Shah Deniz 2 to support sustained fiscal surpluses in Azerbaijan

Oil&Gas Materials 20 July 2019 10:18 (UTC +04:00)

Baku, Azerbaijan, July 20

By Leman Zeynalova – Trend:

The second phase for development of Azerbaijan’s giant Shah Deniz gas and condensate field will support sustained fiscal surpluses in the country, Trend reports citing Fitch Ratings.

“We expect a surge in gas production from the coming onstream of the Shah Deniz 2 gas field, and contained expenditure growth will support sustained fiscal surpluses at a forecast 3.7 percent of GDP in 2019 and 3.5 percent in 2020,” said Fitch, as it has affirmed Azerbaijan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB+' with a Stable Outlook.

Fitch said higher average oil prices supported further strengthening of the fiscal position in 2018, with the government recording a consolidated fiscal surplus of 5.6 percent of GDP in 2018 (including the State Oil Fund of Azerbaijan, Sofaz), versus a 2.6 percent deficit for the current 'BB' median.

“The revised 2019 budget includes a package of social measures, including a rise in public sector wages, pensions and social benefits and debt-reducing measures for households, financed by re-allocation of spending from capital to social expenditure and efficiency measures. The revised budget complies with the fiscal rule adopted in 2018, which provides for caps on yearly consolidated expenditure growth and oil revenue spending, and a decline in non-oil deficit/non-oil GDP. The 2018 tax reform, which aims at reducing the shadow economy and broadening the tax base, could bolster employment and tax receipts in the medium term,” reads a report from Fitch.

The rating agency experts said that external guarantees account for 15.6 percent of GDP in 1Q19, a majority of which stem from the Southern Gas Corridor-related projects.

Further, the report shows that Azerbaijan's external balance sheet strengthened further in 2018, with Sofaz assets reaching $38.5 billion at end-2018 ($40 billion at end-1Q19) as the fund recorded a 7.7 percent of GDP surplus.

“Higher oil prices and healthy non-oil sector exports, notably from tourism, brought the current account surplus to 12.9 percent of GDP in 2018, compared with a deficit of 3.2% for the current 'BB' median. Increased government ownership in the country's largest oil field (ACG) following adoption of the new profit sharing agreement (PSA) will lead to an improvement in the primary income account, while a surge in gas production starting in 2019 will partly offset lower forecast oil prices and support a current account surplus over 9 percent of GDP in 2019-2020,” said Fitch.

Economic recovery is ongoing with growth reaching 1.4 percent in 2018, compared with a five-year average of 0.3 percent and a 'BB' median of 3 percent. Non-oil sector growth reached 1.8 percent, while the hydrocarbon sector expanded by 0.7 percent, supported by a 5.6 percent rise in gas production, according to the rating agency.

“We expect growth to pick up in 2019 to 2.7 percent as gas production ramps-up and the government social measures boost private consumption. However, diversification remains limited, with the oil sector accounting for 42 percent of GDP and 91 percent of good exports and 63 percent of fiscal receipts.”


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