S&P revises its outlook on Azerbaijan's sovereign credit ratings to stable

S&P Global Ratings has revised its outlook on Azerbaijan to stable from negative and affirmed its long- and short-term foreign and local currency sovereign credit ratings at 'BB+/B.'

Report informs citing an article of S&P Global Ratings.

"The stable outlook reflects our expectation that the ceasefire agreement between Azerbaijan, Armenia, and Russia will broadly hold, underpinning a reduction in war-related security, financial sector, and balance-of-payments risks," the article reads.

According to the article's authors, it also reflects S&P's view that a rebound in economic activity and comparatively higher hydrocarbon prices will, over the next 12 months, prevent Azerbaijan's fiscal and external positions from deteriorating materially from strong levels.

"We could consider an upgrade if external surpluses were higher than we expect, resulting in further external asset accumulation. This could happen, for example, if hydrocarbon revenue increases markedly," the article says.

According to S&P, the ratings upside could also build if the government implements reforms addressing some of Azerbaijan's structural impediments, including constraints to monetary policy effectiveness stemming from high financial dollarization and a still-weak domestic banking system.

"We do not expect material economic and financial sector risks to Azerbaijan's credit profile from the conflict [with Armenia] over our rating outlook horizon. Despite heightened geopolitical uncertainties, there has not been any increased conversion of domestic residents' savings to foreign currency or their outright withdrawal from the banking system," the S&P says in the article.

"We consider that Azerbaijan's fiscal and external stock positions remain among the strongest of sovereigns we rate in the 'BB' category, despite lower hydrocarbon prices and the COVID-19-induced economic slowdown. Large liquid government assets, projected at an average of about 74% of GDP in 2021-2024, will continue to provide a buffer against economic and financial shocks. Reflecting our oil price and production assumptions, and considering Azerbaijan's participation in the OPEC+ production cut agreement, we expect external receipts and fiscal revenue will gradually rise over the medium term. We expect that government's import-driven reconstruction measures in the territories surrounding Nagorno-Karabakh will, for now, have a moderate impact on fiscal and external flows," the S&P added.