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Moodyâ€™s upgraded rating of Azerbaijan

20 April 2012 07:31 (UTC +04:00)

The rating outlook is now stable.

The main drivers of this rating action were: (i) the ongoing strengthening in the governmentâ€™s finances, as reflected in the rapid accumulation of foreign assets by the State Oil Fund of Azerbaijan (SOFAZ) and the Central Bank of Azerbaijan (CBA); and (ii) the strong performance of Azerbaijanâ€™s non-oil sector in recent years as a result of government investment activities and efforts to improve the business environment and diversify the economy away from the oil sector. RATINGS RATIONALE The first driver of Moodyâ€™s decision to upgrade Azerbaijanâ€™s ratings into investment grade is the significant improvement in the governmentâ€™s financial strength in recent years. High oil prices have helped the government accumulate considerable foreign assets in both SOFAZ, the countryâ€™s sovereign wealth fund, and the reserves of the CBA, which amounted to around USD40 billion at the end of 2011 (75% of GDP). Moodyâ€™s believes that this level of foreign assets will help shield Azerbaijanâ€™s economy from future adverse impacts arising from internal or external shocks. Moreover, the rating agency expects the government to grow its reserves further in the coming years. With a breakeven oil price of around USD56 per barrel (the price per barrel of oil required for the general government sector to balance its budget), Azerbaijan could withstand a sustained drop in global oil prices without a severe deterioration of its fiscal and debt metrics. The second driver underlying todayâ€™s rating action is the strong performance of Azerbaijanâ€™s non-oil sector, which has benefited from the boom in oil revenues. High government spending on upgrading Azerbaijanâ€™s infrastructure and developing new industries helped non-oil sector output expand by 9.4% last year, up from 7.9% in 2010. This strong performance has helped the economy avoid an outright contraction in output as oil production decreased sharply due to temporary, maintenance-related, disruptions in the countryâ€™s main Azeri-Chirag-Guneshli oilfields during 2011. A high level of public investment in areas such as social infrastructure, construction and services will continue to be a key driver of non-oil sector performance. Going forward, Moodyâ€™s believes that strong government revenues should continue to support further development and diversification of the economy. The stable outlook on Azerbaijanâ€™s Baa3 ratings reflects the governmentâ€™s strong financial position and the deployment of oil revenues towards economic diversification, balanced against constraints stemming from weak governance indicators and geopolitical risks due to the impasse in the conflict over the Nagorno-Karabakh region. Moodyâ€™s has today also aligned Azerbaijanâ€™s local- and foreign-currency ceilings for bonds and deposits with the new government issuer rating of Baa3 to reflect the strong influence of the government over economic activity and the resulting default correlation between the national government, banks and other borrowers in the country.