Fitch Affirms Armenia at 'BB-'; Outlook Stable

Fitch Ratings has affirmed Armenia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook.

Armenia's 'BB-' rating reflects a robust macroeconomic policy framework and strong growth, which is supporting a rise in per capita income, Fitch Ratings said in a press release.

Set against these strengths are the small size of the economy, fiscal deficits that will remain high relative to peers, weak external finances, high (albeit declining) financial sector dollarisation and geopolitical risks.

Following a smaller than budgeted deficit in 2024, Armenia has loosened fiscal policy to accommodate higher defence spending and rehabilitation of refugees from the territories of Nagorno Karabakh. Fitch expects these costs to decline after 2025, but fiscal rigidities will remain heightened due to the introduction of a universal health insurance scheme (with an estimated annual cost rising to 0.8% of GDP in the medium term) and other social spending. Fitch projects the general government deficit to increase to 5.4% of GDP in 2025, before moderating to an average of 4.4% in 2026-27.

Under the 2026-2030 Medium-Term Expenditure Framework, the authorities expect a substantial tightening of fiscal policy beyond 2027 to reduce the deficit to 1% of GDP by 2030. Fitch considers this optimistic given risks around revenue targets.

Fitch assumes the authorities will comply with stricter fiscal rules that are triggered when gross general government debt (GGGD)/GDP exceeds 50%, including capping primary current expenditure growth below historical nominal GDP growth rates. Capex will be larger than the fiscal deficit, in line with the fiscal rules, although Fitch expects capacity constraints to continue to limit project execution.

Fitch projects GGGD/GDP to increase to 51.3% in 2025 from 48% in 2024, given larger deficits and expected deposit accumulation. Fitch expects it to rise to 54.2% by 2027, in line with the current 'BB' median. Fitch expects greater reliance on external borrowing, after several years of financing in the costlier domestic market. In March 2025, Armenia issued a USD750 million Eurobond, exceeding initial issuance plans by 50%, to roll over a USD313 million maturity, replenish international reserves, and reduce the need to tap the domestic markets. Further external issuances are unlikely in 2025-2026.

Long-term debt dynamics are exposed to currency risk, given that at May 2025, about 50% of GGGD was foreign-currency denominated. However, refinancing risks are mitigated by the high proportion of government debt owed to multilateral creditors (nearly 80% of external debt).

Real GDP growth was 5.2% yoy in 1Q25, driven by very strong performance in financial services (27.5% yoy) and construction (14%) benefiting from government-led capex. However, manufacturing and mining have contracted since the start of the year. As one-off effects subside from large transit trade with Russia and the influx of Nagorno Karabakh refugees and other migrants, we expect growth to moderate to 5% in 2025 and 4.7% in 2026-27, from an average 8.9% in 2022-2024. The Amulsar gold mine, which is likely to start operations in 4Q25, will boost growth in the medium term, Fitch Ratings reported.