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Fitch affirm Azerbaijan at ’BB+’ with stable outlook

03 June 2009 15:25 (UTC +04:00)

Baku. Vahab Rzayev â€“ APA-Economics. Fitch Ratings has today affirmed the Republic of Azerbaijan’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ’BB+’ with Stable Outlooks. The agency has also affirmed Azerbaijan’s Country Ceiling at ’BB+’ and Short-term foreign currency IDR at .
"Azerbaijan’s sovereign rating is underpinned by its large hydrocarbon endowment and the oil windfall of recent years, which has enabled the sovereign to build up a strong and liquid balance sheet that leaves it relatively well placed to navigate through the challenging global environment," says Andres Klaar, Associate Director at Fitch’s Sovereign team.
The country has engaged major western oil companies in modernising its oil and gas production and transport facilities. Rising oil production propelled annual real growth of 21% from 2004 to 2008 - faster than in any other Fitch-rated country. The consolidated government budget surplus reached 11% of GDP in 2008, up from 2.6% in 2007 while the current account surplus was above 30% of GDP. With the accumulation of the government’s oil revenue into the Sovereign Wealth Fund - State Oil Fund of Azerbaijan Republic (SOFAZ), sovereign net foreign assets increased to 35% of GDP at end-2008 (’BB’ median is 5.8% net liability position) whereas government debt was 8.6% of GDP (’BB’ median: 40.7%). The transparent management and reporting of SOFAZ is also a rating strength.
The strong starting position of the budget and the accumulation of resources in SOFAZ should allow Azerbaijan to orchestrate a moderate fiscal easing this year to support economic growth without the consolidated budget moving into deficit. Nevertheless, lower oil prices are likely to require tighter control of expenditure and a rebalancing of the economy. Despite sizeable fiscal savings in SOFAZ in 2006-08, budget expenditures increased 65% annually in nominal terms over these years. This stimulus, exacerbated by a nascent domestic credit boom, led to the economy overheating with inflation peaking at 25% in the middle of 2008, albeit partly due to rising global food and energy prices. High inflation contributed to real exchange rate appreciation and worsened international competitiveness of the non-oil sector. Fitch forecast inflation to decline to 3% in 2009, while GDP growth remains positive at 2.5%.
However, coping with lower oil prices and navigating through uncertain global financial conditions raises some risks. Fitch regards the Azeri banking system as weak. It has been growing rapidly, albeit from a low base, and Fitch expects the non-performing loan ratio to rise from a current estimated 10%-15%. The stock of base money and credit fell in Q109, despite reductions in the refinancing rate and banks’ reserve requirements. International reserves declined in Q109 as the central bank supported the exchange rate. However, private sector external debt is moderate, largely shielding the country from global financial pressures. Fitch estimates Azerbaijan’s external debt service ratio at 6% of CXR in 2009 relative to 34% for Kazakhstan and 30% for Russia.
Structural issues also weigh on Azerbaijan’s ratings. Institutions and governance are relatively weak and the business climate remains difficult, despite an impressive improvement in the country’s ranking in the latest World Bank’s "Ease of Doing Business" survey. Structural reforms are necessary to support economic growth in the long term, as increasing hydrocarbon production is expected to be temporary.