Fitch revises Azerbaijan's Outlook to Positive

Fitch Ratings has revised the Outlook on Azerbaijan's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'BB+', Report informs, citing the agency.

"The rating is supported by Azerbaijan's very strong external balance sheet, the lowest public debt in the peer group, and financing flexibility from large sovereign wealth fund assets," the agency said.

Set against these factors are weak governance indicators, lack of predictability of economic policy-making, high banking sector dollarisation, heavy dependence on the hydrocarbon sector, and lingering geopolitical risk of conflict with Armenia.

"The non-energy sector drove GDP growth of 5.8% in 8M22, helped by pent-up pandemic demand, higher Russian remittances and a boost to the transportation sector following the war in Ukraine," the agency said.

Fitch forecasts growth of 4.3% in 2022, falling to an average 2.3% in 2023-2024.

The agency said that greater EU demand for Azeri gas, which led to July's agreement to near double exports to the EU by 2027, could result in new investment.

Fitch named the factors that could, individually or collectively, lead to negative rating action/downgrade:
- External Finances: Lower energy prices sufficient to have a material negative impact on external buffers

- Macro: Developments in the economic policy framework that undermine macroeconomic stability, such as contributing to a rapid erosion of the sovereign's external balance sheet, with adverse effects on the economy, banking sector and public finances

Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Public Finances: Greater confidence that the strong public balance sheet will be preserved, for example, based on a credible medium-term fiscal strategy, stronger institutional safeguards to the fiscal rule, or prolonged high energy prices

- External Finances: Further strengthening of the external balance sheet, for example, due to sustained high energy prices

- Macro: Improvements in the effectiveness and predictability of Azerbaijan's policy framework, including exchange rate policy, to manage external shocks and reduce macro volatility