Fitch affirms Azerbaijan’s long-term rating at 'BB+'


July 30, Fineko/ Fitch Ratings has affirmed Azerbaijan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB+' with a Stable Outlook.

Short-Term Foreign-Currency IDR was affirmed at 'B'; Short-Term Local-Currency IDR affirmed at 'B'; Country Ceiling affirmed at 'BB+'; Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'BB+'; Issue ratings on long-term senior unsecured local-currency bonds affirmed at 'BB+'; Issue ratings on short-term senior unsecured local-currency bonds affirmed at 'B'; and Issue ratings on short-term senior unsecured foreign-currency bonds affirmed at 'B'.

Azerbaijan's 'BB+' ratings balance a strong external balance sheet and low government debt, stemming from accumulated surpluses in times of high oil revenues, with a heavy dependence on hydrocarbons, an underdeveloped and opaque policy framework, and a weak banking sector and governance indicators.

According to Fitch, Azerbaijan's sovereign net foreign assets account for 81% of GDP at end-2017. Assets of the State Oil Fund of Azerbaijan (Sofaz) increased by 5.1% in 1Q18 up to USD37 billion.

Fitch says that Azerbaijan's economy is recovering slowly from the oil price shock and the subsequent policy response, which included exchange rate devaluations and tightening of fiscal policy. According to Fitch, higher oil prices and gas output and uptick in the agriculture and tourism sectors should push up growth to 2% in 2018. However, commodity dependence remains high, with the hydrocarbon sector representing 44% of GDP, 90% of good exports and 50% of fiscal revenues. Non-oil sector growth is gradually picking-up, but we expect diversification of the economy to be incremental.

Fitch indicates macro-stability improved further as inflation fell to 3.2% over the first five months of 2018, from 12.9% in 2017 due to the stable exchange rate and imported disinflation from Azerbaijan's main trading partners. Dollarisation decreased to 63% of deposits and 39% of loans in May 2018 (67% and 41% at end-December 2017), as confidence in the manat has recovered and regulatory measures limiting FX-lending and tightening reserves requirements have supported manat loans.

At the same time, monetary policy is still constrained by the high level of dollarisation and the underdeveloped money market, making inflation targeting a medium-term objective. The stability of the exchange rate, which has remained at around 1.70AZN/USD since April 2017 suggests that the exchange rate is not fully floating.

Fitch’s estimate shows that the current account turned into a surplus in 2017 and we expect it to reach 6.4% of GDP in 2018. Higher oil prices, completion of the Southern Gas Corridor project and production from the Shah Deniz II field will boost hydrocarbon exports. Rising external surplus will help rebuild foreign exchange reserves and Sofaz assets.

Fitch says that gross general government debt is low relative to peers at a forecast 21% of GDP in 2018.

Fitch also predicts keeping of a stable domestic political situation in Azerbaijan after the victory of President Ilham Aliyev in the early elections on April 11, 2018. At the same time, the Agency notes the existence of political risks due to the unresolved Nagorno Karabakh conflict.

Negotiations leading to settlement are not expected in the short term prospect. Therefore, escalation remains a real risk.