S&P: Azerbaijan to continue to run twin fiscal and current account surpluses over next 3 years

S&P Global Ratings has affirmed its 'BB+/B' long- and short-term foreign and local currency sovereign credit ratings on Azerbaijan. The outlook is stable, Report informs referring to S&P website.

“The stable outlook reflects our expectation that, despite a projected medium-term decline in oil production, Azerbaijan's significant fiscal and external buffers will help to shield the economy against any renewed terms-of-trade shocks,” reads the report.

“Azerbaijan’s strong fiscal and external stock positions support the sovereign ratings. The government has accumulated substantial liquid assets within the sovereign wealth fund SOFAZ. We forecast that the government will have access to liquid assets of nearly 70% of GDP through 2027 and that gross general government debt will stabilize around 20% of GDP. We expect Azerbaijan will continue to run twin fiscal and current account surpluses over the next three years, which is based on our projected oil prices of $85 per barrel (/bbl) on average for the remainder of 2024 and $80/bbl thereafter,” S&P noted.

“At the same time, Azerbaijan's economy remains concentrated in the oil and gas sector, which accounts for close to 50% of GDP, and 80% of goods and services exports. Consequently, Azerbaijan remains vulnerable to any potential adverse changes in hydrocarbon prices.

In 2015, for example, on the back of lower oil prices, Azerbaijan's government deficit deteriorated by over 7 percentage points (ppts) of GDP, the current account weakened by 14 ppts of GDP, net reserves declined by over half, households and companies shifted savings into dollars, and the exchange rate was devalued. In our view, while Azerbaijan’s buffers are sizable, they cannot fully protect its concentrated economy from all the consequences of a drop in key export prices, especially if such a drop proved to be sustained, while a structural decline in oil production further constrains the size of these protective buffers,” reads the report.

S&P forecasts Azerbaijan’s growth at just below 2% on average over 2024-2027, reflecting stagnating hydrocarbon output and growth in the non-oil sector of 3%-4% annually.

“Azerbaijan’s economic growth has exhibited a stronger pattern throughout the first four months of 2024 with real GDP expanding by 4.3% year on year, predominantly driven by the non-oil sector, while the oil sector contracted. This follows a muted full-year growth performance of 1.1% in 2023. Over January-April 2024 the non-oil sector grew by almost 8% with an expansion of cargo and passenger transportation, information and communication services, and retail trade turnover,” S&P added.

The authors also noted the strong growth in the construction sector, which reflects the investments in the liberated Azerbaijani lands.