S & P affirmed the ratings of Azerbaijan at "BBB-/A-3"

Ratings Services Standard & Poor's affirmed its long-and short-term sovereign credit ratings of Azerbaijan at "BBB-/A-3." The rating outlook is 'Stable'. Assessment of risk transfer and convertibility remains at 'BBB-'.

As stated in the Standard & Poor's, to reaffirm the sovereign rating of Azerbaijan reflects the stable performance of the net assets of the public sector and strengthens the position of net external creditor, which can provide a significant "safety cushion" for both the state budget and external balance of payments. In this regard, we also note that the general government debt would remain largely limited despite the expected budget deficit.

Because of the high cost of public sector growth in the country's economy will reach 3.8% in 2013, and the highest rate in the last three years. While the oil sector is still in recession, and oil production is expected to recover in the second half of the year, the government's spending (especially in infrastructure) contributes to higher growth in non-oil sectors.

According to forecasts of S & P, this growth will accelerate to 5% in 2014, equivalent to an average annual growth of GDP per capita by 3.6% over the forecast period (2013-2016.). Standard & Poor's expects that the level of oil production will be approximately equal to 2017, and its possible decline in the coming years will be offset by increasing gas production. Further development of gas condensate field Shah Deniz II also received support in the form of agreements for the construction of pipelines to transport Azerbaijani gas to Europe: The State Oil Company of Azerbaijan has made a choice in favor of Trans-Adriatic pipeline - it will connect with the Trans-Anatolian pipeline field (TANAP).

"Export of hydrocarbons must maintain surpluses in the current account, although they will gradually decrease from 20.6% of GDP in 2013 to 16% of GDP by 2016, with an average oil price 104 dollars. / Barrel. Given that the need for external financing (gross) are estimated at 58% of revenues in the current account plus usable reserves, and narrow net external assets amounted to about 100% of the revenue in the current account, it can be concluded that Azerbaijan has a strong position net external creditor ( even if data error is significant.)

As an external balance of payments, budget balance in the medium term will be re-executed with a surplus, although we expect the deficit of the consolidated general government budget at 3.8% of GDP in 2013 - the first time in a decade. This is due to a significant increase in government spending, particularly capital investment to provide more intensive economic growth ahead of the presidential elections in October 2013 Although this leads to a deterioration of the budget figures, the very high proportion of capital expenditure - 46% of total expenditure in 2013 - provide significant fiscal flexibility in the event of lower oil prices. Negative factor is a significant dependence on government revenues associated with oil production (about 60% is directly related to the sale of oil and 12% - with supporting industries) and a small tax base to generate alternative sources of income, - the agency.

A positive factor for the government of the country is a significant amount of liquid assets of the State Oil Fund of Azerbaijan (SOFAR) - Budget Reserve Fund, which is invested abroad in July 2013 assets totaled 34.7 billion (42% of GDP), slightly an increase over the 34.1 billion dollars at the end of 2012 even if the State Oil Fund will not receive additional funds in 2013 or incur a loss, its assets will ensure the country's government considerable room for maneuver in the event of a fall in oil prices. In addition, the level of debt of the central government of Azerbaijan (excluding guarantees) is very low - 5.4% of GDP in 2013

Moderating influence on the ratings of Azerbaijan, still have geopolitical and political risks, particularly in relation to the conflict with Armenia suspended (not rated S & P) in relation to the territory of Nagorno-Karabakh and the possibility of a new armed conflict. With regard to the domestic situation, the government still maintains a high level of legitimacy against the improving standards of living. However, the high level of well-being is not a guarantee of political stability. Additionally, the process of decision-making in the country remains highly centralized and insufficiently transparent, which can lead to less predictability in making policy decisions.

S & P notes that independent institutions, accountability and transparency necessary for the efficient functioning of the market economy, mainly in the early stages of development

Another limiting factor in the rating is the fact that, from the point of view of S & P, the monetary and banking system of the country are not well developed, the banking system does not have high standards of management and underwriting. At the same time, the level of dollarization decreased significantly (44% of total deposits and 32% of total loans at the end of 2012). Manat is increasingly being used in the calculations, which increases the effectiveness of monetary policy, but on the other hand, high interest rates to attract funds by banks in manats weaken the monetary transmission mechanisms. In addition, there are no effective monetary policy instruments that allow neutralizing a large-scale influx of capital, and monetary and fiscal policy is not sufficiently coordinated.

"Stable" outlook reflects, on the one hand, the agency expected further improvement in the external balance of payments and a stable balance sheet of the state budget of the Azerbaijan Republic, and the other - a moderate rate of growth of the economy and unreformed institutional environment.

S & P could raise the ratings if the increase in net foreign assets of the country will be supported by a significant improvement in the macroeconomic environment, the accelerated pace of structural reforms and efforts to diversify the economy and the strengthening of monetary policy and the banking system. Conversely, the ratings could come under pressure if the indicators of international reserves and the budget will be significantly worse than expected performance agency. Another possible reason - the further weakening of the structures of economic and political governance, which, in turn, may complicate the formation and implementation of a balanced and effective economic policy. The sudden escalation of geopolitical tensions and a clear violation of political stability could also (depending on the degree of development of these events) lead to a rating downgrade. -15D -