Fitch Revises Armenia's Outlook to Positive; Affirms at 'BB-'
YEREVAN, January 17. /ARKA/.Fitch Ratings has revised the Outlook on Armenia's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'BB-'.
The Outlook revision reflects Armenia's higher international reserves and continued solid growth that will support fiscal consolidation consistent with debt stabilisation over the medium term. The US-sponsored peace framework with Azerbaijan significantly reduces near-term military escalation risks, but lingering uncertainty remains regarding its successful conclusion due to the proximity of parliamentary elections and potential constitutional reform referendum.
KEY RATING DRIVERS
The revision of the Outlook on Armenia's 'BB-' IDRs reflects the following key rating drivers and their relative weights:
Medium
Historic Peace Framework: Armenia and Azerbaijan signed a joint declaration that aims to reach a peace agreement, which significantly reduces near-term military escalation risks. In Fitch's view, the finalisation remains subject to uncertainties as it is conditional on Armenia amending its constitution to remove references to Nagorno-Karabakh, which requires a popular referendum that will potentially take place after the June parliamentary elections. Trade with and through Azerbaijan has begun to open up. Relations with Turkiye are substantially improving, and the Turkish government is reportedly considering reopening its land border with Armenia.
Gradual Fiscal Consolidation: Fitch estimates that the 2025 general government (GG) deficit was 5.0% of GDP, lower than the budgeted 5.5% but still above the 'BB' median (3.0%), reflecting lower capex and interest payments. Armenia's 2026 budget targets a fiscal deficit of 4.5% of GDP based on reduced defence expenditure (down 2.1pp to 4.7% of GDP), while health spending has increased by 0.5% of GDP to fund the phase-in of a universal health insurance system. We expect the government to meet its 4.5% deficit target in 2026, but from 2027 we expect deficits above the authorities' 3.5% medium-term target.
Fitch estimates that GG debt increased to 50.1% of GDP at end-2025, and forecasts a gradual increase in coming years closer to the projected 'BB' median of 53.6%, given still sizeable deficits and expected overfinancing.
Robust Growth Prospects: Fitch estimates real GDP growth of 5.5% in 2025 (moderating from an average of 8.9% over 2022-2024 due to Russian capital and migration inflows), driven by strong activity in the construction, IT and financial services sectors. Growth should remain above 5.0% in 2026-2027, supported by resilient services and the opening of the Amulsar gold mine, which the IMF estimates will contribute 1.25pp to GDP growth over 2026-2027. Additional upside to the medium-term growth forecast could emerge from sustained implementation of the peace agreement with Azerbaijan and the reopening of the border with Turkiye.
Higher FX Reserves: International reserves rose by 38% to USD5.5 billion in 2025, equivalent to 4.2 months of estimated current external payments for 2025 (current 'BB' median: 5.3 months) due to Eurobond proceeds and central bank purchases in the domestic market. However, Fitch expects reserve coverage will gradually decline in coming years due to projected growth in imports.
Armenia's 'BB-' ratings also reflect the following key rating drivers:
Credit Fundamentals: Armenia's 'BB-' rating reflects a robust macroeconomic policy framework and strong growth, which is supporting a rise in per capita income. Set against these strengths are the small size of the economy, fiscal deficits that are high relative to peers, weak external finances, high (albeit declining) financial sector dollarisation and a fragile geopolitical environment, although peace negotiations have shown some progress.
Banking Sector Resilience: Banks have maintained strong capital and liquidity buffers, with profitability remaining high despite the normalisation of extraordinary Russian financial inflows. Dollarisation continues its gradual decline, with deposit dollarisation falling to around 43.3% in November 2025 supported by regulatory measures and increased confidence in the dram.
Current Account Deficits Widen: We estimate the current account deficit reached 4.5% of GDP in 2025, and expect it will moderate slightly in 2026-2027 but remain above the projected 'BB' median of 2.6%. A wider trade deficit will be contained by higher gold exports with the anticipated opening of the Amulsar mine this year. Fitch expects a normalisation of remittance inflows, moderating the secondary income surplus.
ESG - Governance: Armenia has an ESG Relevance Score (RS) of '5' for both Political Stability and Rights and '5+' for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Armenia has a medium WBGI ranking at 45.5 reflecting a moderate level of rights for participation in the political process, elevated but improving geopolitical risks, moderate levels of political stability, moderate institutional capacity and rule of law and a moderate level of corruption.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Structural: Developments that increase geopolitical risks and undermine political and economic stability; for example, derailment of the current peace process with Azerbaijan.
- External Finances: A reversal of improvements in FX reserves that increases external vulnerabilities.
- Public Finances: Macroeconomic or policy developments that steepen the upward path of general government debt/GDP.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Structural: A sustainable decline in geopolitical risk and domestic political uncertainty; for example, as a result of meaningful progress in the peace process with Azerbaijan.
- Public Finances: Fiscal consolidation that supports a stabilisation in general government debt/GDP, while preserving improvements in terms of currency composition.
- Macro: Preservation of high growth rates supporting a sustained increase in GDP per capita.-0-
