MODERATELY STABLE RATING

In an environment of global economic instability and mounting geopolitical risks, the credit ratings of sovereign states take on heightened importance — both for investors and for the countries themselves.

The recent decision by international rating agency Fitch Ratings to affirm Azerbaijan’s investment-grade rating at “BBB-” with a stable outlook has sent a strong signal to financial markets. Despite its continued reliance on the hydrocarbon sector, Azerbaijan demonstrates a high level of macroeconomic resilience. This is supported by substantial foreign currency reserves, one of the lowest levels of public debt among peer countries, as well as a balanced and predictable monetary policy.

Ceiling upgraded

Fitch upgraded Azerbaijan’s country ceiling to “BBB”, indicating a reduction in the perceived risk of capital controls and restrictions on cross-border capital flows. This decision reflects positive developments in the management of macroeconomic and financial risks.

The upgrade was made possible by more effective liquidity management, a decline in dollarisation within the financial system, and the presence of substantial foreign currency reserves and assets denominated in foreign currencies.

As of April 2025, the share of deposits held in foreign currency declined to 40%. Although this level remains relatively high, it nonetheless reflects a gradual restoration of confidence in the national currency. Fitch also notes that the de facto peg of the manat to the US dollar contributes to the predictability of the financial environment.

Despite a stable macroeconomic situation and robust external buffers, Fitch identifies several factors that constrain the potential for further rating upgrades.

The primary structural risk remains the country’s heavy dependence on the oil and gas sector, which accounts for up to 90% of exports and approximately 32% of GDP. While the government has taken steps towards economic diversification, real progress in this direction remains limited. Among the key constraints, the agency points to the dominant role of the state in the economy, the underdeveloped state of financial intermediation, and the low level of foreign direct investment in non-energy sectors.

Meanwhile, according to the State Statistics Committee, investment in the oil and gas sector declined by 21.9% in January–May 2025, while investment in the non-oil sector rose by 11.7%. Nevertheless, the scale of these investments remains insufficient to effect a fundamental transformation of the economic structure.

Fitch also highlights persistent geopolitical risks and the need for continued improvements in economic policy, particularly in strengthening institutional capacity and enhancing the business climate.

"Another vulnerability lies in the limited effectiveness of the monetary transmission mechanism. Excess liquidity in the banking system, the narrow domestic financial market, and the high level of dollarisation undermine the Central Bank’s ability to influence the broader economy," Fitch Ratings stated.

Nonetheless, the agency notes that the Central Bank of Azerbaijan is taking steps to enhance transmission effectiveness. In particular, instruments are being developed to manage structural excess liquidity, which could improve the efficacy of monetary policy in the medium term.

Moderate growth

According to Fitch Ratings’ forecast, Azerbaijan’s economy will grow by 3.5% in 2025 and by 2.5% in 2026, slowing from 4.1% in 2024. The main drivers of this growth will be public investment and the development of non-energy sectors. In January–May 2025, it was the non-hydrocarbon sector that contributed 3.9% growth, whereas overall GDP rose by only 1.5%.

The development of new oil projects, including the exploitation of the "Garabagh" field, will also add to economic resilience. Analysts believe these developments could expand the country’s export potential over the medium and long term.

Fitch also expects the current account surplus to decline — from an average of 15.6% of GDP during 2021–2024 to 5.3% in 2025 and 4.9% in 2026. These projections are based on the assumption of stable global oil prices. However, geopolitical tensions — particularly the escalation in Iran-Israel relations — have already impacted oil price dynamics. Since mid-June 2025, prices have surged. Brent crude has risen by roughly 18%, nearing $80 per barrel, while WTI has climbed by 10%. Meanwhile, Fitch’s baseline forecast assumes an average price of $65 per barrel.

At the same time, Azerbaijan’s international reserves and assets of the State Oil Fund (SOFAZ) are expected to reach around $74 billion by the end of 2025 — equivalent to 98.4% of GDP. SOFAZ assets are projected to stabilise at around $62 billion in 2025–2026, or 79.3% of GDP, based on a $65 per barrel oil price. "We expect the country’s net foreign assets to average 67% of GDP during 2025–2026 — well above the median levels for ‘BBB’ and ‘A’ rating categories," the agency notes.

