Armenia’s Debt Stock Soars as Eurobonds Placed

Armenia’s Financial Woes Deepen

In a move to shore up its finances, the Armenian government has placed USD 700 million in Eurobonds on the international market, with another USD 85 million deployed to cover the budget deficit. This significant increase in debt has pushed Armenia’s debt stock to 46.6% of GDP, a substantial jump from the 14% mark in 2008.

Foreign Currency-Denominated Debt Raises Concerns

The majority of public and publicly-guaranteed debt is foreign currency-denominated, making it highly vulnerable to exchange rate shocks. This has raised concerns among economists and financial experts, who warn that such exposure could have far-reaching consequences for the country’s economy.

IMF Reclassifies Armenia’s Exchange Rate Regime

The International Monetary Fund (IMF) has reclassified Armenia’s de facto exchange rate regime as “floating,” effective from November 2014. This move is seen as a bid to boost transparency and stability in the financial sector.

Banking Sector Dominates Armenian Financial System

Consolidation Efforts Underway

The Armenian banking sector, which accounts for roughly 90% of total financial assets, has been undergoing consolidation efforts in recent years. With commercial banks primarily funded by non-bank deposits, the sector’s liabilities are dominated by short-term local currency deposits.

Shortage of Long-Term Funding Concerns Enterprises

The shortage of long-term domestic currency funding is a major concern for enterprises, particularly in the Small and Medium-sized Enterprise (SME) segment, where credit growth has been sluggish. The government has thus been exploring alternative financing options to boost economic activity.

Credit Growth Slumps in 2015

Economic Uncertainties Contribute to Slowdown

Credit activity slowed significantly in 2015, with loans to the economy declining by about 3.0%. Loans to enterprises and organizations decreased by 3.7%, while those to households declined by 2.8%. The slowdown was attributed to a weak economic environment, increased uncertainties, and negative spillovers from regional developments.

Early Signs of Recovery in 2016

However, credit growth showed signs of recovery in early 2016, with loans to the economy growing by about 2.6% during January-April 2016. Sectoral credit activity remained uneven, with stronger growth observed in services, trade, and construction sectors, while industry and communications recorded declines.

Implications for Armenia’s Economy

Risks to Economic Growth and Stability

The increasing debt stock and vulnerability to exchange rate shocks pose significant risks to Armenia’s economy. The government must take immediate action to address these concerns and ensure the stability of its financial sector.

Experts Warn of Far-Reaching Consequences

Experts warn that failure to do so could have far-reaching consequences for the country’s economic growth, inflation, and employment rates. In the meantime, investors and economists will be closely monitoring developments in Armenia’s debt market to gauge the potential impact on the economy.