Armenia Sells More Eurobonds to Finance Budget Deficit

YEREVAN — Armenia has sold a $500 million 10-year dollar bond on March 19 for only the second time on record, paying a yield of 7.5%. This most expensive ever borrowing operation is reflecting the fallout from an economic crisis in Russia.

International law firm Cleary Gottlieb Steen & Hamilton LLC was hired by the government to act as an international consultant for the issue, while Deutsche Bank, HSBC Bank and JP Morgan will be the underwriters.

Neither Prime Minister Hovik Abrahamian’s office nor the Armenian Finance Ministry issued any statements on the development on Friday. The ministry promised to comment on Monday.

Abrahamian’s cabinet approved and announced the upcoming Eurobond issue on January 30. It cited the need to finance Armenia’s budget deficit and “neutralize” the Russian recession’s spillover effects on the Armenian economy. Deputy Prime Minister Vache Gabrielian said it is now “extremely important to ensure inflows of hard currency” into the country.

The Armenian budget for this year projects a deficit of roughly $250 million. “It’s not clear what the rest of the [proceeds from the latest Eurobond sale] will be spent on,” Ara Galoyan, an independent economic analyst, told RFE/RL’s Armenian service (Azatutyun.am).

Other analysts have suggested that the money could also be used for shoring up the national currency, the dram, and offsetting a possible shortfall in tax revenue resulting from slowing economic growth in Armenia.

Armenia first issued $700 million worth dollar-denominated bonds in September 2013 at the yield of 6.25 percent. According to Armenian finance ministry, investors were ready to buy as much as $3 billion worth of Armenian external bonds. The bulk of $700 million was used to repay a $500 million Russian loan ten years ahead of schedule.

“The Wall Street Journal” reported last week that the authorities in Yerevan will use the Eurobond proceeds to buy back up to $200 million of their previous dollar bond issue carried out in 2013.

The higher cost of the latest borrowing reflects recent downward revisions by the Moody’s and Fitch agencies of Armenia’s credit ratings. Both agencies singled out a sharp drop in the dollar value of remittances from Armenians working in Russia. Those cash inflows account for more than 10 percent of Armenia’s Gross Domestic Product.

Moody’s said on January 15 that the economic situation in Russia is also the reason why it changed Armenia’s economic outlook to “negative” from “stable.” It cited “the risk that the impact of Russia’s economic downturn on Armenia’s economy will be more significant than currently expected.”

“Armenia is highly exposed to the severe economic downturn in Russia, which will weigh heavily on Armenia’s balance of payment and growth prospects,” Fitch said for its part on January 30. Even so, it said the outlook for the South Caucasus country remains “stable” for now.