S&P Global Ratings has upgraded Armenia’s long-term foreign and local currency sovereign credit ratings from ‘B+’ to ‘BB-‘ after the Caucasus country’s economy boomed last year from spillovers related to the Russia-Ukraine conflict.
The agency affirmed the short-term foreign and local currency sovereign credit ratings at ‘B’. The overall outlook remains stable.
Following a remarkable economic performance in 2022, Armenia is poised to experience a slightly reduced yet robust growth of 7.5% in 2023, according to S&P. It attributes this moderate deceleration in growth to factors like weakened external demand, tighter financial conditions, and a moderation in financial and migrant inflows.
S&P Global Ratings highlights that the previous year saw Armenia’s economy expand significantly by 12.6%. The surge was notably facilitated by an influx of skilled young IT professionals migrating from Russia, which prompted the establishment of over 1,000 foreign-owned companies. This influx significantly boosted Armenia’s most productive IT sector, which expanded by 51% in 2022.
The substantial number of skilled migrants from Russia, particularly in the IT sector, along with the establishment of foreign-owned enterprises, significantly contributed to the country’s economic growth. Additionally, substantial financial inflows, including money transfers from Russia, played a crucial role in Armenia’s economic benefit. Inflows from Russia accounted for 18.4% of Armenia’s GDP in 2022, up from 6.2% in 2021. However, these transfers have stabilised recently due to declining immigration flows.
Armenia’s hospitality, real estate, and transportation sectors were also invigorated by the influx of migrants from Russia. While the country received 1.67 million tourists in 2022, still 14% lower than 2019 levels, the tourism industry exhibited strength with a 79% increase in arrivals during the first quarter of 2023 compared to the same period the previous year. Despite the Armenian dram’s recent appreciation against the US dollar affecting tourists’ spending power, a robust level of tourism is anticipated.
“Russia remains a critical trading partner for Armenia, with exports surging to 45% in 2022 from 28% in 2021 due to the Russia-Ukraine conflict and Russia’s limited trading opportunities. However, data limitations make differentiating between Armenian-origin exports and re-exports via Armenia challenging. Exports to Russia have started stabilising, and this trend is expected to persist due to Russia’s weakened economic outlook and Armenia’s stricter export controls on certain product categories,” reads the report.
In 2024, Armenia’s growth trajectory might encounter potential challenges, according to S&P. The reversal of labour and capital inflows from Russia is a possibility, although less likely due to current domestic stresses in Russia. Economic slowdowns in Russia and the EU, significant trading partners for Armenia, could also impact Armenia’s growth prospects. Additionally, external security risks along the Armenian-Azerbaijani border could spill over and affect economic performance. However, the recent human and financial capital influx could bolster Armenia’s potential growth rate. In the baseline scenario, an average annual real GDP growth rate of around 4% is anticipated until 2026.
S&P also mentions that tensions persist between Armenia and Azerbaijan over the Nagorno-Karabakh region, with sporadic flare-ups since 2020. The US, the EU, and Russia have encouraged both nations to pursue a peace agreement. Armenia’s recent willingness to recognise Nagorno-Karabakh as Azerbaijani territory under specific conditions has generated momentum in peace talks but the historical significance of Nagorno-Karabakh could lead to public opposition in Armenia. “Such political tensions might escalate and influence the government’s policy direction,” reads the report.
Source : Intellinews
