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Moody's Investors Service ("Moody's") on Friday changed the outlook on Armenia's rating to positive from stable and affirmed the B1 long-term issuer and senior unsecured debt ratings.

The positive outlook signals that a rating downgrade is unlikely over the next 12-18 months. It is underpinned by macroeconomic policies that should reduce Armenia's vulnerability to external shocks. Moreover, ongoing reforms of the fiscal framework may shore up fiscal strength over time.

Armenia's B1 rating balances credit strengths from robust growth potential and improving institutional strength against credit challenges stemming from a small and low income economy that remains exposed to external developments, a moderately high debt burden that relies on external funding, and latent geopolitical tensions with neighbouring Azerbaijan.

Moody's has also raised Armenia's long-term local-currency bond and deposit ceilings to Baa3 from Ba2. Armenia's long-term and short-term foreign currency bond and deposit ceilings remain unchanged at Ba2/"Not Prime" and B2/"Not Prime", respectively.

Moody's has also pointed out the risky factors that served as a basis to leave the country’s rating unchanged and changing the outlook on Armenia's rating to positive from stable.

The service mentions the following as positive factors: high, although fluctuating, GDP growth, strengthening institutions implementing macroeconomic stability assistance policies, a high level affordability of the state debt due to the great share of privileged loans. 

Moody's says upward pressure on Armenia's rating would stem from further economic and/or institutional reforms that point to sustained improvements in economic competitiveness and institutional strength. Taking into account the government's fiscal plans, Moody's expects the government's fiscal deficit to narrow to 2.6% of GDP in 2018 and 2.5% in 2019, from 4.7% in 2017. Moody's also expects Armenia's general government debt to gradually decline to 56.5% of GDP by end-2018 and 54.2% by end-2019.