Fitch Ratings: Revise State Budget of Azerbaijan Tied to Oil Prices

The sovereign long-term issuer default rating of Azerbaijan, both in national and in foreign currency has been affirmed at BBB- with "stable" outlook.

According to the report of Fitch Ratings, this also applies to the rating of government bonds in different currencies. It mentions that a very negative impact on the economy's dependence on oil country, the export of hydrocarbons which account for more than 90% of the total merchandise exports, made the decline in world oil prices.

According to the agency, the devaluation of the manat February 21 (34% against the dollar), and return to the currency basket (dollar - the euro) were a reaction to the sharp appreciation of the real effective exchange rate and a reduction in foreign exchange reserves of the Central Bank (from $ 16.4 billion in October to $ 11 billion in February 2015). Thus reserves, however, are still quite high, coating amounts of 6-month import.

In his view, the current budget allows for a deficit of 2.8% of GDP at the average price of a barrel of oil at $ 90. A weaker exchange rate will soften (in manat) blow from the fall in oil revenues, while the government will reduce spending on infrastructure with very high levels of delaying the implementation of the forthcoming non-essential projects. This combination should prevent a significant budget deficit.

"As a result, the government is likely to be able to avoid the net loss of assets of the State Oil Fund, which at the end of 2014 had assets of $ 37.1 billion., Or 49% of GDP. The transfer from the Oil Fund to the state budget (10.4 billion.), Is likely to be reduced in accordance with the budget cuts, "- experts say the agency.

The banking sector remains relatively weak, as the devaluation of the manat was his "failure test". Dollarization was there before the devaluation on 21 February. The short foreign exchange position of banks stood at $ 1.7 billion, or 43% of their equity capital by the end of 2014, and was only partially hedged. Foreign currency loans were estimated at 27% of the total lending. The devaluation caused a 2 percent reduction in the capital adequacy ratio of the banking sector, which was at 19% by the end of 2014. However, the impact may vary among banks and slower growth in government spending will put additional pressure on banks' asset quality.

According to experts, the progress in the diversification of the economy will be limited by a weak business climate. Office in Azerbaijan is weaker and the political risk is higher than the average for countries that fall into the category «BBB». Skirmishes along the ceasefire line between Armenia and Azerbaijan in Nagorno-Karabakh continues, and is likely to risk a more serious escalation of hostilities will be maintained.

The agency believes that the negative pressure on the rating of Azerbaijan may come from:

- Failure to adjust costs in a lower price of oil, which would have led to a sharp reduction in sovereign wealth funds.

- The long period of low oil prices.

- Regional geopolitical shock – to so seriously disrupt the economic and financial stability of the country with such risks as the full-scale conflict over Nagorno-Karabakh.

Positive impact on the rating can come from the following factors:

- Improving the budgetary position, in addition to the measures provided for in the present time, it is enough to boost confidence in Fitch's sovereign long-term sustainability of the strong balance sheet of Azerbaijan.

- Sustainable economic diversification, supported by reforms to improve governance and transparency.

"At the same sovereign rating of Azerbaijan is based on the global economic outlook agency, pending stabilization of oil production in the country in the years 2015-2018, as well as the preservation of internal political stability," the statement said. --17D-