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The government deficit for 2015 is likely to come in at 3.5% of GDP, compared with the objective of 2.3% of GDP in the original budget, reflecting the weakening of the economy, Fitch Ratings reported July 27.

“A major objective is to increase government revenues, which are currently low, and an increase in excise duties is currently before parliament,” the statement said.

“However, tax increases and similar measures will likely face strong social and political challenges, as the recent protests against higher consumer electricity charges demonstrates.”

Armenia's large exposure to Russia increases risks to its growth prospects and balance of payments and weighs on the rating as a result. Russia is an important source of Armenia's net receipts of workers' remittances (80%, 2014) and export revenues (20%, 2014).

Remittances, which accounted for 13% of Armenia's GDP in 2014 and are a key driver of private consumption, fell 40% year-on-year in the first five months of 2015, Fitch Ratings said.

Armenia's external finances are weaker than the median of its 'B' range rating peers. Net external debt to GDP is high (42.6% vs 'B' median of 14.4%, 2014) and the current account deficit plus net FDI is large (-4.6% vs 'B' median of -2.7%, 2014).

Armenia's geopolitical environment is a constraint on the rating. The latent conflict with Azerbaijan over the disputed Nagorno-Karabakh region entails the tail risk of escalating into a full-scale conflict although this risk is unlikely to occur. No resolution is expected in the short term, the statement said.

The conflict between the two South Caucasus countries began in 1988 when Armenia made territorial claims against Azerbaijan. As a result of the ensuing war, in 1992 Armenian armed forces occupied 20 percent of Azerbaijan, including the Nagorno-Karabakh region and seven surrounding districts.

The two countries signed a ceasefire agreement in 1994. The co-chairs of the OSCE Minsk Group, Russia, France and the US are currently holding peace negotiations. Armenia has not yet implemented the UN Security Council's four resolutions on the liberation of the Nagorno-Karabakh and the surrounding regions

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