Fitch Ratings: Azerbaijan's Revised Budget Highlights Hit from Oil and Pandemic

Azerbaijan's (BB+/Negative) revised 2020 budget highlights the hit to public finances from lower oil prices and the pandemic, Fitch Ratings says. The planned deficit has been raised to 12.4% of GDP from 2.3% in the original budget. An increase in the planned transfer from the sovereign wealth fund (SOFAZ) to the budget, should support the 1.7 AZN/USD exchange rate, which has faced less pressure in recent months. The key change in the revised consolidated budget, approved by the president in mid-August, is a lower oil price assumption.

 

Fiscal projections are now based on an average of USD35/b (consistent with Fitch's forecast for Brent crude), compared with USD55/b in the original 2020 budget. Spending has been revised up by 1.2pp of GDP. This incorporates a rise of 0.4pp of GDP in health expenditure compared with the original budget, additional capital investments to stimulate the economy amounting to 0.3pp of GDP, and 0.5pp of GDP in additional unspecified measures. As with many other sovereigns, countering the economic impact of the coronavirus pandemic has necessitated a temporary suspension of the government's fiscal rule. Despite the severe adverse impact on the fiscal deficit, large savings provide Azerbaijan with a significant degree of financing flexibility. The consolidated budget deficit will be primarily financed by a drawdown of SOFAZ assets and the large cash deposits in the government's single treasury account.

 

SOFAZ assets were broadly flat over the first six months of 2020, ending June at USD43.2 billion, with changes in the value of its portfolio offsetting lower oil revenues and transfers to the budget. With nominal GDP falling in US dollar terms and its portfolio primarily in foreign currency-denominated assets, SOFAZ assets will remain in excess of 85% of GDP. Consequently, while most sovereigns are projected to post large rises in debt/GDP in 2020, we forecast Azerbaijan's general government debt to increase by just 4.0pp to 23.0% of GDP, with much of that resulting from a sharp fall in the denominator.

 

SOFAZ transfers to the state budget were increased to the equivalent of USD7.2 billion from USD6.7 billion, which will support the 1.7 AZN/USD de facto fixed exchange rate. SOFAZ sales of FX for manats to transfer to the budget are a key source of foreign currency and helped preserve exchange rate stability, notably in March 2020. The recovery in oil prices from their March/April lows has eased pressure on the exchange rate. The 2020 economic growth assumption in the revised budget has been cut to -5.0% from 2.4% (close to Fitch's forecast of -4.2%) reflecting coronavirus containment measures and Azerbaijan's participation in OPEC+ oil supply cuts. A renewed lockdown in July highlights the lingering risk of coronavirus in Azerbaijan and downside risks from further waves of infections and renewed lockdown measures, which could further pressure real GDP growth. We revised the Outlook on Azerbaijan's ratings to Negative from Stable in April 2020, reflecting increased external pressures from the sharp fall in oil prices and increased risk of a disorderly devaluation of the manat.