YEREVAN, MARCH 6, NOYAN TAPAN. Fitch Ratings said on March 5 that a proposed IMF loan facility for USD540m would support the adjustment of Armenia's economy in the face of a global and regional economic shock, and support the outlook for its sovereign ratings. Armenia's foreign and local currency Issuer Default Ratings (IDRs) are "BB" with Stable Outlooks. The Country Ceiling is "BB+" and the country's Short-term rating is "B". According to the Press Service of the Central Bank of Armenia (CBA), "Armenia's decision to seek a precautionary IMF programme and allow a freer float for the currency is a welcome signal of the authorities' cautious approach to managing current difficulties," said Andrew Colquhoun, Director in Fitch's Sovereigns Group. IMF Managing Director Dominique Strauss-Kahn has requested that the IMF's Board approve a USD540m, 28-month Stand-By Arrangement for Armenia, at a planned 6 March meeting. A programme approval would follow a 24% fall in official reserves to USD1.26bn by end-January 2009, from USD1.66bn at end-2007. The CBA has said it spent USD360m supporting the Armenian dram (AMD) at around 305 to 1 USD during 2008, to support confidence in the partly-dollarised financial system amid global financial turmoil and political tensions. The CBA says it will now permit greater exchange-rate flexibility, and expects the AMD to settle around 370 to the USD. However, the CBA has held back from formally committing to an AMD target or band. The IMF programme will include support to Armenia's banks, enabling them to absorb the consequences of AMD depreciation for the 38% of loans in the system denominated in foreign currency. With bank credit to the private sector of only 17% of GDP at end-2008, any potential problems in the still relatively well-capitalised banking sector should be more manageable than for most of Armenia's regional peers. Armenia's GDP growth slowed to 6.8% in 2008, from 13.8% in 2007. The economy contracted by 0.2% in Q4 08, hit by an 11% fall in construction. The sharp downturn in the Russian economy in Q4 08 is likely to have affected remittance receipts, an important source of foreign exchange and demand. The IMF projects that Armenia's economy could shrink 1.5% in 2009, although the authorities expect growth of around 2% driven mainly by fiscal stimulus, partly funded from official sources. In addition to the likely IMF programme, Armenia is expected to receive a USD500m credit from Russia, and up to USD525m from the World Bank for SME financing over four years. Securing and successfully implementing the IMF programme and sustained domestic policy discipline would support the ratings. According to the IMF, geopolitical risk remains a background feature in a volatile region, although there have been signs of progress towards a resolution of Armenia's frozen conflict with neighbouring Azerbaijan. Domestic political risk appears to have eased after the election-related violence of March 2008, although a downturn in the economy could spark further unrest. The public finances remain a rating strength, with government debt projected by Fitch at around only 14% of GDP by end-2008.

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