Fitch upgrades Azerbaijan's rating to BBB- with stable outlook

ISTANBUL

Fitch Ratings said Friday it upgraded Azerbaijan's long-term foreign currency issuer default rating to BBB- from BB+ with a stable outlook.

The rating agency said the upgrade reflects the country's robust external balance sheet, continued current account and fiscal surpluses, reduced foreign-currency vulnerabilities, low government debt and developing monetary policy.

Annual inflation remained below the central bank's target band of 4% in the first half of 2024 and it is expected to average 3.5% this year, before increasing to 4.7% by 2026, it said in a statement.

While Azerbaijan's central bank has paused its monetary easing cycle since May, Fitch does not expect additional rate cuts because of "the expected pick-up in inflation due to increased regulated prices and the projected increase in government spending from the 2024 amended budget."

The country's economy is forecast to recover to 3.2% but slowing to 2.7% next year and 2.3% in 2026, although it is expected to be still supported by public investment.

"Meanwhile, the drag of the oil sector will ease relative to previous years, due to new oil production that could slow the pace of the decline and higher natural gas production," said the statement.

Fitch warned that Azerbaijan's rating could be negatively affected if there is a deterioration in the economic policy mix that could result in macroeconomic and financial stability risks, or if there are increases in Azerbaijan's vulnerability to external shocks including oil price volatility.

Other negative effects include significant erosion of its balance sheet due to persistently lower commodity prices, and a more rapid decline in hydrocarbon outputs, or significant fiscal loosening.

Azerbaijan's rating could be positively affected if it continues to strengthen its economic policy framework and institutional capacity that enhance its capacity to absorb shocks.

Successful implementation of structural reforms that support improved governance and higher growth could also lead to a positive rating action, it added.