Moody’s concerns about Armenian economic growth outlook reflected in 2012 budget: finance ministry

YEREVAN, November 29 /ARKA/. In response to Moody's Investors Service decision to lower its outlook on Armenia's junk-territory sovereign ratings to negative from stable, Armenian finance ministry said these concerns are reflected in the draft 2012 state budget.

Moody’s has also revised to negative the outlook on the Ba3 country ceiling for foreign-currency deposits. At the same time, the country ceiling for local-currency debt was also downgraded to Baa1 from A3, bringing it in line with the country ceiling for local-currency deposits, which was affirmed at Baa1. The country ceiling for foreign-currency debt was affirmed at Baa3 and its outlook remains stable.

Moody's said its decision to change the outlook on Armenia's sovereign ratings to negative is primarily driven by the country's ongoing economic vulnerability to the weaker growth prospects in Europe and Russia, which together account for 58% of Armenia's export market. In particular, Armenia's reliance on exports to, as well as remittances and foreign direct investment from, Russia poses risks to its external position. In addition, potentially lower commodity prices could further affect the Armenian economy as exports are concentrated on mining, precious stones and metals (representing 73% of exports in 2010).

Moody's noted that the country is now faced with a large current account deficit (estimated to be 11% GDP in 2011) and a government external debt ratio that has doubled to 35% in 2011 from 14% of GDP in 2008. Its total debt burden in relation of GDP is now 39% compared with 16% in 2008.

According to the World Bank, this figure should be less than 50% of GDP.

"Moody’s said if these risks are manifested and the government will appear unable to reduce the budget deficit, then the country's rating will suffer. Under the draft budget for 2012 if these risks come true, the economic growth may slow down or to 1.5-2.5%, or significantly reduce, at least by 3- 4.5%," the ministry said in a statement posted on its official website.

Moody's said it would consider downgrading Armenia's sovereign ratings in the event of a failure to achieve its fiscal deficits reduction plan; and/or a continued large current account deficit caused by prolonged weakness in commodity prices and/or remittances; and/or) a decline in FDIs, thereby eroding the sustainability of the country's external position.

According to 2012 draft budget, tax collection rate may drop from 25 to 60 billion drams if the forecast risks come true.

The Armenian parliament ended debates on the 2012 draft budget which calls for 910 billion drams in revenues and 1.042.5 trillion drams in spending. The projected deficit is 132.5 billion drams. The amount of revenue is projected to increase by 6.8% from this year's budget (852.4 billion drams). The spending is expected to grow by 41.5 billion drams. The government has also designed a package of changes to several laws which are expected to help it collect 101 billion drams in additional taxes in 2012. -0-