, a genuine commitment to reform, and IMF support, all of which contribute to its 'B+' IDRs. Geopolitical concerns, a substantial portion of state debt denominated in other currencies, and weak external finances work against these advantages," Fitch said.

Fitch stated, "The Ukraine conflict and sanctions on Russia have triggered a substantial migration of Russian, Ukrainian and Belarusian citizens to Armenia since March, with visitor numbers rising 515% YoY (year-over-year) in the first half of this year. A 200% year-over-year rise in money transfers from Russia to Armenia in the same period supports this argument. A significant portion of migrant professionals is thought to be highly educated, especially from the information and communications technology industry. These patterns contributed to growth increasing by 13% YoY in the second quartal of 2022 (first quartal of 2022: 8.7% YoY), and they should continue in the second half of 2022. Due to the increase in personal spending brought on by remittances and the continued strength of exports (especially to Russia), Fitch has increased its real GDP growth estimates for 2022 to 6.4%. In 2023–2024, Fitch forecasts growth to be 4.7% on average."

Regarding the sanctions on Russia, Fitch assessed, "Armenia continues to take a careful stance in its management of ties with the US, UK, and EU. The government is committed to derisking the banking industry to avoid breaking sanctions. However, there is still a sizable amount of trade with Russia. Russia accounted for 31% of Armenia's exports, 36% of its imports, and a projected 40% of foreign direct investment as of June 2022. Before the crisis in Ukraine began, 32% of all money transfers (including remittances) came from Russia. Due to its high reliance on Russian energy, Armenia has been paying for its imports of Russian natural gas in rubles since the Ukraine crisis began. There are few indications that export market diversification will happen in the near to medium term."

The report said: "As a result of the armed conflict between Armenia and Azerbaijan in Nagorno-Karabakh in August, which resulted in fatalities on both sides, and additional purported territory advances by Azerbaijan, relations with that country have deteriorated since. Although Fitch does not currently anticipate that Azerbaijan's relocation of inhabitants in the area would have wider macroeconomic effects, tensions are projected to remain high in the medium term."

"Consumer price increases reached an 11-year high of 10.3% in June, considerably outside the Central Bank of Armenia's (CBA) 4% (+/-1.5pp) objective, as a result of the significant number of migrants and the demand boost they caused. Property rentals increased by 23.4% YoY in June, driven by rising expat demand, raising inflation concerns. Given the extreme reliance on imported food, the strength of the dram, which increased 16% in value versus the US dollar between February and July, helps to moderate price inflation to some extent. Given that Armenia has secured natural gas supply from Russia at 2021 rates, retail energy price pressures are more constrained. The CBA increased rates cumulatively by 175bps in 2022, bringing them to 9.5% as of August. Rates are predicted to be reduced gradually to 8.5% by the end of 2023. Despite the widespread acceptance of the inflation targeting regime, the significant degree of dollarization (42% of banking sector deposits and 39% of loans to citizens as of July 2022) hinders the transmission mechanism of monetary policy to some extent," Fitch added.

"The fiscal deficit will drop from 4.6% of GDP in 2021 to 3.1% of GDP in 2022 (below the pre-pandemic five-year average of 3.5%), most likely in 2022, thanks to tax revenue outperformance brought on by robust nominal growth in the first half of the year. Strong whiskey lowers debt payment expenses and benefits the budget overall. In contrast to the 'B' median of 4.4%, Fitch predicts that the budget deficit will decline to 2.6% in 2023 and 2.3% in 2024. We predict that when the escape clause for 2020 and 2021 has been activated, the authorities will be committed to returning to conformity with budgetary norms in 2022," the report reads.

According to Fitch, given that 64.7% of gross general government debt (GGGD) was denominated in foreign currencies at the end of June (current 'B' median: 63.4%), exposure to exchange rate volatility is the main risk to debt dynamics in the longer run. It added that the significant increase in the dram's value relative to the US dollar in 2022 and the robust nominal GDP growth would lower the GGGD/GDP ratio by about 10 percentage points to 50.5%. However, the ensuing depreciation might raise it back to roughly 54% in 2023–2024.