Azerbaijan's Credit Rating: Time for a Fair Assessment?

Azerbaijan's Credit Rating: Time for a Fair Assessment? A country’s credit rating serves as a financial and investment passport, reflecting its economic stability, ability to service debts, and capacity to attract investments
Finance
January 13, 2025 16:27
Azerbaijan's Credit Rating: Time for a Fair Assessment?

A country’s credit rating serves as a financial and investment passport, reflecting its economic stability, ability to service debts, and capacity to attract investments. Despite showcasing significant economic growth year after year, Azerbaijan's credit ratings are lower than those of some countries with less developed economies. This disparity raises several questions.

Recently, President Ilham Aliyev, in an interview with local television channels, stated that the government observes positive changes in the attitudes of leading international rating agencies toward Azerbaijan. However, the head of state also noted that the country deserves a higher international rating than its current level, adding that, for certain reasons, the leading rating agencies are still displaying a modest approach.

What is Azerbaijan's Current Rating?

Last year, the three leading global agencies—Standard & Poor’s, Fitch Ratings, and Moody’s—affirmed Azerbaijan's relatively high credit rating, citing strong fiscal reserves and external balances as key advantages. Moody's upgraded its outlook to positive (Ba1, "positive"), reflecting optimism about economic diversification. Fitch Ratings raised the rating itself to investment grade (BBB-, "stable"), while S&P maintained a stable outlook (BB+/B, "stable").

The investment grade rating of BBB- from Fitch Ratings marks a return for Azerbaijan after nearly nine years. Back in February 2016, the decision to downgrade the rating came in the wake of a sharp drop in oil prices and the subsequent dual devaluations in 2015. However, due to government measures taken in subsequent years, the country's economy returned to a path of confident growth and successfully navigated the COVID-19 pandemic.

The other two agencies have yet to grant Azerbaijan an investment grade rating, but the country remains one step away in both cases. Moody's investment grade starts at Baa, while S&P, as with Fitch, begins at BBB-.

Why is an Investment Grade Rating So Important?

An investment grade rating signifies that the issuer is considered a reliable borrower with a low risk of default. Since credit ratings are influenced by various macroeconomic factors, including external balances, the current account surplus, fiscal surpluses, public debt, monetary policy, economic growth, and the efficiency of state institutions, a higher rating indicates that a country is stable, secure for business, and an attractive destination for investments.

Additionally, countries with high ratings can attract loans on international capital markets under more favorable terms, meaning lower interest rates. This helps reduce the budget's debt burden, freeing up savings to support socio-economic development.

A high credit rating enhances a country's international standing, solidifies its position on the global stage, and builds confidence in its national currency. Furthermore, an investment grade rating positively impacts various economic sectors. For example, companies can gain easier access to financing and attract investments to expand production and implement new projects. A strong rating also fosters the development of the securities market and increases its appeal to investors.

For these reasons, improving a credit rating is a strategic goal for any nation, as it supports sustainable economic growth, raises living standards, and strengthens international credibility.

Who Shares the Same Credit Rating as Azerbaijan?

It's important to understand that while the credit rating methodologies of the three leading agencies—S&P, Moody’s, and Fitch Ratings—share similarities, they also differ in key aspects. As a result, Azerbaijan's "credit neighbors" vary depending on which agency has assigned the rating.

For instance, S&P has assigned Panama, Oman, Morocco, and Colombia the same rating (BB+). Fitch Ratings, on the other hand, places Azerbaijan in a slightly different group with its investment grade BBB- rating, which is shared with Greece, India, Mexico, and Romania. Under Moody’s methodology (Ba1), Azerbaijan's peers include Brazil, Greece, Guatemala, Morocco, and Oman.

At the same time, Azerbaijan's rating is higher than that of several countries with large economies, such as Türkiye (BB-), Jordan (B+), Egypt (B-), Pakistan (CCC+), Iraq (B-), Uzbekistan (BB-), and South Africa (BB-).

Why Does Azerbaijan Deserve a Higher Rating?

Azerbaijan already outperforms countries with comparable or even higher ratings across numerous economic indicators.

