S&P affirms Azerbaijan’s 'BB+/B' ratings

S&P affirms Azerbaijan’s 'BB+/B' ratings

Baku, Azerbaijan, Jan. 30

By Maksim Tsurkov - Trend:

On Jan. 27, 2017, S&P Global Ratings affirmed its 'BB+/B' long- and short-term foreign- and local-currency sovereign credit ratings on the Republic of Azerbaijan. The outlook remains negative, S&P report said Jan. 30.

S&P ratings on Azerbaijan are primarily supported by the sovereign's strong fiscal position, underpinned by the large foreign assets accumulated in the Azerbaijan State Oil Fund SOFAZ.

“In our view, at a time of lower and more volatile oil prices, the economic outlook

for heavily commodity-dependent Azerbaijan will to a significant degree depend on

the authorities' reform agenda, including efforts to improve the business environment and ultimately diversify the economy away from commodities,” the report said.

According to S&P, against that background, SOFAZ has remained the main supplier of foreign exchange for the domestic economy.

“SOFAZ has continued to exchange foreign assets into manat and transferred these local currency proceeds to the government, which has utilized only part of them, implying a significant reduction in spending against the initially budgeted levels,” S&P said.

“We believe the lower government spending has been primarily due to balance of payments rather than fiscal concerns, with the authorities tightening expenditures to relieve further external pressures,” the report said.

According to S&P, to stabilize the foreign exchange market, the government is considering making a direct transfer from SOFAZ to support the firepower of the Central Bank this year.

The maximum size of the expected transfer is set at 7.5 billion manat (about $4

billion at current exchange rates), S&P said.

“In our view, the actual transfer will likely be materially lower than the maximum level as the government remains cautious about using SOFAZ for monetary purposes, given how fast the CBA reserves have declined historically,” the report said.

“We also believe that SOFAZ will remain primarily a fiscal buffer and we would consider the eventual transfer as a one-off development,” the report said.

S&P forecast anticipates a gradual reduction in balance of payments pressures. This


The adjustment of the exchange rate, which has continued to weaken through the

beginning of 2017. A weaker manat should act as a break on imports, leading to an

improvement in the current account position.

• The deposit/savings dollarization reaching its peak and reducing additional demand

for foreign currency.

• Higher oil prices.

• Additional exports of gas from 2018 when the large Shah Deniz II gas field comes

online as planned.

“We continue to assess the Azerbaijani economy's external position as strong on a

stock basis, and we expect the country's liquid external assets to exceed external

debt over the foreseeable future,” the report said.

“Nevertheless, we still view Azerbaijan's fiscal position as strong and a key support

for the ratings,” the report said.

“The government remains in a substantial net asset position (estimated at 80 percent of GDP as of end-2016) and we don't anticipate this changing over the next few years,” the report said.

“Moreover, we believe Azerbaijan has a high level of fiscal flexibility given the large share of capital spending in the overall expenditure envelope (estimated at about 40 percent of total government spending in 2014-2015) and the government's ability to quickly reduce expenditures when needed,” the report said.

“We anticipate that the consolidated general government budget will post a deficit of

4 percent of GDP this year, mostly reflecting SOFAZ's transfer to the CBA,” the report said.

“However, we expect general government debt to increase by a larger 10 percent of GDP, mostly reflecting the effect of the additional asset transfer from IBA to Aqrarkredit,” the report said. “The budget would gradually move into surplus thereafter, supported by expenditure restraint, a weaker manat, and rising oil prices.”

S&P forecasts that SOFAZ assets will return to growth in dollar terms from 2018

onward, supported by the new gas exports from the Shah Deniz II project.

“Beyond the project's fiscal and balance of payments impact, we believe it would support broader economic growth and employment through growing investments over the next few years and a subsequent rise in exports,” the report said.

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