The rating was lowered to BB+ from BBB-, Azerbaijan’s first ever reduction, according to a statement on Friday. S&P assigned a stable outlook. Fitch Ratings and Moody’s Investors Service have the Caspian nation at their lowest investment-grade levels with stable outlooks.

"Oil prices have declined further over the last several months and we now anticipate Azerbaijan’s general government will run deficits through 2018,” S&P said. "In our view, external risks are increasing, with the central bank’s foreign currency reserves declining by two-thirds from their mid-2014 peak.”

Azeri officials have held talks with the International Monetary Fund as the renewed drop in energy prices wreaks havoc on the economy. While Finance Minister Samir Sharifov said this week that the government isn’t asking for a bailout loan, the central bank burned through more than 60 percent of its reserves last year to defend its currency, the manat. Governor Elman Rustamov has said as many as seven banks may be merged to bolster an industry where six lenders were closed this week alone.

Capital Controls

Azerbaijan has placed restrictions on the movement of capital after the manat fell by about half in 2015, with the central bank allowing it to float freely in December. The manat traded 1.4 percent weaker at 1.6068 against the dollar at 8:35 p.m. in the Azeri capital of Baku.

The government’s 2024 dollar bond stayed lower after Friday’s downgrade, with the yield up 9 basis points to 6.60 percent. That takes the monthly increase to 82 basis points, data compiled by Bloomberg show.

S&P said Azerbaijan’s economy will shrink 1 percent in 2016, with gross domestic product per capita plummeting by almost half to $4,100 from $8,000 two years ago. The ratings company said oil production, the mainstay of economic growth, would probably decline by 1 percent to 2 percent a year without sustained investment.

Azerbaijan isn’t alone in the former Soviet region in facing financial strains from the oil-price slump. Russia, the world’s biggest energy exporter, and Kazakhstan moved to free-float regimes in the past year as their currencies came under pressure.

"Azerbaijan is one the many net commodity exporters that is having to face a reality check as ratings agencies increasingly warn of downgrading potential,” Simon Quijano-Evans, an emerging markets strategist at Commerzbank AG in London, said by e-mail shortly before the rating cut.

 

(Bloomberg)