Moody’s upgraded rating of Azerbaijan

Moody’s upgraded rating of Azerbaijan

Moody’s Investors Service has today upgraded Azerbaijan’s foreign- and local-currency government issuer ratings by one notch to Baa3 from Ba1.

The rating outlook is now stable, APA reports. The main drivers of this rating action were: (i) the ongoing strengthening in the government’s finances, as reflected in the rapid accumulation of foreign assets by the State Oil Fund of Azerbaijan (SOFAZ) and the Central Bank of Azerbaijan (CBA); and (ii) the strong performance of Azerbaijan’s non-oil sector in recent years as a result of government investment activities and efforts to improve the business environment and diversify the economy away from the oil sector.

RATINGS RATIONALE

 

The first driver of Moody’s decision to upgrade Azerbaijan’s ratings into investment grade is the significant improvement in the government’s financial strength in recent years.

High oil prices have helped the government accumulate considerable foreign assets in both SOFAZ, the country’s sovereign wealth fund, and the reserves of the CBA, which amounted to around USD40 billion at the end of 2011 (75% of GDP). Moody’s believes that this level of foreign assets will help shield Azerbaijan’s economy from future adverse impacts arising from internal or external shocks. Moreover, the rating agency expects the government to grow its reserves further in the coming years. With a breakeven oil price of around USD56 per barrel (the price per barrel of oil required for the general government sector to balance its budget), Azerbaijan could withstand a sustained drop in global oil prices without a severe deterioration of its fiscal and debt metrics.

The second driver underlying today’s rating action is the strong performance of Azerbaijan’s non-oil sector, which has benefited from the boom in oil revenues. High government spending on upgrading Azerbaijan’s infrastructure and developing new industries helped non-oil sector output expand by 9.4% last year, up from 7.9% in 2010. This strong performance has helped the economy avoid an outright contraction in output as oil production decreased sharply due to temporary, maintenance-related, disruptions in the country’s main Azeri-Chirag-Guneshli oilfields during 2011.

A high level of public investment in areas such as social infrastructure, construction and services will continue to be a key driver of non-oil sector performance. Going forward, Moody’s believes that strong government revenues should continue to support further development and diversification of the economy. The stable outlook on Azerbaijan’s Baa3 ratings reflects the government’s strong financial position and the deployment of oil revenues towards economic diversification, balanced against constraints stemming from weak governance indicators and geopolitical risks due to the impasse in the conflict over the Nagorno-Karabakh region.

Moody’s has today also aligned Azerbaijan’s local- and foreign-currency ceilings for bonds and deposits with the new government issuer rating of Baa3 to reflect the strong influence of the government over economic activity and the resulting default correlation between the national government, banks and other borrowers in the country.

 

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