Fitch affirms Azerbaijan at 'BBB-'; Outlook Stable

Fitch affirms Azerbaijan at 'BBB-'; Outlook Stable

Azerbaijan, Baku, Oct. 18 / Trend A. Akhundov /

Fitch Ratings has affirmed Azerbaijan's Long-term foreign and local currency IDRs and its senior unsecured bonds at 'BBB-'. The Outlook on the IDRs is Stable. The Country Ceiling is affirmed at 'BBB-', and the Short-term foreign currency IDR at 'F3', Fitch Ratings reported today.

The affirmation reflects the following factors:

Oil output is stabilising after a 20% decline since 2010, improving the short-term outlook for growth and public finances. Fitch expects oil production will increase slightly by 2015. Longer-term, oil output will fall, given natural decline rates in the main oilfield.

Fitch expects overall real GDP growth of 5% in 2013 (up from 2.2% in 2012).

"Government spending will drive growth of 10% in the non-oil economy in 2013 but provide less impetus in 2014 and 2015," the statement said.

Public finances recorded several years of large surpluses prior to 2013, making Azerbaijan's sovereign balance sheet one of the strongest among rated sovereigns and mitigating the budget's high dependence on oil revenues. Sovereign assets held in the State Oil Fund of Azerbaijan (SOFAZ) reached USD34.7bn (49% of GDP) at end-June 2013, having grown USD600m since end-2012, the statement said.

Public spending has grown rapidly in recent years and rose 19% in 7M13 to reach 40% of GDP.

"The recent draft 2014 budget calls for a slowdown in spending growth and a lower transfer from SOFAZ to the budget of AZN9.34bn (2013: AZN11.35bn)," the statement said. "However, Fitch still expects the consolidated budget deficit to widen to 5% of GDP by 2015 from 1% of GDP in 2013. The 2014 state budget assumes a wider deficit of AZN1.7bn (2.9% of forecast GDP), based on an oil price assumption of USD100/barrel, implying higher borrowing. Government debt will rise from a low starting point of 14% of GDP (including guaranteed debt). But the lower projected drawdown from SOFAZ points to SOFAZ assets stabilising through 2015 rather than falling as Fitch had forecast in April."

Fitch expects Azerbaijan to run a current account surplus of 17% of GDP in 2013, down 4pp of GDP from 2012 but still one of the strongest surpluses of any Fitch-rated sovereign. The surplus will narrow further but remain comfortable, barring an oil price shock, leading the external balance sheet to strengthen.

"The banking system is a weakness relative to 'BBB'-rated peers. International Bank of Azerbaijan, partly state-owned and the largest bank in the system, now meets minimum standards for regulatory capital after receiving capital injections from the government totalling 0.5% of GDP," the statement said. "However, Fitch believes it may require more capital to help clean up its balance sheet, which would be manageable for the government."

Incumbent Ilham Aliyev, standing for a third five-year term in office, won the presidential election on 9 October with 84.7% of the votes, defeating the main opposition challenger Camil Hasanli representing the National Council of Democratic Forces. Few policy changes are expected after the election.

The Stable Outlook reflects Fitch's view that upside and downside risks to the rating are balanced.

The main factors that individually or collectively might lead to rating action are as follows:


-Sustained action to reduce risks to the public finances from oil price shocks via a credible medium-term fiscal strategy would increase confidence in the sustainability of the public finances

-Improving the business climate to promote diversification of the economy in preparation for the forecast decline in oil output


-More rapid spending growth than forecast would erode the country's fiscal strength in the medium term

-A severe and prolonged oil price shock

-Fitch assumes that the price of oil, Azerbaijan's main export and source of budget revenue, will average USD105/barrel in 2013, and USD100/barrel in 2014 and 2015.
-Growth and fiscal projections are sensitive to oil production assumptions.

Fitch assumes that oil production stabilises in 2014 and increases 3% in 2015, before resuming a mild decline.

-Fitch assumes that Azerbaijan avoids domestic or regional political shocks, such as no escalation in hostilities with Armenia over Nagorno Karabakh, and domestic political stability is preserved following the presidential election in October 2013

-Fitch assumes that the government broadly adheres to the draft 2014 budget submitted to parliament in October 2013.

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