On July 28, Fitch Ratings upgraded Armenia's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BB-' from 'B+.'

The report says: "Armenia has had a strong rebound from successive shocks in recent years since its downgrade 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 202,4, and 4.5% in 2025."

"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 stabilization 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," Fitch adds.

Regarding fiscal performance, the organization stated: "Fitch expects that robust nominal economic growth and higher spending will result in a moderate increase in the general government deficit (cash basis) to 2.5% of GDP, from 2.2% in 2022. Fitch's forecast is more optimistic than the government's expectation of a deficit of 2.9%, given the agency's higher growth projection and slightly more conservative view of capex execution. Fitch expects the deficit to widen to an average of 3% of GDP in 2024-25."

About the external balance sheet, Fitch notes, "The current account posted a surplus of 0.8% of GDP in 2022 (2021: deficit of 3.7%) as 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."

The report also mentions rising geopolitical risks: "Fitch considers geopolitical risks from Azerbaijan to have increased since the start of the year. 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."

"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," the report concludes.

Read also:

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Fitch Revises Armenia's Outlook to Positive; Mentions Probability of War with Azerbaijan

Fitch rates Armenia at "B+"