Moody’s Agency improves outlook on Azerbaijan’s rating

Moody’s Agency improves outlook on Azerbaijan’s rating
# 09 March 2011 08:51 (UTC +04:00)
According to APA-Economics, citing to official information of Moody’s Agency, this rating action was taken as a result of (i) significant improvements in the government’s fiscal and external positions, reflected in the rapid accumulation of financial assets in the State Oil Fund of Azerbaijan (SOFAZ) and (ii) ongoing government efforts to invest in the non-oil sector.

Concurrently, Moody’s has changed the outlook on Azerbaijan’s Baa2 foreign and A3 local-currency debt ceilings and its Ba2/Baa1 foreign and local-currency deposit ceilings to positive from stable.

Moody’s improved outlook on Azerbaijan’s government bond ratings reflects significant improvements in the country’s fiscal and external accounts, which have strengthened due to the recovery in oil prices in 2010 and the prudent management of the revenues from those increases. The government registered a fiscal surplus of 14% of GDP in its consolidated budget, while the current account surplus was 30% of GDP in 2010. Most of the surpluses were saved in SOFAZ, whose assets grew by USD8 billion to USD23 billion between the end of 2009 and the end of 2010, in addition to which the Central Bank’s foreign reserves increased by USD1.6 billion to USD7 billion.

The government’s investments in the non-oil sector are also beginning to yield benefits. Non-oil sector growth increased by 7.9% in 2010, compared with 3.2% in 2009. The government actively supports the private sector with its Enterprise Fund, which invested USD125 million in over 100 companies in 2010. However, the outlook for non-oil growth in Azerbaijan will depend on further progress towards liberalising the economic structure as well as the extent of the government’s investment capital.

Positive pressure would be exerted on Azerbaijan’s sovereign bond ratings if the government’s attempts to diversify the economy away from the energy sector leads to higher sustained non-oil sector growth. The ratings will also experience upward pressure if the government and the central bank continue to build larger foreign-currency reserves to cushion against any external or political shocks and continue to invest those assets conservatively.

Downward rating pressure on Azerbaijan’s sovereign bond ratings might occur if there is significant deterioration in the domestic or regional political environment, or a prolonged period of fiscal deterioration. However, Moody’s considers a prolonged period of fiscal deterioration as a low-probability event, given the government’s very high financial strength. Similarly, the probability of a domestic political shock is low, because government revenues will likely remain high and social policies redistributive. Geopolitical risks related to the unresolved conflict with Armenia over the Nagorno-Karabakh region are another consideration that constrains the ratings.
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THE OPERATION IS BEING PERFORMED