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Moody's announces conditions for upgrading Azerbaijan's credit rating

05 February 2025 18:09 (UTC +04:00)

The positive outlook reflects improving economic diversification prospects and macroeconomic policy effectiveness that may lead to a further strengthening in Azerbaijan's credit profile consistent with a higher rating level, the international rating agency Moody's Ratings said in a report provided to APA- Economics.

It was noted that Moody's Ratings (Moody's) has completed a periodic review of the ratings of Azerbaijan and other ratings that are associated with this issuer. Azerbaijan's ratings, including its Ba1 long-term issuer ratings, are supported by the government's large net creditor position given sizeable financial assets held by the State Oil Fund of Azerbaijan (SOFAZ), the country's sovereign wealth fund, which provides a significant financial buffer and lowers government liquidity and external vulnerability risks. Furthermore, improvements to the monetary and macroeconomic policy framework promote stability in the external and banking sectors in the face of shocks, while effective deployment of fiscal buffers allows for countercyclical spending and limits the potential deterioration in the government's fiscal and debt metrics. These strengths are balanced against longstanding challenges related to governance and tensions with Armenia (Ba3 stable) that pose geopolitical risks.

The agency also added that Azerbaijan's economy has grown faster than expected, with real GDP growing 4.1% year-on-year during the first eleven months of 2024 and projected to be around 4% by the end of 2025. This represents a significant rebound from the modest 1.1% growth in 2023 and higher than the 3% expected in July 2024. The strong performance continues to be driven by the non-oil sector. Nevertheless, we expect state budget deficits to remain narrow at around 1-2% of GDP in 2024, which will contain borrowing needs and keep the debt burden below 30% of GDP.

Azerbaijan's "aa1" fiscal strength is underpinned by the country's strong net creditor position, as the size of sovereign wealth assets covers all of the government's direct debt and guarantees, notwithstanding the high share of foreign currency denominated debt.

The rising prominence of the so-called Middle Corridor as an important transport node between Europe and Asia and investments across the country are driving economic prospects, although the impact on economic strength will only become tangible over time. Meanwhile, greater European demand for Azeri gas as well as a widening pipeline of renewable projects will mitigate the impact of depleting oil resources on the country's external accounts.

The positive outlook signals that a rating downgrade is unlikely over the near term.

Heightened geopolitical tensions with Armenia or significant spillovers from the Russia-Ukraine military conflict that would exert a significant negative impact on economic activity and government finances would also be credit negative.

The Southern Gas Corridor's (SGC) Ba1 rating and positive outlook also remain unchanged. We rate SGC at the same level as the Government of Azerbaijan given it receives explicit guarantees on all of its foreign currency debt from the government.