ATTRACTIVE FOR INVESTORS

The stability of Azerbaijan's macroeconomic indicators in 1Q2021 has become one of the main factors that made it possible to successfully overcome the consequences of the pandemic crisis. These positive trends are confirmed by the assessments of Moody's Investors Service, which recently raised the financial stability rating of Azerbaijan. Such forecasts are based on the country's ability to maintain its position as a net creditor and the availability of sufficient foreign exchange reserves in sovereign funds.

Staying afloat and keeping it up

The steady trends emerging in recent months due to the success of the vaccination process indicate a post-pandemic recovery in the global economy. However, in the US and most European countries, this process is much slower than in China. Moreover, due to the increasing emission of money pumping up the economies with hundreds of billions of dollars and euros, there are serious market imbalances. The main risk for the world market is the uncontrolled inflation: due to the shortage, prices rose literally for everything, including grains and food, non-ferrous metals, lumber, semiconductors and microcircuits for the automotive industry, plastic and cardboard, etc. To get prevent greater price increases, manufacturers and traders are restocking stocks, and this exacerbates the scarcity, which can continue for a long time.

The imported inflation is felt throughout the post-Soviet space, including Azerbaijan. However, unlike its neighbours in the region, the government and the Central Bank of Azerbaijan (CBA) manage to keep the basic macroeconomic indicators within the forecasted limits. Thus, the national currency of the country withstood all the global pressure and retained the stability of the exchange rate of manat. This is especially noticeable amid the depreciation of the currencies of the main trading partners of Azerbaijan, including Turkey, Russia, Ukraine, Belarus, Kazakhstan, Georgia and Iran. According to CBA, the upward trend in world oil prices improves the balance of payments and forecasts, positively affects the stability of the foreign exchange market, while the confidence in manat helps to reduce dollarization in the banking sector.

Inflation rate in Azerbaijan has also been kept within the target range of 4%. “Despite the slightly changed forecast horizon, annual inflation reached 4.1% by March. There are no factors that could push inflation beyond the target range,” CBA Chairman Elman Rustamov said recently.

In general, according to Mr. Rustamov, in the current conditions, the monetary policy of CBA is aimed at maintaining an optimal balance between supporting economic growth and protecting macroeconomic stability. In particular, in order to stimulate economic activity during the year, the bank gradually reduced the discount rate from 7.5 to 6.25%. As a result, efforts to support the non-oil sector are gradually reaching their goal: demand for borrowed funds is recovering, and the lending activity of the banking sector is growing. The aggregate loan portfolio of banks in the first quarter increased by 1.4%, while mortgage loans increased even by 4.4%. Moreover, the extension of many macroprudential easing by CBA until July 1, 2021 will provide additional support for banks' lending activities.

Improving ratings

Stability of manat’s exchange rate, controlled inflation and the presence of a high level of gold and foreign exchange reserves contribute to the improvement of forecast expectations for economic growth and financial stability. In turn, this is a basic condition for increasing country ratings and the attractiveness of Azerbaijan for investors and creditors.

Thus, Moody's recently raised Azerbaijan's financial strength rating from A2 to A1. The agency believes that the current rating level is supported by Azerbaijan's strong position as a net creditor. In addition, despite the relatively high share of foreign currency debt, the volume of the country's sovereign funds covers all direct government debt and guarantees. Azerbaijan’s strategic gold and foreign exchange reserves exceed $51 billion, which is approximately 5.8 times more than the size of the external debt, which by the beginning of this year amounted to $8.8 billion.

Remarkably, earlier Moody's confirmed the long-term rating of the issuer and the rating of the priority unsecured obligations of Azerbaijan at the level of BA2 and improved the outlook from ‘stable’ to ‘positive’. This decision is due to the improvement of Azerbaijan’s monetary policy framework, which will help maintain stability in the banking sector despite possible shocks. Moody's also improved the forecast for the banking system of Azerbaijan, raising it from ‘negative’ to ‘stable’ due to the increase in macroeconomic indicators and the reduction of risks on the quality of banking assets. The country also noted progress in effective the use of significant budgetary funds, which will allow for countercyclical spending and limit the deterioration of budgetary performance and debt parameters.

Plus for the image

Obviously, the largely positive forecasts for the national economy are based on the rise in world oil prices and the increased demand for raw materials in recent months. We should also consider the progress of the vaccination process and the removal of some lockdown restrictions. Plans for budget financing of infrastructure and construction projects in Garabagh also play an important role here. Thus, the scale of contracted works will increase significantly, which will encourage the development of the non-oil sector, which raised by 4.1% in 1Q2021. All these factors indicate the growth of positive dynamics in the national economy.

Azerbaijan’s ability to diversify its economy, reduce national debt and maintain a strong external balance during the pandemic was also assessed by Fitch Ratings. The rating agency recently upgraded its rating outlook from ‘negative’ to ‘stable’ and affirmed Azerbaijan's long-term local and foreign currency issuer default ratings (IDRs) at ‘BB+’.

High appreciation of the macroeconomic and financial stability of Azerbaijan by rating agencies plays an instrumental role in shaping the country's image, increasing its investment attractiveness, and improving the forecasts of other international organisations. No wonder the International Monetary Fund (IMF) has improved its forecasts for the Azerbaijani economy and believes that in 2021 the country's GDP growth will exceed 2.3%. According to the World Bank, the growth rate will be 2.8%, increasing to almost 4% next year. In turn, Moody's experts estimate real GDP growth in 2021 at about 3.5%.

“International financial institutions monitored the work of the Azerbaijani government in the fight against the pandemic. Azerbaijan has achieved the growth of its credit rating by one degree. Last year, a radical optimization of the state budget was carried out. As a result, expenses were reduced in a number of spheres, having saved ₼431.1 million,” Azerbaijani Finance Minister Samir Sharifov said.

Of course, all these forecasts depend on the readiness of the Azerbaijani government to continue structural reforms, including the reduction of the still high dependence of the economy on the export of hydrocarbons, increasing efficiency in fiscal rules, reforms of state-owned enterprises, and their successful privatisation.

In general, the outlines of further reforms are indicated in the National Priorities for Socio-Economic Development: Azerbaijan-2030. Among other things, the government's efforts should be aimed at deep structural and institutional reforms, including the fight against the shadow economy, corruption, and monopoly. It is necessary to expand transparency in public administration, introduce methods of corporate governance at state-owned enterprises, and strengthen control over their borrowings. It is necessary to deepen the policy of maintaining foreign exchange reserves at a stable level, including by gradually reducing the share of transfers from the State Oil Fund to the state budget. All these measures are designed to strengthen the financial stability of the country, make it sustainable in the long-term, hence further increasing the international investment rating of Azerbaijan.