Moody's reaffirms Azerbaijan's creditworthiness

In a report published on October 6, Moody's Investors Service says that Azerbaijan's Baa3 foreign and local-currency bond ratings with a stable outlook reflect the government's (1) low government debt; (2) its sustained albeit falling fiscal surpluses over the past couple of years; and (3) its strong net creditor position due to sizable foreign assets that it has accumulated.

These strengths will help to shield the economy from internal and external shocks.

The rating agency's report is an update to the markets and does not constitute a rating action.

Hydrocarbon-rich Azerbaijan has been one of the fastest growing economies over the past decade because of the strong expansion in its oil and gas extraction industry, and surging oil and gas prices.

Moreover, the rise in oil-related revenue has enabled the government to generate fiscal surpluses and to significantly invest in the country's infrastructure, thereby transmitting the positive effects from the oil sector to the broader economy. As a result, Azerbaijan's poverty levels have dropped significantly, limiting the likelihood of domestic political and social unrest.

Despite this diversification, Moody's notes that the overall economy continues to rely heavily on the oil sector as hydrocarbon-related GDP accounted for around 41% of total nominal GDP, 70% of consolidated central government revenue and 93% of total exports of goods. The rating agency believes that this is unlikely to change in the short to medium term as hydrocarbon offers the resources to further develop the country's non-oil sectors and to promote self-sustaining employment in the broader economy.

Also supportive of the rating is Azerbaijan's accumulation of sizeable foreign assets over the past few years, both within the sovereign wealth fund, the State Oil Fund of the Republic of Azerbaijan (SOFAZ) and the Central Bank of Azerbaijan (CBA), the central bank. Moody's believes that Azerbaijan's high level of foreign assets worth $50.9 billion (or 69.2% of GDP) as of end-2013 will help to shield the economy from internal and external shocks.

Moody's says that constraints on the rating include the very low institutional strength, limited credibility and effectiveness of government policies, sustained geopolitical tensions with neighbouring Armenia over the territory of Nagorno-Karabakh, as well as risks from recent rapid credit growth in the context of a generally weak banking system.

Bakudaily.Az