Fitch affirms Azerbaijan at 'BBB-'; Stable Outlook
Azerbaijan, Baku, April 29 / Trend /
Fitch Ratings has affirmed Azerbaijan's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' with a Stable Outlook. The Short-term rating has been affirmed at 'F3' and the Country Ceiling at 'BBB-', Fitch Ratings said today.
Azerbaijan's 'BBB-' rating weighs a strong government balance sheet, the product of windfall oil revenue and low indebtedness, against high oil dependence, Fitch Ratings said.
- Public finances have recorded several years of large surpluses. Azerbaijan's sovereign balance sheet is one of the strongest among rated sovereigns and mitigates the budget's high dependence on oil revenues. The State Oil Fund of Azerbaijan (SOFAZ), the sovereign wealth fund, contains $32bn or 50% of GDP, enough to finance at least two years of current spending at 2013 rates.
Government spending has grown rapidly in recent years and will reach 40% of GDP in 2013. The breakeven oil price (needed to generate enough revenue to fully fund SOFAZ's on- and off-budget spending) has risen to above $115/b and exceeds current oil prices.
Maintaining a similar pace of spending growth would undermine the public finances and erode the sovereign net asset position over the medium term, the statement said.
In contrast to similarly-rated oil producers, oil production has peaked and is forecast to fall relatively steeply over the next decade. This puts a premium on the government's ability to save oil revenue for the future, and invest to promote non-oil activity. Azerbaijan lacks an explicit fiscal rule, based on the oil price or non-oil fiscal deficit, to guide medium-term policy.
"The external position remains strong: Azerbaijan recorded a current account (CA) surplus of 21.7% of GDP in 2012 and the CA balance, although declining, will remain comfortably in surplus in 2013-2014," the statement said. "The country is a net external creditor."
Commodity dependence is high. Non-oil exports account for only 6% of (officially-recorded) merchandise exports.
"While Azerbaijan's sovereign balance sheet is one of the strongest among rated sovereigns, Fitch no longer expects it to strengthen," the statement said. "Indeed, for the first time since 2009, Fitch forecasts the consolidated general government will run a deficit in 2013 and SOFAZ assets will decline under its core oil price assumption."
Overall real GDP will grow by 3.5% in 2013 and 4.5% in 2014. Higher government spending will drive growth of almost 10% in the non-oil economy in 2013. Oil output will continue to fall in 2013, before experiencing a temporary boost in 2014. The economy's ability to grow without substantial stimulus from government spending is unproven.
The Stable Outlooks on the ratings reflect Fitch's view that the risks to the rating are evenly balanced:
The main factors that could lead to positive rating action are:
- Sustained action to reduce risks from oil price shocks and improve the long-term sustainability of the public finances- by reining in spending, lowering the non-oil deficit and adhering to medium term budgeting.
- Successful moves to improve the business climate, including strengthening the financial sector, to promote diversification of the economy in preparation for the forecast decline in oil output.
The ratings and Outlooks are sensitive to a number of assumptions.
- Fitch's economic and fiscal projections assume that overall public spending growth will slow from 2014, and that the transfer from SOFAZ to the budget stays flat in nominal terms.
- Fitch assumes that the price of oil, Azerbaijan's main export and source of budget revenue, will average $105/b in 2013 and $100/b in 2014. If oil prices go well below these assumptions for a prolonged period, the government may run higher deficits, putting negative pressure on the rating.
- Fitch assumes that Azerbaijan avoids domestic or regional political shocks.