Fitch Ratings reported a “negative” outlook for Armenia by sovereign rating and banking sector rating for 2016.

Fitch “2016 Outlook: CIS and Georgian Banks” report reads this.

Armenia and Russia are the only CIS member states to have got “negative” outlooks in both cases.

Both outlooks are “stable” for Georgia and Uzbekistan.

Azerbaijan, Kazakhstan and Belarus got from Fitch Ratings a “stable” outlook for sovereign ranking and “negative” outlook for the banking sector.

The report notes that currency depreciations in 2015 will continue to put pressure on the asset quality of banks in Georgia, Azerbaijan and Armenia in 2016, although Fitch views Georgian lenders as better placed to manage these, due to their sound financials.

Fitch analysts note that the negative outlook is driven by the weaker operating
environment in Armenia, with an economic slowdown, depreciation pressures and higher interest rates.

“Decelerating credit growth, weaker asset quality and softer financial performance in are being felt by the banking sector. We do not expect a material improvement in operating conditions over 2016”, the report reads.

The report points out high dollarisation of the sector (66% of loans and 65% of deposits
were in FX at end-3Q15) and therefore it is highly susceptible to the Armenian dram exchange rate.

Fitch also stresses the fact that the sector’s external debt remains large (33% of liabilities, or USD2bn), in particular compared to the country’s official international reserves of USD1.6bn.

“However, 70% of external liabilities were long-term loans raised from international financial institutions and nonresident related parties, including parent bank institutions, reducing refinancing risks. The liquidity situation has been manageable so far, in part due to the CBA obliging banks to hold greater mandatory reserves, with the sector reporting healthy liquidity ratios at end-3Q15”, the report reads.

Fitch sums up that revision of the sector outlook to stable would require a
stabilization of Armenia’s economic prospects, driving a stabilization of asset quality and easing pressures on the capital, liquidity and performance of the sector. “A sharp deterioration in banks’ asset quality, performance and capital metrics driven by the weaker economy and dram instability could result in rating downgrades”, the report reads.