According to Samir Nasirov, Head of the Statistics Department at the Central Bank of Azerbaijan, the country’s strategic foreign currency reserves increased by $2.5 billion in the first quarter of 2025, reaching $73.5 billion. However, reserve assets simultaneously declined by $413 million.

Falling oil prices earlier in the year impacted the country’s external balance: in Q1 2025, Azerbaijan posted a balance of payments deficit of $413 million, compared with a surplus of $116 million the year before.

The deficit occurred despite a current account surplus of $1.14 billion, which was 33.9% lower than in the same period last year. The capital account remained nearly unchanged (deficit of $0.7 million), while the financial account recorded a $1.22 billion deficit — 23.2% lower than the previous year. Balancing items also turned negative — $330.5 million, which is 17.8 times the level of the previous year.

As Nasirov noted, the key contributors to the positive current account were the foreign trade balance and secondary income. According to Central Bank data, the trade surplus amounted to $2.4 billion, while secondary income reached $0.1 billion.

Responding to new challenges

It is well known that rising oil prices typically exert inflationary pressure. According to Fitch, given relatively low price levels, Azerbaijan’s average annual inflation is expected to reach 5.3% in 2025 and decrease to 4.6% in 2026, remaining within the Central Bank of Azerbaijan’s target corridor (4% ± 2 p.p.). The agency notes that a reduction in the CBA’s key policy rate is unlikely in the near term — the regulator is expected to maintain its current cautious monetary stance through to 2026, considering persistent inflation risks.

For January–May 2025, annual inflation stood at 5.9%. Fitch notes that this figure was partially driven by the low base effect from the previous year, as well as the increase in the minimum wage in the first quarter of 2025.

Amid a moderately stable inflationary environment, Azerbaijan is also experiencing shifts in its fiscal position. Fitch forecasts that beginning in 2025, the consolidated budget will move into deficit. According to the agency, this will be driven by oil price volatility, continued capital expenditure for the reconstruction of Garabagh, and elevated defence and social spending obligations. It should be noted that the state budget assumes a price of $70 per barrel, whereas oil had dropped to $66 before the Israel-Iran escalation on 13 June.

Nonetheless, Fitch points out that the fiscal situation could improve if non-oil revenues exceed expectations and some planned expenditures are not fully implemented. The authorities, in turn, reaffirm their commitment to the fiscal rule, which targets a reduction of the non-oil primary deficit to 13% of non-oil GDP by 2029 (down from 20.4% in 2024).

Fitch analysts emphasise that nearly 50% of total budget revenues currently come from non-oil sources. The government aims to increase this figure to 65% by 2029, though achieving this goal will largely depend on the sustained growth of the non-hydrocarbon economy — a prospect the agency still considers uncertain.

Additional risks to fiscal sustainability, according to Fitch, include oil price volatility and potential deviations from budget parameters due to defence and reconstruction-related expenditure.

Despite these challenges, Azerbaijan’s fiscal stability remains strong: gross public debt at the end of Q1 2025 stood at 20.4% of GDP, and is projected to average 21.5% in 2025–2026 — one of the lowest levels among Fitch-rated investment-grade countries.

The agency identifies large government deposits (10.4% of GDP at the end of 2024) and the assets of SOFAZ (around 81% of GDP) as key fiscal buffers.

Moreover, currency-related debt risks have declined markedly. By the end of 2024, the share of public debt denominated in foreign currency fell to 32%, down from a peak of 95% in 2017. In absolute terms, external debt declined by 41.5% over the same period.

In short, Azerbaijan continues to demonstrate its ability to maintain macroeconomic stability amid external shocks — whether due to global inflation, geopolitical conflict, or volatility in commodity markets.

At the same time, for sustained growth and future rating improvements, it will be necessary to enhance institutional quality, diversify revenue streams, and implement reforms in the financial sector. That said, Azerbaijan has already laid the groundwork for these changes — the only question is how swiftly and consistently its ambitious goals for economic transformation can be realised.