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Standart & Poorâ€™s assigns sovereign ratings to Azerbaijan for the first time

17 December 2008 15:18 (UTC +04:00)

The outlook is stable. At the same time, a Transfer & Convertibility Assessment of â€˜BBB-â€™ was assigned. With this new rating, Standard & Poorâ€™s now rates 122 sovereign governments worldwide.
"The ratings are constrained by Azerbaijanâ€™s regional geopolitical risks, as well as from developing political, legal, and economic institutions, and high inflation. They are supported by the presence of substantial resources endowment, fiscal and external buffers, and strong economic growth," said Standard & Poorâ€™s credit analyst Luc Marchand.
Azerbaijanâ€™s external and fiscal buffers continue to improve from a position of strength. Net international reserves grew to $5.3 billion in November 2008 from $4.0 billion at the end of 2007 and $2.0 billion in 2006. Standard & Poorâ€™s projects that the external financing needs will represent only 58% of both these reserves and current account receipts in 2008. In addition to these reserves, The State Oil Fund of the Republic of Azerbaijan (SOFAZ), a fiscal reserve fund invested externally, rose to $11.8 billion in November 2008, from $2.5 billion at the end of 2007. SOFAZ provides the sovereign considerable room for maneuver if--as Standard & Poorâ€™s expects--oil prices fall below the 2009 budgeted level of $70/barrel.
The ratings on the country are constrained by regional geopolitical risks, as well as from developing political, legal, and economic institutions, and high inflation. (CPI inflation is expected to remain at double digits in 2009.) The key challenge for the country is to encourage diversification in non-oil sectors, as the economy remains highly vulnerable to swings in oil prices.
"The stable outlook balances the strong buffers provided by both fiscal and external sectors against the risk of a rapid increase of expenditures at a time when oil prices may remain lower than budgeted. Downward pressure on the ratings is possible if the government draws heavily on SOFAZ to finance the budget or if the countryâ€™s banking sector increases its external debt from its current modest amount to levels observed in other Commonwealth of Independent States countries," added Mr. Marchand.
Upward pressure on ratings could come from improved geopolitical regional risks or maturation of the nationâ€™s institutions.