On July 10, Fitch Ratings affirmed Armenia’s Long-Term Issuer Default Rating (IDR) at ‘BB-’ with a Positive Outlook, citing stronger international reserves, sustained economic growth, and improving prospects for reducing longstanding geopolitical risks. The agency noted that the US-sponsored peace framework with Azerbaijan had significantly lowered the immediate risk of military escalation, although uncertainty remains over the finalization of a peace agreement, particularly because constitutional amendments required by the treaty could necessitate a referendum, potentially in 2027.

Fitch stated that Nikol Pashinyan, the Prime Minister of Armenia, secured policy continuity after his Civil Contract Party won the June 2026 parliamentary elections. However, the party failed to obtain the two-thirds majority needed to amend the constitution unilaterally. According to the agency, removing constitutional references to Karabakh remains one of Azerbaijan’s conditions for a peace treaty, leaving the peace process exposed to political uncertainty.

The report also highlighted Armenia’s increasingly strained relations with Russia as a key risk. Fitch noted that Russia remains Armenia’s largest trading partner, accounting for 35% of goods exports and supplying more than 80% of the country’s natural gas imports under preferential terms. The agency pointed to recent Russian restrictions on Armenian food exports and transit, as well as threats to end preferential energy and rough diamond trade in response to Armenia’s EU accession ambitions. Given that natural gas covers 61% of Armenia’s energy needs, Fitch warned that supply disruptions or higher prices could adversely affect the country’s economic, fiscal, and external positions.

Despite these risks, Fitch assessed Armenia’s economic outlook as strong. After GDP expanded by 7.1% in 2025, the agency expects growth to moderate to 5.2% in 2026, remaining well above the median for countries with a ‘BB’ rating. Fitch stated that Armenia’s limited dependence on oil reduces its exposure to the regional consequences of the Iran conflict, while the overall impact of Russia’s trade restrictions remains uncertain. It noted that the Armenian government and the EU are providing financial support and tariff relief to exporters to help mitigate these effects.

Looking beyond 2026, Fitch projected medium-term economic growth of around 5%, supported by the expanding ICT sector, the launch of the Amulsar gold mine, and several major infrastructure initiatives. Among these, the agency highlighted the proposed Trump Route for International Peace and Prosperity, intended to connect Azerbaijan with its Nakhchivan exclave through Armenia and onward to Türkiye, as well as plans for a large AI data center with investment that could reach 12% of GDP. Fitch added that successful implementation of a peace agreement with Azerbaijan and the reopening of the Armenian-Turkish border could further stimulate investment, exports, employment, and long-term growth.

The agency forecast average inflation of 4.4% in 2026 before gradually returning to the Central Bank of Armenia’s 3% target. According to Fitch, inflationary pressures had already been rising before the Iran conflict because of higher food prices, services, and universal healthcare costs. It also expects the Central Bank to raise its policy rate by 25 basis points to 6.75%, while noting that Russian trade restrictions could increase domestic supplies of some goods and partially offset inflationary pressures.

On fiscal policy, Fitch stated that Armenia’s 2025 general government deficit stood at 3.7% of GDP, below the government’s target but still above the median for similarly rated countries. The agency expects the deficit to increase slightly in 2026 before gradually declining to 3.4% of GDP by 2028. It attributed continued spending pressures to healthcare reform and higher pension costs, although these are expected to be partly offset by lower defense and security expenditures.

Fitch also noted that general government debt declined to 47.2% of GDP at the end of 2025, below the ‘BB’ median of 51.6%. It expects the debt ratio to remain broadly stable over the medium term as strong nominal GDP growth offsets relatively small primary deficits. Financing needs are projected to continue being covered through domestic borrowing alongside bilateral and multilateral lenders.

Although Armenia’s current account deficit widened from 4.6% to 7.2% of GDP in 2025 because of stronger domestic demand, weaker travel receipts, and the normalization of transit trade, Fitch emphasized that external financing risks remain manageable. The agency projected that the deficit would gradually narrow between 2026 and 2028, while remaining above peer levels. It also highlighted that Armenia’s foreign exchange reserves reached a record USD 5.9 billion by the end of May after the Central Bank increased US dollar purchases, although reserve coverage is expected to remain below the ‘BB’ median because of the country’s high import requirements.

Assessing the financial sector, Fitch stated that Armenia’s banking system remained resilient despite the decline in extraordinary financial inflows from Russia. Private-sector lending continued to grow rapidly, while strong capital and liquidity buffers supported financial stability. The agency also pointed to declining deposit dollarization, attributing the trend to regulatory measures, growing confidence in the Armenian dram, and currency appreciation.

Fitch identified governance and geopolitical factors as the principal constraints on Armenia’s sovereign rating. While acknowledging the country’s functioning political institutions, established rule of law, and moderate corruption levels, it noted that lingering geopolitical risks, including tensions with Russia and the still-fragile peace process with Azerbaijan, continue to weigh on the rating.

According to Fitch, factors that could result in a downgrade include renewed geopolitical instability, deterioration in Armenia’s external position, or rising public debt. Conversely, a lasting reduction in regional tensions, continued fiscal discipline, and sustained high economic growth without creating macroeconomic imbalances could support a future upgrade.

The agency also affirmed Armenia’s senior unsecured debt ratings at the same level as the sovereign IDR and maintained the country ceiling at ‘BB’, one notch above the sovereign rating, reflecting a moderate risk of capital or exchange controls affecting private-sector debt repayments. Fitch concluded that its climate vulnerability assessment did not identify elevated climate-related risks for Armenia.