“International Ratings will be Reviewed in Case of Serious Anti-Corruption Policy”
These days “Mudis” authoritative rating agency reduced the rating of Armenia’s producers and state bonds from Ba3 to B1. As Armenia’s main risks “Mudis” mentions increase in external dependency, decrease of transfers, availability of unstable perspectives for foreign investments, deterioration of budget indicators, increase of state debt. We talked to Ashot Khurshudyan, expert and economist at International Center for Human Development, on these issues and their implications.
-Mr. Khurshudyan, what does reduction of Armenia’s rating by “Mudis” mean and what implications it may have?
-Its after-effect, of course is negative to the sense that Armenia’s creditworthiness has decreased, although the change is insignificant. Rating of 2 banks in Armenia—Ardshininvestbank and VTB-Armenia, has fallen as well, which is simply an implication of Armenia’s rating reduction. However, this creditworthiness is a long-term assessment, and decides not for the moment, but it’s an assessment of Armenia’s potential, where impact many factors. As compared to “Mudis,” “Fitch” revised Armenia’s rating in January and didn’t change it—B+, i.e. regarding Armenia “Mudis” assessed some risks, which are revealed in comparison with Georgia. “Mudis” didn’t change Georgia’s rating—Ba3. Armenia and Georgia used to have the same rating, however, by revewing Georgia, they left it unchanged, and reduced that of Armenia, however, the so-called assessment for the future given by “Mudis,” turned from negative to stable in case of Armenia, i.e. it’s anticipated that it won’t fall from B1, and that of Georgia turned from positive to stable, i.e. if formerly it was expected that Georgia’s creditworthiness won’t change for the time being and won’t become positive. Through comparison of indicators it’s observed that some indicators of Georgia, as compared to our country, have even worsened—reduction of national currency, debt/GDP ratio, indicators of foreign trade.
–In that case why did Armenia’s rating fall, and that of Georgia—maintained?
–This is where the long-term factors emerge, as they try to assess country’s economic policy, and in case of Georgia they clearly state that the index isn’t being reduced, as it’s anticipated, that singing of Deep and Comprehensive Free Trade Agreement with the EU provide big economic possibilities for Georgia, and in case of Armenia integration with Russia provides negative assessment. Here political factor is observed, as Armenia’s economy is directly dependent from that of Russia. In this regard, I give preference to disposition by “Fitch,” that this factor ignores and observes loan management policy in Armenia and considers that the country succeeds to confront external shocks and it’s really so.
For instance, “Mudis” mentions that risk for exchange rate is big, however it doesn’t consider that as a result of the pursued policy of interest rate increase in Armenia, consumer loans have essentially been reduced, consumption was decreased, as a result, import decreased as well. That is, Armenia has already got adapted to that situation. Surely, well-being is decreasing, but we succeeded to counteract by our behavior, we started to import less, by that decreasing financial risks as a state. This factor isn’t taken into consideration, meanwhile it’s rather essential, even balance of our trade turnover due to this clarification improved last year, and as a result, Armenian dram wasn’t so sharply depreciated, like it happened in Georgia. This means, our clarification on economic policy was more quantitative than pricing. I consider when “Mudis” reviews and ignores political factor, it should raise Armenia’s rating further on. This is an intermediary issue, however, “Mudis” raises a crucial issue, that Armenia’s economic policy pursuers should take into account: seemingly we speak of interest rates, external debt, exchange rate and etc., and there are serious financial issues there, however, basically, our rating is low due to budget policy.
In particular, Armenia has produced Eurobonds, and this shift will leave its trail if we try to reproduce them, and we will mandatorily produce them to clear off the previous one. For instance, “Mudis” states that indicator of Armenia’s loan management is rather high, however, regarding budget deficit it’s stated that it increases our risks. And budget deficit isn’t a loan management, it’s management of our expenditures and incomes, and there are some problems here. We succeeded this year to confirm the budget a bit lower than previous year, we restrained budget appetite, but it wasn’t enough. Budget deficit should be shortened, meanwhile nowadays government again seeks for loans for other expenses. This will more increase risks and will cost us expensive in the future.
