FITCH RAISES AZERBAIJAN"S RATING, BUT NOTES HIGH CORRUPTION

    Fitch Ratings increased Azerbaijan"s long-term issuer"s default rating (IDR) from BB+ to BBB- in local and foreign currencies on Thursday. The forecast is stable. Fitch also increased Azerbaijan"s national upper limit from BB+ to BBB-, and the short-term IDR in hard currency from B to F3. So Azerbaijan has become a third CIS country to receive an investment rating. The country"s long-term foreign-currency rating is comparable with that of Kazakhstan and is only a step behind the Russian one. Andres Clare from Fitch said the increase in Azerbaijan"s sovereign rating resulted from the rapid increase in the country"s oil income and the reasonable income management. The income is used to make Azerbaijan stronger as net creditor. The reasonable income management increased the State Oil Fund to $16.2 billion by late March 2010 (38% of the GDP of 2009). Despite the volatile oil prices and the global financial crisis, Azerbaijan"s state budget showed a positive balance of 6.3% of the GDP in 2009, because the government decreased the state budgetary expenses and increased the State Oil Fund by $3.7 billion. The current operations" positive balance was 20.7% of the GDP in 2009, while inflation decreased from 20.8% in 2008 to 1.5% in 2009. The country"s foreign assets" net value was 37% of the GDP by the end of 2009, which was comparable with the indexes of Kazakhstan (41%) and Russia (33%). The Central Bank successfully upheld the AZN/USD exchange rate during the global financial crisis. Fitch believes that, if the oil extraction keeps to the level of 2009, Azerbaijan"s oil resources will run out in 18 years (in 54 years in Kazakhstan). Fitch is pleased with the Azerbaijan State Oil Fund"s (SOFAZ) transparency and with the Extracting Industry Transparency Initiative"s observance. Fitch believes the SOFAZ assets will increase to $22 billion (45% of the GDP) by the end of 2010. Fitch also believes structural adjustment should be conducted to diversify Azerbaijan"s economy and develop the non-oil sector. The high corruption should be decreased and the non-oil business environment should be improved. Fitch believes that the Nagorno-Karabakh problem, the excessive centralism and non-transparency of Azerbaijan"s political power, the institutional environment and management errors, and the high corruption level create risks for Azerbaijan"s rating.