Azerbaijan maintains strong net general government and external asset positions, S&P says

Details added (first version posted on 11:48)

Baku, Azerbaijan, August 4


Standard & Poor's Ratings Services affirmed its 'BBB-/A-3' long- and short-term sovereign credit ratings on the Republic of Azerbaijan. The outlook is stable

The affirmation reflects S&P view that Azerbaijan's general government net asset and external creditor positions are currently solid, despite some gradual weakening from the previous several years when the country experienced rapid oil-related revenue growth, S&P said on Aug.4.

"Although we expect the general government budget to start running deficits and accumulating debt, we anticipate that the overall fiscal profile will remain strong over the next couple of years."

The agency projects a modest slowdown in economic growth to about four percent in 2014-2017 from 5.8 percent in 2013, due to stagnating oil production, gradual weakening of oil prices to about $103/barrel in 2015-2016, and decelerating growth rates in the non-oil sector.

"We think that lower public-sector capital spending will further slow economic growth. Nevertheless, we anticipate that GDP growth will be supported by a substantial inflow of investment into the development of new

oil and gas fields, in conjunction with last year's increase in public-sector salaries and other social-related expenditures. Long-term GDP per capita

growth of about three percent is in line with that of Azerbaijan's peers, although the country's wealth levels remain relatively low, with GDP per capita estimated at $8,300 in 2014," S&P said.

After a period of government surpluses, we anticipate a gradual deterioration in Azerbaijan's fiscal profile, with the general government fiscal balance posting modest deficits averaging about 1.5 percent of GDP in 2014-2017, according to the agency.

"Nevertheless, we expect some consolidation on the capital spending side. Capital expenditures comprised almost 40 percent of total expenditures in 2013, which in our view provides a large degree of fiscal flexibility. Over the next three years, the revenue base will likely remain highly concentrated and exposed to the volatile oil sector, which we estimate provides more than 60 percent of revenues directly from oil sales and another 10 percent from related revenues. We expect the non-oil tax base, which could generate alternative revenue sources, to remain relatively limited," S&P stressed.

S&P believes that concentration risks and the potential financial distress that might arise from a sharp and sustained decline in oil prices are mitigated by the government's large liquid assets. These are accumulated in SOFAZ, a fiscal reserve fund invested externally. In 2013, SOFAZ assets increased to $36 billion (48 percent of GDP), up from $34 billion in 2012.

"We forecast SOFAZ's assets will remain flat nominally and gradually decline as a proportion of GDP, especially given the plans to provide funding for gas projects. A rapid shift to a more risky investment policy might also lead us to apply liquidity haircuts to the fund's assets under management. We forecast that the general government will remain a strong net creditor, equivalent to about 40 percent of GDP, despite a rise in gross debt (excluding guarantees) to 11 percent of GDP in 2017 from six percent in 2013".

In early 2014, Azerbaijan issued its debut $1.25 billion Eurobond, which will cover deficit financing needs in 2014 and 2015 and might allow the government to further accumulate reserves.

"If Azerbaijan's net external asset position were supported by a

significant improvement in the macroeconomic environment, or we observed an

acceleration of institutional reforms that enhanced policymaking

predictability and transparency, or a strengthening of monetary policy and the banking system, this could have a positive impact on the ratings," S&P said.

Republic of Azerbaijan-selected indicators


Net general government

debt/GDP (%)












General government interest

expenditure/revenues (%)












Bank claims on resident

nongovernment sector/GDP (%)












CPI growth (%)












Gross external financing

needs/CARs +usable reserves (%)












Current account balance/GDP (%)












Current account balance/CARs













Narrow net external debt/CARs













Net external liabilities/CARs (%)












Standard & Poor's analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional and governance effectiveness; (ii) economic structure and growth prospects; (iii) external liquidity and international investment position; (iv) the average of government debt burden and fiscal flexibility and fiscal performance; and (v) monetary flexibility.

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