The expenditure of Eurobonds costing half billion dollars isn’t visible on us, but it’s rather essential, and it should be regarded not as a source for budget income, but as an attempt to integrate with those markets. We made a serious mistake, when we increased external debt due to the internal one, and now we pay too expensive for that, more than in case if we produced internal bonds, if we produced Eurobonds by about 6%, and internal bonds—by 12-13%, seemingly, it’s cheaper. However throughout the last year we had at least 17% depreciation, i.e. if we add that interest to the price for Eurobond, internal bonds will be much cheaper. At the moment we paid not only the interest rate but exchange rate risk as well, as debt by foreign currency means risk of big exchange rate, and at least 70% of Armenia’s debt is in foreign exchange rate.
Taking an external debt refers not only the government, but banks and everyone as well, who try to invest in economy through a debt. It’s a simple calculation, if external debt increases, and economy—not, it means there is a serious mistake in economic policy. In Armenia this very situation was recorded throughout the last 4 years, and we scarcely saved economy due to external shock, took big external loans, but most of them were social and didn’t provide considerable economic growth. And we should review why it’s this so, and why our economy doesn’t record progress, and a serious issue of productivity of budget expenses should be put forward.
The biggest source for our exchange rate income is money sent by the working migrants. But what economy does it develop? It turns into a trade, and trade isn’t economy. Currently most part of budget is based on trade, however, Armenia is a small country and isn’t able to have a consumer economy. Our budget should have been quickly adapted to sharp fall of consuming, but it remained the same, meanwhile budget should have been reviewed yet in 2014, when we knew that crisis is existent. The budget of 2015 has hardly been implemented, but the budget should have been adjusted to economy. Nowadays fiscal policy has an essential impact both on exchange and interest rates, but it’s not being touched upon. And “Mudis” has risen this very question; Armenia’s fiscal deficit is an issue, debt/GDP ratio is an issue and there is no GDP growth perspective connected to Russia. If currently Armenia pursues a serious anti-corruption policy, the rating will be reviewed. They regard steps taken by the country and, accordingly, make assessments, surely political factor is existent as well, which is very clearly observed while comparing Armenia and Georgia. However, integration into the EU financial market and producing of bonds means taking political factor into consideration as well. Among the risks NKR issue is covered as well. These ratings should be taken seriously, as interest rate of the bonds to be produced next year depends on this.
–How will international community reflect to this reduction, especially investors?
-Direct investors don’t look at rating, they analyze for themselves, whether to come to the country or not. Its best example is complex deal on Vorotan WPP. Rating impacts portfolio investments, i.e. the person, who’s not even aware of where Armenia geographically is located, tries to make a portfolio in the exchange with various securities, and, accordingly, he/she looks to the rating. At the moment it won’t have any impact on Armenia, only in the secondary market prices for our securities will drop, and it’ll impact on rating. Currently interest rates in the world record a sharp fall, and it’s not excluded that next securities will be produced with lower interest rate, than the previous one. 15 years ago Armenia could produce Eurobonds, but fortunately, it didn’t. Now, when they launched them, it means they have to continue whether they want or no, to withdraw they need to repay USD 700 million, which is already impossible. Our issue now, is productivity of those means, how they’re wasted. Most of the money enters Armenia through money transfers of migrants, but they don’t become an economic result. However, that divine situation, when money is made from nothing through transfers, can’t last long. The time has come and the crisis accelerated the process, and trade will record a sharp fall. Long-term perspective economic investments should be done to make economy competitive.
–RA Prime Minister announces that steps are taken, productivity of which will be observed in a long-term perspective, RA president has launched consultations on deepening foreign economic relations. Do you observe these steps which may improve the situation?
–The issue is not in upwards or downwards, it’s in the middle, i.e. casting responsibility is already an issue. We should have risen those questions yesterday. What does productivity mean? Money is never a problem, today they may bring in loans from donors. The value of money matters.
By Gayane Khachatryan
