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Fitch Ratings has revised the Outlook on Armenia's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'B+'.

An influx of immigrants (estimated by the authorities at about 65,000) from Russia, Ukraine and Belarus, representing a 2.2% annual increase in the population, has boosted external as well as macroeconomic and fiscal performance. A very large influx of immigrants and capital from Russia in 2022 has boosted external as well as macroeconomic and fiscal performance. The exact scale of the immigration is hard to quantify, given the open migration regime for Russians in Armenia and the durability of this positive shock is still uncertain. However, it led to a 140% increase in remittances/money transfers and Fitch anticipates that a substantial proportion of new immigrants will stay in Armenia for at least two to three years and sees a substantial chance that some of the positive effects will endure.

The external inflows led to a marked improvement in the external balance sheet for Armenia. Fitch estimates the current account to have registered a small surplus in 2022 (current 'B' median: -3.8%; 'BB' median: -4.1%), based on 1Q-3Q outturns, the first annual surplus on record, which contributed to an increase in FX reserves by USD880 million to USD4.1 billion in 2022. Fitch expects a return to moderate deficits in 2023 and 2024.

In addition, net external debt fell by around 12pp to an estimated 44.5% of GDP in 2022 (current 'B' median: 26.6%; 'BB' median: 15.4%). Separately, in December 2022, the IMF approved a USD171 million three-year Stand-By Arrangement (SBA), which is being treated as precautionary by the Armenian authorities, and will provide a policy anchor and limited buffer in case of any negative external shocks, such as a reversal of the recent inflows.

According to the agency's revised outlook, the Armenian economy is estimated to have grown by 11.6% in 2022, a 15-year high, boosted by the large influx of migrants, which also provides an upside to potential growth (currently estimated at 4.5%). Fitch estimates growth will slow to 6.1% in 2023 and 4.7% in 2024. Growth will be driven by personal consumption, relatively stable exports (notably to Russia as Armenia replaces import sources that have become disrupted by sanctions) and an expected increase in public investment.

The fiscal deficit fell from 4.6% in 2021 to 2.2% of GDP in 2022, below the government's target of 2.5% (current 'B' median: 2.7%; 'BB' median 3.3%) amid tax revenue growth of 18% and a decline in capex of 10%. Public debt fell by nearly 13pp to 47.6% in 2022, driven in large part by the exchange rate appreciation (about 18% vs the US dollar in 2022) and robust real GDP growth. Fitch expects debt to stabilise around 47.4% of GDP in the medium term. A sharp depreciation of the exchange rate is the primary risk to debt dynamics, given that 62.1% of public debt is FX-denominated as of 2022 (end-2021: 71.2%).

Armenia boasts strong governance indicators relative to 'B' rating peers, as well as a robust macroeconomic and fiscal policy framework, and credible commitment to reform, the agency said.