Fitch Ratings Confirms Azerbaijan's "BB+" Rating with Positive Outlook

Fitch Ratings, the renowned international credit rating agency, has upheld Azerbaijan's long-term foreign currency default rating ("IDR") at "BB+" with a positive forecast, according to the agency's latest announcement.

The agency's decision to maintain the rating underscores several key strengths within Azerbaijan's economic framework. Fitch highlights Azerbaijan's robust external balance sheet, characterized by very strong fiscal flexibility and the lowest level of public debt compared to peer countries. The country's substantial sovereign wealth fund assets further contribute to its financial resilience.

However, Fitch also points out certain vulnerabilities, including Azerbaijan's continued heavy reliance on the hydrocarbon sector, management deficiencies, and other factors that warrant consideration.

The positive outlook reflects favorable trends in external and fiscal reserves, propelled by higher-than-budgeted energy prices and enhanced cost containment measures.

Fitch analysts project that high energy prices will bolster Azerbaijan's sovereign balance sheet, with the current account surplus reaching 14.8% of GDP in 2023, remaining the highest among countries in the "BB" category. Despite a slight dip in oil prices, sovereign assets in foreign currency surged to $69.8 billion in 2023, predominantly sourced from the State Oil Fund (SOFAZ). The net position of Azerbaijan's sovereign assets, estimated at 67% of GDP in 2023, is anticipated to remain stable through 2024-2025, positioning the country favorably among its peers.

Moreover, Fitch anticipates that elevated oil prices and growing non-oil revenues will sustain the consolidated budget surplus, notwithstanding increased expenditure on reconstruction in Karabakh. Azerbaijan has extended its target reduction of the non-oil deficit to 2027 to accommodate obligations related to Karabakh and defense spending.

Azerbaijan's public debt, standing at 21.8% of GDP in 2023, is forecasted to average 21.6% of GDP in 2024-2025, maintaining its status as the lowest among countries in the "BB" category.

Fitch acknowledges improvements in Azerbaijan's banking sector, albeit it remains relatively weak with a "b" rating on the Fitch banking system indicator. Non-performing loans decreased to a record low of 1.8% at the end of 2023, while capitalization levels remained adequate. The decline in dollarization of deposits and loans in foreign currency further reflects stabilization in the banking sector.

The agency highlights Azerbaijan's geopolitical dynamics, particularly its regained control over Karabakh in September 2023, following a decisive military operation. Ongoing negotiations between Armenia and Azerbaijan, alongside complex regional relations, underscore the intricate geopolitical landscape influencing the country's stability and outlook.

Looking ahead, Fitch identifies potential factors that may trigger a downgrade, including lower energy prices and shifts in economic policy that could deplete external reserves. Conversely, continued strengthening of the external balance and improvements in economic policy efficiency could lead to an upgrade in Azerbaijan's credit rating, signaling optimism for the country's economic prospects in the foreseeable future.