Fitch Ratings: Azerbaijan to keep social, political stability
Baku, Azerbaijan, Aug. 27
By Azad Hasanli – Trend:
Fitch Ratings assumes that Azerbaijan will continue to experience broad social and political stability and there will be no prolonged escalation with Armenia regarding the Nagorno-Karabakh conflict to a level that would affect economic and financial stability, according to the agency’s report posted on its website Aug. 27.
Fitch Ratings has affirmed Azerbaijan's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB+'.
The issue rating on Azerbaijan's senior unsecured Foreign-Currency bond has also been affirmed at 'BB+'. The Country Ceiling has been affirmed at 'BB+'. The Short-Term Foreign- and Local-Currency IDRs have been affirmed at 'B' and the issue rating on Azerbaijan's senior unsecured Short-Term Local-Currency bond has been affirmed at 'B'.
Azerbaijan's 'BB+' ratings balance a strong external balance sheet and low government debt, stemming from previous years of high oil revenues, according to the agency.
Fiscal performance is being hit by the fall in oil prices and a consolidated general government deficit of 7.3 percent of GDP is forecast for 2016, according to Fitch. The deficit compares favorably with Fitch's previous forecast of 12.5 percent of GDP due to a modest improvement in our oil price assumptions and a much sharper than expected fall in capital spending.
Capital expenditure of Azerbaijan’s government was only 31 percent of the budgeted amount in the first half of 2016, reflecting a reassessment of plans and a desire to not put more pressure on the exchange rate, the ratings agency said.
Tax revenues were slightly above target driven by a combination of inflation and improved administration, the experts of the agency said, adding that the deficit is forecast to narrow over the forecast period due to rising oil prices.
Azerbaijan has ample buffers to finance the deficit, the agency reported.
“Assets held by the State Oil Fund of Azerbaijan (SOFAZ) were $35.1 billion at the end of June, up by $1.5 billion over the first half of 2016,” Fitch Ratings said. “The stabilization in 2016 reflects both an improvement in the balance of payments and the proportionate increase in the use of SOFAZ assets to meet local foreign exchange requirements.”
The external balance sheet remains strong despite the fall in oil prices, according to the report. Import compression is expected to return the current account to surplus in 2016, Fitch Ratings noted.
Despite the economy contracting by 3 percent year over year during the first seven months of 2016, the decline in non-oil growth is slowing and Fitch assumes that it will turn positive in 2017.
Large energy projects will support growth over the medium term, according to the report.
Inflation has been stoked by the devaluation and has been in low double-digits so far in 2016, Fitch Ratings reported. It is expected to fall back into single digits in 2017, according to the agency.
Fitch assumes that Brent crude will average $42 per barrel in 2016, $45 per barrel in 2017 and $55 per barrel in 2018.