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- Depository Insurance: AMD 2,000,000
- Income Tax: 10%
- Corruption Index: 94
- Peace Index: 97
- Date Modified: Jun-2015
Syndicated Analyses:Reuters "Fitch Downgrades Armenia to 'B+'; Outlook Stable" 30-Jan-2015:
Fitch Ratings has downgraded Armenia's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B+' from 'BB-'. The Outlook is Stable.
Armenia is highly exposed to the severe economic downturn in Russia (BBB-/Negative), which will weigh heavily on Armenia's balance of payment and growth prospects. The economy is expected to fall into a mild recession in 2015, with risks tilted to the downside given the worsening economic situation in Russia and likely negative impact on external imbalances and further depreciation pressures.
Foreign currency reserves at the Central Bank of Armenia (CBA) are expected to continue their downward trend from a relatively low level of USD1.49bn in December 2014. The decline in reserves is primarily due to lower current account receipts and FDI inflows, but also, to a lesser extent, to market intervention by the CBA to limit the depreciation of the Armenian dram.
The debt-to-GDP ratio rose to nearly 50% in 2014, primarily as a result of exchange rate depreciation. The ratio is expected to remain broadly stable in the coming years but this assumes a stabilisation of the exchange rate. Risks are to the downside. Fiscal policy has been prudent since 2010, and we expect the government to maintain the fiscal deficit below 3% of GDP. Armenia is highly reliant on Russian gas supplies, remittances and military support, leaving it particularly vulnerable to economic and policy changes in Russia. Armenia's accession to the Eurasian Economic Union in January 2015 will further deepen its economic, financial, political and institutional ties with Russia.
The financial sector is highly dollarised and will therefore be negatively impacted by the depreciation of the Armenian dram. The depreciation and economic downturn are likely to bring about an increase in non-performing loans and to dent the currently robust capital adequacy ratios. The CBA has increased the minimum capital requirements for banks, which could trigger some consolidation in the sector.
The CBA raised its refinancing rate twice in recent months to 9.5%. The Armenian dram depreciated by 17% in 2014. Inflation is expected to pick up to 6.5% in 2015
Armenia's business environment compares favourably with rating peers, as illustrated by the World Bank's ease of doing business indicators. Armenia's geopolitical environment is a constraint on the rating. The latent conflict with Azerbaijan over the disputed Nagorno-Karabakh region entails the risk of escalating into a full-scale conflict. No resolution is expected in the short term.Moody's Corporation "Moody's downgrades Armenia's government bond rating to Ba3 from Ba2, and changes outlook to negative from stable" 15-Jan-2015:
Moody's Investors Service has today downgraded Armenia's issuer and government bond rating to Ba3 from Ba2, and changed the outlook to negative from stable. The key drivers for the downgrade are the following: 1) Armenia's increased external vulnerability due to declining remittances from Russia, an uncertain outlook for foreign direct investment (FDI), an elevated susceptibility to exchange rate volatility, and expected pressure on foreign exchange (FX) reserves; 2) The country's impaired growth outlook, compounded by negative growth spillovers from Russia, weak investment activity, and constraints on trade with countries outside the Eurasian Economic Union (EEU) that are expected from Armenia's recent EEU accession.
The first driver of the downgrade is Armenia's increased external vulnerability driven by declining remittances from Russia and risks to expected FDI inflows. Remittances represent about 15% of GDP, with over 90% of the total stemming from Russia. Given the sharp recession expected in Russia, the adverse impact of reduced remittance inflows on the country's balance of payments will potentially put pressure on Armenia's FX reserves, which were at 4.5 months of import cover at the end of 2014. Moreover, Armenia's position as a significant net international borrower exposes the currency to elevated depreciation risk. Approximately 83% of Armenia's government debt is denominated in foreign currency, mostly in Special Drawing Rights (SDR) and US dollars. The Armenian dram's depreciation of over 15% since November 2014 has the potential to put additional pressure on Armenia's FX reserves, which remain subject to intervention by the Central Bank of Armenia to counteract excessive volatility. The second driver of the downgrade is pressure on Armenia's economic growth prospects, which is compounded by the negative growth spillovers from Russia's economic downturn. Moody's expects that Russia's GDP will contract by 5.5% in 2015, weakening Armenia's economic activity given its historically strong correlation with Russia's growth cycle via remittances and trade channels, with Russia accounting for 23% of total Armenian exports. In addition, trade constraints with respect to non-EEU countries likely as a result from Armenia's EEU accession in January 2015 also affect the country's medium-term growth outlook. In this context, Moody's expects Armenia's integration process into the EEU to be more challenging than for Belarus, Kazakhstan or Russia, owing to (1) the lack of a common border to establish trade routes without customs checkpoints, even as "pass-through" rules with Georgia as Armenia's main transit route are being negotiated; and (2) the imposition of higher tariffs for non-EEU country imports, taking into account that temporary exemptions have been negotiated for a series of products, such as cars, medicines, basic food items, and agricultural and industrial inputs for a total of about 800 exemptions for the next five years.Wikileaks Public Library of US Diplomacy "Russian Ambassador Speaks On Russian Investment In Armenia" 12-Apr-2005:
Dryukov claimed that Russian capital was behind nine of Armenia's twenty banks and made up one third of Armenia's total statutory capital. While there is Russian capital behind some of Armenia's non-transparent "pocket" banks, Russian bankers are also behind some of Yerevan's most active full service banks like Converse Bank, ArdShinInvestBank, UniBank (owned by Russian UniAstrumBnak), ArExImBank (owned in part by Russian ImpExBank)and ArmSavingsBank (seventy percent owned by the Russian state- owned VneshtorgBank). Russian oligarch Oleg Deripasko also owns IngoStrakh, a full-service private insurance company working in Armenia.
A significant proportion of the investments that Dryukov mentioned were made by Russian firms that are largely state-owned and have Russian government seats on the board. Still, even excluding these assets, many of which were the results of the debt-for-equity swaps of 2003, Russian private investment accounts for an important share of Armenia's financial sector. Russian foreign investment tends to be equity investment with little Russian control on the ground and, also, less transparency in ownership and corporate governance than we see in other foreign investments.