BAKU

Moody’s Investors Service has changed the outlook on Azerbaijan’s rating to “positive” from “stable” and affirmed the long-term issuer and senior unsecured debt ratings at Ba2.

“The positive outlook reflects Moody’s assessment that governance and in particular policy effectiveness is improving, albeit from a low base, which may raise the resilience of the government’s credit profile,” Moody’s said in a statement.

In particular, enhancements to the monetary and macro policy framework may promote stability in the external and banking sectors in the face of shocks, while continued effective use of sizeable fiscal buffers would allow counter-cyclical spending and limits the deterioration in the government’s fiscal and debt metrics.

The rating affirmation balances credit strengths from the country’s sizeable net creditor position that underpins fiscal strength and lowers government liquidity and external vulnerability risks, as well as relative domestic political stability that supports the implementation of oil and gas projects, against credit challenges including still limited prospects for economic diversification, longstanding institutional and governance weaknesses, and geopolitical tensions with neighbouring Armenia.

The affirmation of Azerbaijan’s Ba2 rating is underpinned by the government’s large net asset position — which in addition to providing fiscal flexibility also contains government liquidity and external vulnerability risk as discussed above — and the relative stability in domestic politics that will continue to facilitate the implementation of oil and gas projects and provide policy continuity.

Balanced against these credit strengths are the country’s still significant reliance on oil and gas to drive longer-term economic growth and support government finances, still limited prospects for economic diversification beyond this sector, as well as longstanding institutional and governance challenges and geopolitical tensions with Armenia that weigh on economic competitiveness.

Over the next 2-3 years, Moody’s estimates that growth will average around 3 percent, supported by ongoing reinvestment in the existing oil and gas fields — such as a new platform in the largest Azeri-Chirag-Guneshli field that will help sustain production at current levels for some time — and increased oil and gas production from the completion of ongoing projects at the Karabakh and Absheron fields.