Baku: Moody’s Ratings released a report highlighting the conditions under which Azerbaijan’s credit rating could be upgraded. The report, shared with APA-Economics, indicates that the positive outlook is a result of improving economic diversification prospects and effective macroeconomic policies that may bolster Azerbaijan’s credit profile, aligning it with a higher rating level.
According to Azeri-Press News Agency, Moody’s has conducted a periodic review of Azerbaijan’s ratings, which includes its Ba1 long-term issuer ratings. These ratings are supported by Azerbaijan’s substantial financial assets managed by the State Oil Fund of Azerbaijan (SOFAZ), which enhance the government’s net creditor position. This financial buffer significantly reduces government liquidity and external vulnerability risks. Additionally, Azerbaijan’s monetary and macroeconomic policy improvements have contributed to stability in the external and banking sectors. The effective use of fiscal buffers has enabled countercyclical spending, limiting potential deterioration in fiscal and debt metrics. However, challenges such as governance issues and geopolitical tensions with Armenia remain.
The agency noted that Azerbaijan’s economy has exceeded expectations, with real GDP growing by 4.1% year-on-year in the first eleven months of 2024, and it is projected to maintain around 4% growth by the end of 2025. This marks a notable recovery from the modest 1.1% growth in 2023 and surpasses the 3% growth projected in July 2024. The non-oil sector continues to drive this robust performance. Despite this growth, the state budget deficits are expected to remain narrow, between 1-2% of GDP in 2024, which will limit borrowing needs and keep the debt burden under 30% of GDP.
Azerbaijan’s fiscal strength is further demonstrated by its “aa1” rating, attributed to the country’s strong net creditor position. The sovereign wealth assets are sufficient to cover all government direct debt and guarantees, despite a substantial portion of the debt being foreign currency-denominated.
The Middle Corridor’s increasing role as a critical transport link between Europe and Asia, along with ongoing investments, is enhancing economic prospects. However, the impact on economic strength will materialize gradually. Additionally, increasing European demand for Azeri gas and expanding renewable energy projects are expected to mitigate the effects of diminishing oil resources on Azerbaijan’s external accounts.
The report suggests that a downgrade in Azerbaijan’s rating is unlikely in the near term. However, escalating geopolitical tensions with Armenia or significant consequences from the Russia-Ukraine conflict that negatively affect economic activity and government finances could be detrimental to Azerbaijan’s credit status.
The Southern Gas Corridor’s (SGC) Ba1 rating and positive outlook remain unchanged, as it benefits from explicit government guarantees on all its foreign currency debt, aligning its rating with that of the Government of Azerbaijan.