TOPIC OF THE WEEK: Is the market giving Armenia too much benefit of the doubt?
Armenia has seen a stronger compression of Eurobond yields since 2022 when compared to CCA peers. This outperformance is especially impressive when assessed against its higher-rated neighbor Georgia. What is driving this?
While GDP growth over the last couple of years has been among the best in the world, the latest spurt of economic activity exhibited in the last last couple of quarters has well-defined temporary features, which are already generating an appreciable slowdown in economic momentum. Much more importantly, the external position is Armenia's Achilles' heel. It is the only country in our CCA space that has been steadily hemorrhaging FX reserves over the last two years, chiefly as a result of persistent CA deficits and, more recently, net portfolio outflows presumably related to the defeat in the 3rd Karabakh War. FX reserves cover is also the worst in the region, running at below 3 months of imports of goods and services.
In our view, what then explains Eurobonds' outperformance is the perception of sharply reduced political and geopolitical risk premium. Newly emerging internal challenges to PM Pashinyan have failed to materialize, and the PM looks safe enough to sail through to the 2026 Parliamentary Elections despite poor ratings. Armenia's conscientious decision to lower its geopolitical guard vis-a-vis Azerbaijan is also delivering benefits in terms of risk perception.
Put simply, we find the market's positive view on Armenia is justified, as the political/geopolitical boon is currently trumping more standard macro challenges. The much lower political and geopolitical risk is ultimately driving Armenian Eurobond outperformance, at least for the Eurobond bond maturing before the 2026 elections. Post-2026, there is likely to be a much wider distribution of risk scenarios given the significant probability that political uncertainty may then join macroeconomic vulnerability.
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