Fitch Ratings affirmed Armenia's Long-Term Foreign-and Local-Currency Issuer Default Ratings (IDR) at 'B+' with Stable Outlook.

The issue ratings on Armenia's senior unsecured foreign-currency bonds have also been affirmed at 'B+'.

At the same time, Fitch affirmed the Country Ceiling at 'BB-' and the Short-Term Foreign-and Local-Currency IDRs at 'B'.

Key rating drivers

Armenia's 'B+' ratings are supported by strong income per capita and governance indicators relative to peers, a credible monetary policy framework, reduced external imbalances and a favourable government debt structure.

The Fitch ratings were constrained by high net external debt, high fiscal deficits leading to a rising public debt burden, exposure to external shocks, a highly dollarized banking sector and "tensions in relations with some neighbouring countries".

"The country is continuing to adjust following the external shock in 2014-15 from the drop in commodity prices and remittances from Russia. GDP growth has recovered strongly reaching 6.5% in 1Q17, after the sharp deceleration to 0.2% in 2016. Fitch has revised its growth projection up to 3.4% for 2017, with upside risks from stronger than expected public sector capital spending and faster export growth. Growth could accelerate further in 2018-19, but improving the country's medium-term growth prospects is likely to require further progress in improving the investment climate, as total investment is low at 18.4% of GDP," Fitch analysts believe.

According to Fitch, Armenia's strongly growing exports helped its current account deficit to remain roughly stable at 2.7% of GDP. Meanwhile, the agency considers that a recovery in commodity prices, improved export diversification and stabilization of the Russian economy will benefit export and remittances receipts, leading the current account deficit to average 2.1% in 2017- 2018.

"Lower current account deficits help mitigate external vulnerabilities given Armenia's small size and commodity dependence, as well as helping to support stabilization of the country's high net external debt of 46.7% of GDP vs 20% for the rating category median," Fitch stated.

The agency's analysts noted that strong GDP and revenue performance year-to-date afforded the government space to increase capital spending without modifying the original deficit.

They also expect Armenia's general government deficit to narrow to 3.3% of GDP in 2017 after  ballooning to 5.5% of GDP in 2016, compared with an original target of 3.5%.

"Armenia is exposed to external shocks but has shown a capacity to absorb them, helped by a credible monetary policy framework. After 16 months, the country exited deflation in April. Inflation could average 1.6% in 2017 and will likely remain moderate over the forecast period," reads the Fitch report.

Banks have raised minimum capital levels, in line with the Central Bank's requirements, leading to strengthened capitalization mostly through shareholder contributions and with no need of sovereign support. Non-performing loans equaled 7.3% in April. Foreign-currency credit and deposit levels remain above 60%.

Touching upon the parliamentary elections, Fitch remarked they "took place peacefully with the results accepted by opposition parties" and states, "In the event of changes to the composition of government, Fitch expects the general direction of economic policy to be unaffected."

"Following the April 2016 four day military conflict, incidents between Azerbaijan and Nagorno-Karabakh have picked up in magnitude and frequency since late 2016. As formal negotiations over Nagorno-Karabakh issue seem to be at a standstill, further escalation is a material risk," Fitch believes.

It's worth reminding that Fitch's latest rating for Armenia was the same 'B+', affirmed in January 2017.