YEREVAN

Armenia’s economy will experience a moderate recovery this year and next as the country returns to growth after the COVID-19 pandemic and a flash war with Azerbaijan, Fitch Ratings said.

Gross domestic product will expand 3.2 percent in 2021 and 4.0 percent in 2022, the rating agency said. which should improve prospects for Armenian banks’ credit growth and revenues.

While economic activity is returning, some industries, such as banking, still continue to be affected by the recent downturn.

“We believe that the downturn has not yet been fully captured by banks’ asset quality metrics reported in 2020 and the first quarter of 2021 and problem loan recognition will continue in 2021 and potentially in 2022,” Fitch said. “Some risk aversion and continuing business uncertainty still weigh on growth appetite, further constraining the potential for near-term profitability improvements.”

Armenia’s gross domestic product (GDP) shrank 3.3 percent year-on-year in the first quarter of 2021 as the impact of the coronavirus pandemic and war over Nagorno-Karabakh dampened prospects of recovery. Though Armenia reported rapid growth in recent years, the ex-Soviet economy has suffered from restrictions aimed at containing the COVID-19 pandemic and a six-week conflict between Azerbaijan and ethnic Armenian forces over the Nagorno-Karabakh region and surrounding territories.

Armenia accepted a Russian-brokered ceasefire to end the bloody conflict which secured territorial gains for Azerbaijan. The country’s economy contracted by 7.6 percent in 2020, mainly reflecting a decline in services and trade.

The economy started to show its first signs of recovery in May. Economic activity in the first five months of 2021 grew by 4.3 percent compared to the same period in 2020. Industrial output grew by 2.3 percent in January-May this year compared to the same period last year. Growth was recorded in other sectors.

Armenian government projects GDP growth at 3.2 percent in 2021.

Last month, the ex-Soviet country’s Central Bank revised upward its growth forecast to 4.6 percent. The World Bank predicts 3.4 percent growth in 2021 and 4.3 percent in 2022, while the International Monetary Fund projects growth this year at 1 percent.

In May, Fitch Ratings affirmed Armenia’s long-term foreign-currency issuer default rating (IDR) at ‘B+’ with a stable outlook.

Fitch said that Armenia also had a robust macroeconomic and fiscal policy framework, and credible commitment to reform, both of which are underpinned by the IMF stand-by arrangement.