Fitch Ratings has assigned Azerbaijan's USD1.25bn, 2024 eurobonds a 'BBB-' rating, in line with the sovereign's foreign currency Long-term Issuer Default Rating (IDR).
In line with Fitch's latest assessment of Azerbaijan's sovereign ratings, dated 17 October 2013, Azerbaijan's 'BBB-' IDR reflects the following key rating drivers: Oil output is stabilising after a 15% decline since the 2010 peak, improving the short-term outlook for growth and public finances. Strong sovereign balance sheet, with sovereign assets held in the State Oil Fund of Azerbaijan (SOFAZ) reached 49% of GDP at end-2013.
The 2014 budget calls for a reduction in reliance on oil revenue in the form of transfers from SOFAZ. Azerbaijan is estimated to have recorded a current account surplus of 17% of GDP in 2013, and Fitch forecasts it will continue to record surpluses. The banking system is a weakness relative to 'BBB' rated peers.
Governance indicators and the business environment remain below the 'BBB' median. RATING SENSITIVITIES The Stable Outlook on Azerbaijan's IDRs reflects Fitch's view that upside and downside risks to the rating are balanced.
The main factors that individually or collectively might lead to rating action are as follows:
Positive: -Sustained action to reduce risks to the public finances from oil price shocks via a credible medium-term fiscal strategy would increase confidence in the sustainability of the public finances. -Improving the business climate to promote diversification of the economy in preparation for the forecast decline in oil output.
Negative: -More rapid spending growth than forecast would erode the country's fiscal strength in the medium term. -A severe and prolonged oil price shock. -A domestic or regional political shock. KEY ASSUMPTIONS Fitch assumes that the price of oil, Azerbaijan's main export and source of budget revenue, will average USD105/barrel in 2014, and USD100/barrel in 2015. Growth and fiscal projections are sensitive to oil production assumptions.
Fitch assumes that oil production stabilises in 2014 and 2015. Fitch assumes that Azerbaijan avoids domestic or regional political shocks, such as no escalation in hostilities with Armenia over Nagorno Karabakh, and domestic political stability is preserved. Fitch assumes that the government broadly adheres to the 2014 budget.
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