Baku, Azerbaijan, March 28
By Emin Aliyev - Trend:
International ratings agency 'Fitch Ratings' has affirmed Azerbaijan's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-', the agency reported on March 28.
The Outlooks are Stable.
The Stable Outlook reflects Fitch's view that upside and downside risks to the rating are balanced.
Fitch assumes that the price of oil, Azerbaijan's main export and source of budget revenue, will average USD105/barrel (Brent) in 2014, and USD100/barrel in 2015.
The agency assumes that the government broadly adheres to the 2014 budget, the report said.
The issue ratings on Azerbaijan's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB-'. The Country Ceiling has been affirmed at 'BBB-' and the Short-term foreign currency IDR at 'F3'.
The affirmation reflects Fitch's expectation that oil production will remain broadly stable for the next five years.
"Oil production grew 0.3% in 2013, halting a steep decline from the 2010 peak. New wells and a possible extension of the production sharing agreement between the BP-led consortium and the government will mitigate natural output decline rates. The natural gas export outlook is also more certain, after stakeholders in the Shah Deniz 2 natural gas project chose an export route to Europe in December," the report said.
The government plans to progressively reduce transfers to the budget from SOFAZ, the State Oil Fund, and generate more non-oil revenue, analysts of the agency noted.
"Oil revenues will still account for around two-thirds of the budget, underscoring high dependence on commodity prices. The 2014 budget calls for spending growth to halve on the previous year to just 5% in nominal terms, so that spending as a share of GDP, which reached 39% of GDP in 2013, will stop growing," the report said.
The analyts noted that Azerbaijan issued a debut USD1.25 bn 10-year sovereign Eurobond in March, establishing a presence in the bond market.
"Despite the fiscal consolidation under way, the state budget will run a deficit. The consolidated budget, including SOFAZ, will be close to balance," the report said.
Azerbaijan's sovereign balance sheet is one of the strongest among rated sovereigns and underpins the rating, the agency said.
"SOFAZ accumulated USD1.7bn in 2013 to reach USD35.9bn (49% of GDP) by end-2013. International reserves of the Central Bank of Azerbaijan (CBAR) are a further USD14.4bn. Fitch expects further modest growth in sovereign assets, providing a buffer against oil price or production shocks. Fitch estimates the current account surplus at nearly 18% of GDP in 2013, driven by a wide trade surplus. The current account surplus will narrow but remain in excess of 10% of GDP in 2015," the report said.
Fitch expects growth to moderate to 3%-4% in 2014-2015, as the government seeks to rein in capital spending.
"Real GDP grew 5.8% in 2013 with non-oil growth exceeding 10%. Inflation will rise from recent lows after the government raised fuel prices in December. The real effective exchange rate has appreciated owing to Russian rouble and Turkish lira weakness. The Azeri manat remains pegged to the US dollar, backed by large CBAR reserves," the report said.
CBAR has acted to curb rapid lending growth by increasing the risk weighting on consumer loans and Fitch expects this to slow lending growth.
"The authorities have given banks until January 2015 to meet a higher minimum capital requirement. The banking system is a relative weakness, given the asset quality problems at the dominant, state-owned International Bank of Azerbaijan (IBA). The government has pledged to inject more capital into IBA," the report said.