FROM TURBULENCE TO STABLE GROWTH

International rating agencies Standard & Poor's and Fitch Ratings have revised and updated their forecast on Azerbaijan’s long-term issuer default rating in foreign and national currencies from negative to positive affirming it at BB+.

In parallel, Moody's has published its Outlook for CIS sovereigns, stating that the outlook for 2018 is stable as improving growth offsets persistent debt, banking and political risks. Analysts of the agency predict moderate but steady growth of the Azerbaijani economy.

End of shaking

In early 2016, top three rating agencies reduced Azerbaijan's sovereign rating from investment BBB- to speculative BB+ with a negative outlook.

The decline was due to the effects of a sudden and noticeable drop in oil prices in the world. Two subsequent devaluations of the national currency, manat, aimed at saving the melting currency reserves of Azerbaijan. This led to a double-digit inflation, which has hardly reached 2% after the preceding devaluations in 2013-2015.

In 2016, when Azerbaijan’s GDP fell by 3.8%, rating agencies confirmed the negative outlook for the national economy. A year later, the situation changed radically. In 2017, Azerbaijani economy left the turbulent zone with a growth rate of 0.1%. The experts of rating agencies announced the end of the negative period that began in late 2014.

According to Standard & Poor's, Azerbaijan's GDP growth in the next four years will reach an average 3.3%, while the inflation rate will be 8% in 2018 and approximately 5% in the next three years.

The hydrocarbon factor

Given the increasing global oil prices, international experts expect the further growth of Azerbaijan’s foreign exchange reserves, including the savings of the State Oil Fund of the Republic of Azerbaijan (SOFAZ) largely due to the improved outlook of Azerbaijan's sovereign rating because of the rising global oil prices.

Experts have praised the conservative approach of the Azerbaijani government in forecasting world oil prices and the moderate use of SOFAZ reserves. S&P predicts an average oil price at $60 and $55 per barrel in 2018 and 2019, respectively. According to Fitch’s estimates, oil will cost an average of $52.5 and $55 per barrel in 2018 and in 2019, respectively. Moody's also expect that the oil prices in medium term will vary between $40-60 per barrel. The Azerbaijani budget for this year is based on $45 per barrel.

According to Moody's, the current level of oil prices reduces pressure on trade in Azerbaijan, Russia, and Kazakhstan. In general, the sovereign issuer outlook for the CIS countries for 2018 remains stable, given the economic growth in these countries and stable oil prices.

Experts are also positive about the production sharing agreement on the Azeri-Chirag-Gunashli field extended until 2050. The agreement is scheduled to deliver another $3.6b in equal portions to the SOFAZ in the next eight years. S&P analysts believe that the production of natural gas from the Shah Deniz field and its supplies to European markets will be of particular importance for Azerbaijani economy.

According to international experts, even in the worst-case scenario, SOFAZ’s assets will reach about 60% of GDP by the end of 2018.

Towards investment rating

Oil and gas sectors of the national economy remain the main sources of foreign currency inflow to Azerbaijan. In parallel, one of the most important prerequisites to restore Azerbaijan's investment rating is the acceleration of economic diversification, in particular, through the improvement of exports structure.

Azerbaijan has prepared a reliable base for considerable progress in the non-oil industry and its export growth. In 2017, the growth of non-oil export products was implemented at the expense of the agrarian sector. In 2018 however, the share of non-oil industry is expected to increase.

In 2018, it is planned to open large enterprises in automotive, textile and pharmaceutical industries. New chemical companies SOCAR Polimer and SOCAR Carbamid will increase exports in non-oil sector by hundreds of millions of dollars.

Undoubtedly, the Alat Free Economic Zone (FEZ) offering maximum freedom for business organization for investors and entrepreneurs will certainly contribute to the increase of Azerbaijan’s sovereign rating.

For international analysts, the most alarming factor for today is the fact that domestic borrowed capital markets remain small and underdeveloped for business development. Accordingly, the transition from the oil and gas economy to the non-oil economy is somewhat complicated by the limited access of the business community to financial resources.

Meanwhile, the Director of the Center for Analysis of Economic Reforms and Communications, Vusal Gasimli, noted that positive trends are clearly visible in the financial and banking sectors. "The stability of manat, gradual decline of inflation rate and dollarization, increase of bank profits, capital injection into the banking sector and other factors are the results of reforms in financial and banking sectors. This all also positively affects our credit rating," said Gasimli.

According to Gasimli, international rating agencies have acknowledged the results of reforms and confirmed Azerbaijan’s leading status in the implementation of reform among the CIS countries.

"The credit rating is a good opportunity for sovereign and pension funds and other investors to assess the solvency of Azerbaijan. The higher the credit rating, the more preferences the country can get for attracting loans. In addition, the high credit rating improves the access of Azerbaijani companies to foreign markets, and contributes to the development of the securities market," reported Trend news agency.

Thanks to the implemented reforms, Azerbaijan has been confidently leaving the turbulent zone shaped as a result of falling oil prices. The country’s outlook upgraded by the leading world rating agencies from "negative" to "positive" allows to reconsider Azerbaijan's sovereign rating on investment.