Frankfurt am Main, March 18, 2016 -- Moody's Investors Service, ("Moody's") has today downgraded Armenia's long-term issuer and senior unsecured debt ratings to B1 from Ba3. Concurrently, Moody's has changed the outlook to stable from negative.

The key drivers for the downgrade to B1 are:

1. Armenia's increasing external vulnerabilities stemming from (a) declining remittances from Russia that have not yet bottomed out, (b) an uncertain outlook for foreign direct investment (FDI) inflows that collapsed in 2015 and (c) an elevated susceptibility to renewed pressures on the local currency and the country's foreign exchange reserves;

2. Armenia's worsening fiscal and government debt metrics and the expectation that Armenia's general-government-debt-to-GDP ratio will rise above 50% in 2017 under the baseline assumption of a growing economy.

The stable outlook reflects Moody's expectation that downside and upside risks to Armenia's credit profile are broadly balanced at the new, lower rating level of B1.

In the same action, Moody's has also lowered Armenia's long-term foreign-currency deposit ceilings to B2 from B1 and the long-term local-currency bond and deposit ceilings to Ba2 from Ba1. At the same time, the long-term and short-term foreign-currency bond ceiling and the short-term foreign-currency deposit ceilings remain unchanged at Ba2/NP and NP, respectively.

RATINGS RATIONALE

RATIONALE FOR DOWNGRADING THE RATING TO B1 FROM Ba3

FIRST DRIVER: ARMENIA'S HIGH DEGREE OF EXTERNAL VULNERABILITY

The first driver for downgrading Armenia's issuer and government bond ratings to B1 (from Ba3) is the country's increasing external vulnerabilities stemming from (a) declining remittances from Russia that have not yet bottomed out, (b) an uncertain outlook for foreign direct investment (FDI) inflows that collapsed in 2015, as well as (c) an elevated susceptibility to renewed pressures on the local currency and the country's foreign exchange reserves.

Russia remains Armenia's largest single export market destination as well as the major originator of gross money transfers (remittances) and FDI inflows into the country. Russia's ongoing economic crisis has not only weighed on Armenia's export sector, but also, and more importantly, depressed domestic private consumption through a drastic decline in remittances from Russia. Remittances from Russia, which had already contracted by 10% in US$ terms or 8.6% in local-currency (Armenian Dram; AMD) terms in 2014, declined by a further 35.6% in 2015 US$ terms (or 26% in AMD terms). Increased remittances from other countries, including the US, were not able to compensate for the deep fall in remittances from Russia. As a result, total gross remittances into Armenia decreased by 23.5% in 2015 in US$ terms (or 12.1% in AMD terms), addition to the contraction of 7.8% (or 6.3%) that had already occurred in 2014.

Despite recent declines, remittances from Russia still account for more than 60% of Armenia's total remittances (or 9.5% of Armenia's GDP). Given Russia's ongoing economic problems, Armenia's remittances will likely decline further this year and continue to depress private consumption. The collapse in FDI inflows also means that Armenia's gross capital formation will remain weak, weighing on the economy in the near term and constraining Armenia's medium-term growth potential. While Armenia's gross capital formation continued to contract for the third consecutive year in 2015 (latest number is as of Q3 2015: -13.2% Y-o-Y), annualized FDI inflows (as measured by the 4 quarter moving sum) decreased by almost 80% Y-o-Y in US$ terms in the third quarter of last year.

Meanwhile, Armenia's gross external debt level has remained high both relative to Armenia's GDP as well as current account receipts, leaving the country vulnerable to a further worsening of external conditions. While Armenia's gross-external-debt-to-GDP ratio increased to more than 80% in 2015 (according to latest available data for Q3 2015) from 73.3% in 2014, the country's ratio of gross external debt to current account receipts rose further to an estimated 168% from roughly 153% in 2014. Although Armenia's external vulnerability indicator (EVI, the ratio of short-term external debt in the previous year plus currently maturing long-term external debt in the current year and total non-resident deposits over one year in the current year to official foreign exchange reserves of the previous year) declined to an estimated 153% for this year -- mainly due to an increase in foreign exchange reserves in 2015 -- from more than 190% in 2014, it remains very high both in absolute terms as well as relative to the median EVI ratios of around 40% and 65% for Ba3 and B1 rated sovereigns, respectively.

SECOND DRIVER: ARMENIA'S WORSENING FISCAL AND GOVERNMENT DEBT METRICS

The second driver captures Armenia's worsening fiscal and government debt metrics in the recent past and the likely upward debt trend trajectory over the coming two years. Armenia's fiscal and government debt metrics are today much weaker than prior to economic crisis in 2009 when the country's construction boom came to an end with real GDP contracting by roughly 14% and the fiscal deficit widening to 7.5% of GDP. Only in 2009, Armenia's government-debt-to-GDP ratio spiked to 40.4% from just 16.4% (+24 percentage points of GDP).