For instance, Azerbaijan's net external creditor position is projected to reach 154% of GDP by the end of 2024 (according to Fitch)—the strongest figure among sovereigns rated BBB. Fitch also expects the country’s current account balance to remain in surplus over the coming years, marking it as the highest in the BBB category.

Sovereign assets in foreign currency reached $72 billion in 2024, significantly exceeding the levels seen in 2010 when the agency first upgraded Azerbaijan to an investment grade. Fitch notes that Azerbaijan's net sovereign asset position, projected at 71% of GDP in 2024, will remain the highest among sovereigns rated BBB or even A.

External debt has declined in absolute terms in recent years, and in the coming years, Azerbaijan's government debt is expected to remain among the lowest levels not only in the BBB category but across all Fitch investment-grade sovereigns—from BBB to AAA.

S&P highlights that Azerbaijan is significantly more transparent than many countries with the same rating (e.g., member states of the Gulf Cooperation Council) in terms of the structure of its sovereign wealth fund assets. The State Oil Fund of Azerbaijan (SOFAZ) publishes detailed audited annual reports with comprehensive information about its investment categories.

Moody’s has also repeatedly pointed to Azerbaijan’s strong fiscal discipline and effective fiscal policy. The agency noted a significant improvement in the consolidated fiscal balance, which shifted from a deficit of 6% of GDP in 2020 to a surplus of 8% in 2023.

Although the state budget remains in deficit, it is minor, amounting to about 1-3% of GDP over recent years. Fiscal flexibility during periods of stress—thanks to the efficient use of fiscal reserves—and the rapid return to prudent fiscal policy afterward are indicative of sound public financial management, Moody's emphasized last year. These factors contribute to strong fiscal indicators compared to similarly rated countries.

Existing Opportunities and Risks

Azerbaijan’s economy has several strengths, including a solid external balance characterized by substantial government reserves in foreign currency, a significant current account surplus, robust growth in the non-oil and gas sector, enhanced monetary policy efficiency, and several other factors.

In recent years, the Central Bank’s ability to manage domestic liquidity has significantly improved. The banking sector's condition has also strengthened, becoming less exposed to currency risks year by year due to declining dollarization. Additionally, the quality of banking sector assets has improved, while capital and liquidity positions remain stable.

Consistent fiscal surpluses help maintain strong sovereign external assets and prevent macroeconomic imbalances. They also provide flexibility in managing oil price volatility. Additionally, the government's commitment to reducing reliance on oil revenues in public finances is one of the key factors influencing Azerbaijan’s credit rating.

All three major rating agencies highlight the trend toward diversification, with increasing growth rates in the non-oil sector and expanding opportunities in both traditional and renewable energy. This includes the growing European demand for Azerbaijani gas, the implementation of new renewable energy projects in Karabakh and other regions, the delivery of green energy to European countries, and the construction of an underwater cable for electricity exports to the EU.

Stronger economic growth in the non-oil sector, driven by the development of cargo and passenger transportation, construction, ICT, and the expansion of retail trade, has contributed to Fitch upgrading Azerbaijan’s rating and Moody's improving its outlook. As of January-November 2024, Azerbaijan's non-oil economy grew by 6.4%. This strong trend of economic diversification is expected to continue in the coming years.

Amid positive developments, some challenges remain, addressing which could lead to an improved credit rating for Azerbaijan. Broadly speaking, when discussing the criteria necessary for a rating upgrade, agencies refer to the importance of continuing the measures already being implemented by the government. For instance, further strengthening the framework of economic policy and institutional capacity could enhance the country’s ability to absorb shocks. Special attention is also drawn to the need for developing capital markets.

Today, our country stands on the threshold of a new phase of recognition for its economic accomplishments. The question of fairness in assessing Azerbaijan by international agencies is not just about comparing numbers. It is a challenge to global standards, which should take into account actual resilience, growth prospects, and the ability to withstand crises.

Despite existing challenges, the country possesses all the prerequisites for a credit rating upgrade thanks to its strong sovereign assets, sustainable non-oil growth, and commitment to reforms. This makes Azerbaijan an attractive and reliable partner on the international stage.

Perhaps, it is time for rating agencies to reconsider their approaches and acknowledge this reality.

Azad Hasanov, analyst and expert in digital economy

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