FROM STABILITY TO FAIRNESS

Azerbaijan's economy continues to demonstrate resilience and the ability to adapt effectively to external changes amid growing volatility and instability in global financial markets. These positive trends are further confirmed by recent assessments from international rating agencies and financial institutions.

Currency Position

Fitch Ratings has confirmed the Azerbaijan Long-Term Foreign-Currency Issuer Default Rating (IDR) at "BBB-" with a stable outlook. This decision is based on the country's ability to maintain its position as a net creditor and its substantial foreign currency reserves in sovereign funds.

The investment-grade rating reflects confidence in Azerbaijan as a reliable borrower with a low risk of default. The rating also underscores the country's strong macroeconomic indicators, including a robust external balance, low public debt, and significant assets in the State Oil Fund of Azerbaijan (SOFAZ).

According to Fitch Ratings, Azerbaijan's sovereign foreign currency assets reached $76 billion by the end of 2024, equivalent to 102% of the projected GDP. This figure significantly exceeds the levels recorded in 2010, when the country was first assigned an investment-grade rating. The majority of these assets (83%) are held in SOFAZ, with the remainder stored in the reserves of the Central Bank of Azerbaijan (CBA).

During a press conference, CBA Chairman Taleh Kazimov reported that the central bank's foreign currency reserves amounted to $11 billion by the end of 2024.

A positive trade balance of $5.5 billion was recorded, which is a key component of the current account balance. Kazimov also emphasised that stability was maintained in the foreign exchange market in 2024, and demand for foreign currency was fully met at all auctions conducted by the Central Bank.

Despite a decline in export revenues due to falling oil prices (oil and gas revenues account for 89% of total exports), the current account surplus in 2024 stood at 6.5% of GDP, with expectations for it to remain at 6.2% in 2025-2026. This will contribute to the continued accumulation of foreign currency assets and strengthen the country's economic resilience.

According to Fitch, Azerbaijan's net external creditor position has improved to 153% of GDP, achieving the highest rating in this category.

Fiscal Policy and Macroeconomic Indicators

In 2024, Azerbaijan's consolidated budget surplus saw a substantial decrease. This was due to increased government spending, including social payments and costs related to the reconstruction of Garabagh and Eastern Zangazur. However, this was partially offset by an increase in non-oil revenues, partly resulting from the expiration of pandemic-related tax exemptions and income from SOFAZ assets. Fitch anticipates that Azerbaijan's fiscal policy in 2025-2026 will prioritize budget sustainability, though pressure from social and defense expenditures is expected to persist.

In 2024, Azerbaijan's GDP growth reached 4.1%. This was achieved through a slowdown in the decline of oil production, as well as economic activity related to the reconstruction of territories liberated from occupation. Fitch forecasts GDP growth of 3% in 2025 and 2.4% in 2026. The primary reasons for this slowdown are expected to be reduced oil production volumes and a gradual shift toward developing non-oil sectors of the economy.

The Ministry of Economy of Azerbaijan has a more optimistic outlook, projecting GDP growth of 3.5% in 2025 and 2.8% in 2026. Government investments in infrastructure projects and increased natural gas production are expected to play a key role in supporting the economy, partially offsetting the decline in the oil sector.

The gradual reduction of dependence on the oil sector is part of Azerbaijan's long-term strategy to diversify its economy. This is a crucial step toward enhancing resilience to global challenges, particularly volatility in energy markets.

In terms of another important macroeconomic indicator, inflation, Fitch reports that it stood at 2.2% in 2024, significantly below the average for countries with a "BBB" rating. However, the agency predicts that consumer price growth will approach 5.3% in 2025, exceeding the average forecasted inflation rate of 3% for countries in this category. This increase is attributed to rising prices for regulated goods and stronger domestic demand driven by government support for the economy. The Ministry of Economy projects average annual inflation at 4.6% by the end of 2025, while the Central Bank estimates it at 5.8%. This approach is influenced by both external and internal factors, including rising prices for imported goods, increased costs for infrastructure projects, and the need for investments in economic modernization. Nevertheless, experts are confident that maintaining stable monetary policy and prudent fiscal management will help contain inflationary risks.

As Fair As It Gets

Despite Azerbaijan's evident economic achievements, international rating agencies such as Standard & Poor's and Moody's have maintained a cautious approach in their assessments. In an interview with local media, President Ilham Aliyev noted that the government has observed positive changes in the attitudes of leading international rating agencies towards Azerbaijan. However, he acknowledged that current ratings do not fully reflect the country's economic successes, and that the agencies continue to adopt a cautious stance for reasons that are not fully understood.

It is noteworthy that last year, Moody's upgraded Azerbaijan's rating outlook to positive ("Ba1"), reflecting optimism about the prospects for economic diversification. Meanwhile, S&P maintains a stable outlook ("BB+/B"). Both ratings are just one step away from investment grade. For Moody's, investment grade begins at "Baa", while for S&P, it starts at "BBB-", the same as Fitch.

S&P highlights that Azerbaijan demonstrates significantly greater transparency than countries with similar ratings, including members of the Gulf Cooperation Council. SOFAZ is particularly noteworthy in this regard for publishing detailed audited reports that provide a comprehensive breakdown of investment categories. Moody's has repeatedly emphasised Azerbaijan's high level of fiscal discipline and effective fiscal policy.

In order to upgrade the country's rating, the agencies have identified three key areas for improvement: strengthening institutional capacity — improving the efficiency of public institutions and economic governance; developing domestic capital markets — creating conditions for attracting private investment and fostering non-oil sector growth; and reducing dependence on oil revenues — diversifying the economy to mitigate vulnerability to energy price fluctuations.

These objectives are already being actively pursued through structural reforms and government investments in non-oil sectors.

Experts are confident that Azerbaijan's financial stability, SOFAZ's transparent operations and successful macroeconomic management make the country a reliable partner for investors. These factors underscore the need for international rating agencies to reassess their approach to evaluating Azerbaijan. A higher credit rating would be a significant step towards strengthening Azerbaijan's position on the global investment stage.