S&P approves Azerbaijan's ratings at BBB-/A-3 with outlook stable

S&P approves Azerbaijan
# 02 August 2013 10:16 (UTC +04:00)

The outlook is stable. The transfer and convertibility assessment remains at 'BBB-'.

The affirmation reflects our view of Azerbaijan's stable public sector net asset and strengthening external creditor positions, which maintain substantial fiscal and external buffers.

Due to higher public spending, economic growth should reach 3.8% in 2013, the highest in three years. While oil production will likely plateau through 2017, increased gas production is expected to offset any declines in the immediate years thereafter.

According to the exports of the agency, the government also benefits from the large liquid assets of the State Oil Fund of the Republic of Azerbaijan (SOFAZ), a fiscal reserve fund invested externally, whose assets exceed $34.7 billion as of July 2013 (42% of GDP), slightly up from $34.1 billion at the end of 2012.

"Even if SOFAZ is not expected to add further savings in 2013 and could even see a decline, its assets provide the sovereign a considerable cushion to mitigate oil price decline. Furthermore, at 5.4% of GDP in 2013, the gross central government debt burden (excluding guarantees) is very small - 5.4 percent of GDP in 2013,' the report said.

According to S&P, the geopolitical and political risk affects rating constraints. In particular, the frozen conflict with neighboring Armenia (not rated) over the territory of Nagorno Karabakh retains potential for armed confrontation.

"As for domestic situation, we consider Azerbaijan's government to enjoy high popular legitimacy on improving standards of living. We also note that the independent institutions, accountability, and transparency, which are needed to maintain an efficient market economy, are mostly still in the early stages of development, in our view," the report said.

"We could consider raising the ratings if Azerbaijan's net external asset growth were supported by a significant improvement in the macroeconomic environment, an acceleration of structural reform and diversification efforts, as well as a strengthening of monetary policy and the banking system.

"Conversely, a significant shortfall relative to our expectations about the development of external and fiscal buffers would put downward pressure on the ratings. So too would a further weakening of economic and political governance structures, which in turn could hamper rational and efficient economic policy formulation and implementation," the report said.

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