After remaining broadly stable between 2010 and 2014, Armenia's government debt resumed its upward trajectory in 2015, primarily as a result of fiscal easing to support the domestic economy amid severe external headwinds and also because of the debt-raising effects stemming from the currency depreciation on the government's large share of foreign-currency debt. Specifically, the government-debt-to-GDP ratio increased to 48.7% in 2015 from 43.5% in 2014. At the same time, the government-debt-to-revenue ratio rose to around 208% (from roughly 180%). Debt affordability as captured by the ratio of interest payments to government revenues also deteriorated, increasing to 6.5% in 2015, up from 5.2% in 2014. Going forward, Moody's forecasts the ratio of interest payments to government revenues to increase further to around 8.5% in 2016, more than double the level of 2013 (4.2%).

The government will face significant headwinds this year and beyond in its efforts to gradually narrow the fiscal deficit as a result of weakening economic conditions. After benefiting from one-time boosting effects in the agriculture and mining sectors, Moody's expect real GDP growth to decelerate to 2.2% in 2016 (from an estimated 3.0% in 2015) given the ongoing adverse external environment. Beyond this year, economic growth is unlikely to pick up rapidly given the latent and weak recovery expected in its main trading partner, Russia. As a result, the rating agency expects the upward debt trajectory to continue, with the debt-to-GDP to rise above 50% in 2017. Our baseline scenario does not foresee a reversal of this unfavorable trend in the coming years. Therefore, the strength of the government's balance sheet will remain much weaker than in the past, leaving the country more vulnerable to the adverse impact of potential renewed economic shocks in the future.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that downside and upside risks to Armenia's credit profile are broadly balanced at the new, lower rating level of B1.

Downside risks mainly relate to worsening economic situation in Russia, which would adversely hit Armenia's economy more sharply than expected, mainly through the remittances, trade and investment channels, and which could prompt significant downward pressures on the local currency and the country's foreign exchange reserves. Moreover, further major downside risks stem from lower prices for Armenia's major commodity export items (such as copper or metals), which would further affect the country's terms of trade. Under this adverse macro-economic scenario, the budgetary and debt trajectory would likely worsen significantly and further erode the country's fiscal strength.

Major upside risks stem from a faster-than-expected improvement in the external environment and the related positive spill-over to the Armenian economy as well as rising prices for Armenia's major commodity export items (such as copper or metals), which would lead to an improvement in the country's terms of trade and would make foreign direct investment into Armenia's commodity sector more attractive. Stronger- than-expected growth could pave the way for more favorable budgetary outcomes and general government debt trends.

WHAT COULD MOVE THE RATING UP

Upward pressures could be exerted on Armenia's issuer and government bond ratings following a reduction in Armenia's high degree of external vulnerability and/or the prospects that Armenia's government-debt-to-GDP ratio will show a firm downward trajectory over the medium term. A reduction in Armenia's external vulnerability could be triggered, for instance, by a faster-than-expected economic stabilization of Russia, Armenia's largest single export market destination and key source of remittances and foreign direct investment, and the related positive spill-overs to the Armenian economy. Also, a decrease in geopolitical risks could lead to upward pressures on Armenia's sovereign bond rating. Furthermore, significant improvements in the country's institutional framework and business environment, sustained economic diversification and a rise in Armenia's medium-term growth potential could create upward pressure on the sovereign rating.

WHAT COULD MOVE THE RATING DOWN

Downward pressures could develop on Armenia's issuer and government bond ratings following a worsening economic situation in the Russian economy, which would adversely hit Armenia's economy more sharply than expected, mainly through the remittances, trade and investment channels, and which could prompt significant downward pressures on the local currency and the country's foreign exchange reserves. Moreover, the rating could come under downward pressures if Armenia's government debt metrics deteriorated faster and more pronounced than expected over the near term and diminishing prospects for an ultimate stabilization and/or reversal of the country's high government debt burden over the medium term. Also, an increase in geopolitical risks, for instance, related to the unresolved conflict with neighboring Azerbaijan over the disputed territory of Nagorno-Karabakh could lead to downward pressures on Armenia's sovereign bond rating.

GDP per capita (PPP basis, US$): 8,164 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.4% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -0.1% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -1.9% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -7.3% (2014 Actual) (also known as External Balance)

External debt/GDP: 73.3 % (2014 Actual)

Level of economic development: Low level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 15 March 2016, a rating committee was called to discuss the rating of the Armenia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become increasingly susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sebastian Becker

Asst Vice President - Analyst

Sovereign Risk Group

Moody's Deutschland GmbH

An der Welle 5

Frankfurt am Main 60322

Germany

JOURNALISTS: 44 20 7772 5456

SUBSCRIBERS: 44 20 7772 5454



Yves Lemay

MD - Sovereign Risk

Sovereign Risk Group

JOURNALISTS: 44 20 7772 5456

SUBSCRIBERS: 44 20 7772 5454



Releasing Office:

Moody's Deutschland GmbH

An der Welle 5

Frankfurt am Main 60322

Germany

JOURNALISTS: 44 20 7772 5456

SUBSCRIBERS: 44 20 7772 5454



Moody's downgrades Armenia's government bond rating to B1, changes the outlook to stable from negative