Azerbaijan's credit rating reflects the vulnerability of its economy, government finances and banking system to oil price volatility, global rating agency Moody's said Friday in its report.
'The drop in oil prices resulted in a prolonged recession in Azerbaijan and has put pressure on the government and external finances,' wrote Kristin Lindow, a Moody's Senior Vice President, in Moody's report.
'Although the government's finances are supported by a large sovereign wealth fund with a value equivalent to nearly 90 percent of GDP, the outlook for oil and gas revenue is sufficiently constrained that the government has limited flexibility to use the fund's resources for counter-cyclical fiscal policy that would soften the impact of lower oil prices,' she added.
Azerbaijan's economy contracted by 1.4 percent in the first half of 2017, compared to the same period a year ago, Moody's said.
The rating agency added that it forecasts Azerbaijan's economy to contract for the second consecutive year in 2017 as well.
'Oil prices remain relatively low and credit is continuing to shrink rapidly amid ongoing banking sector distress,' it said.
Moody's also said it estimates the country's fiscal deficit to GDP ratio would be 2.9 percent this year, and 1.8 percent next year, if crude oil prices would be in the range of $45-$55 a barrel during that period.
The agency, however, insisted that Azerbaijan's economy should diversify, given the high dependence on oil revenues.
It warned that Azerbaijan's 'Ba2' rating and 'stable' outlook would come under pressure if the government's balance sheet deterioration would continue beyond 2018.
By Ovunc Kutlu in New York
Anadolu Agency
energy@aa.com.tr