Home Vydané ratingové hodnotenia Aktuálne platné ERA rates AZERBAIJAN BB+, outlook Stable
ERA rates AZERBAIJAN BB+, outlook Stable
Piatok, 19 Október 2018

ERA issues the following unsolicited credit rating for Azerbaijan.

Long term unsolicited credit rating at level BB+. The agency expects a stable outlook for the following 12 months. The rated entity was notified on October 17, 2018, about the rating and after the notification there were no changes or amendments in the rating. This is the first release of the rating for distribution.

The credit rating assigned to Azerbaijan stems from an ongoing process of stabilization of the economy, yet sustained risks. The economy shows signs of stabilization based on inflation calming, improvements in real growth, and positive expectations on oil price dynamics. The long-term forward-looking indicators demonstrate certain improvement, though the overall assessment remains moderate on efficiency indices and low on political and economic stability.

Rating components

Macroeconomic factors

Economic factors

Low

Debt and current account factors

High

Public finance factors

Moderate

Private finance factors

High

Foreign dependency factors

Very high

Liquidity factors

Moderate

Final assessment

High

Forward-looking factors

Political and economic stability

Low

Efficiency and reforms potential

Moderate

Final assessment

Low

Overall score

Moderate

Final rating

BB+

Macroeconomic factors of rating assessment

Azerbaijan’s economy shows signs of stabilization after a period of drastic shock due to a plunge in oil prices and problems in the domestic banking sector

Azerbaijan’s economy demonstrates stabilization and improvement of growth perspectives:

After negative growth in 2016 and minuscule growth of 0.1% last year, Azerbaijan’s economy is expected to show a relatively firm dynamic of 1.5% this year. The recovery is mainly propped up by the non-oil sector of the economy with a 10% growth in January-August in the non-oil industry. Azerbaijan’s positive external sector balances resulted in a $2.4bln increase in reserve assets in 1H2018 ($1.97bln in 2017) and is expected to continue strengthening the reserve capabilities of the country, thus supporting its foreign currency solvency.

Calming inflation patterns amounted to 2.7% in January-August of 2018 (14% in 2017) and Azeri manat’s exchange rate stabilization signals the weakening of monetary pressure, a vital pre-condition for revived investments in the economy.

The Azeri oil-sector, while finding itself on the positive track and supporting overall stabilization, still brings about long-term risks to the economy in the long-run in that it’s dynamics remain vitally important for all sectors of the economy. So far, it is unreasonable to forecast the weakening of this dependence as investment activity is still depressed (capital investments decreased 2.6% in 2017 year-on-year and 12.8% in January-August of 2018). In 2017, the mining and quarrying sector’s share of total industry constituted 85%. Mineral fuels, oils and related by-products amounted to 89.5% of exports and 37% of Azerbaijan’s GDP corrected for net taxes.

Current account formation signals solidity in the country’s external sector and reserve’s increase potential:

The country’s economic growth is already driven by both the oil-sector and the non-oil sector. ERA’s oil price forecast predicts that the Brent Crude Oil Price will vary within the range of $60-70 a barrel, allowing the oil- sector to drive the overall economic performance up further. After negative current account figures in 2017 and a depletion of reserves accompanied by a growth in external debt in 2015-2017, improved economic performance is seen to continue strengthening external balances, reserves, and certain decreases in the sovereign’s indebtedness level, which has become the worst in the South Caucasus region. Azerbaijan’s national reserves (including SOFAZ assets and FX reserves) constituted USD41.3 bln, or 34.7% of GDP (in 2017), allowing to mitigate concerns of increased external debt and gross government debt.


Azerbaijan’s gross governmental debt (as % of GDP) has become the worst in the region

Img_1

Source: National authorities


Economic crisis featured with negative growth, currency shocks and widespread inflation is over:

After a nominal growth of 0.1% in 2017, Azerbaijan’s economy will remain in the phase of moderate economic growth in 2018-2019, amounting to around 1.5% a year.

The economy is finding itself in a more stable and predictable phase thanks to more moderate inflation and a relatively stable exchange rate of manat. As a result, the currency risk is mitigated and real incomes are entering the positive zone on the monthly basis (real incomes have been growing since January 2018 and real wages have been growing since May 2018). As this tendency continues throughout 2018-2019, one can expect a supportive demand side of GDP.

The banking sector remains vulnerable:

After the 2015 national currency devaluations and the IBA debt restructuring in 2017-2018, the Azeri banking sector is still burdened by a relatively significant level of overdue loans (14.4% in August 2018, 15.5% in October 2017). In addition, restructured loans amounted 25% by the end of 2017. The abovementioned factors increase risks and potential volume of governmental bailout, causing certain pressure on governmental balances. The somewhat high share of foreign currency loans is a point of concern as well (41% by end-2017 and 38% as of August 2018). At the same time, Azeri banks’ aggregate capitalizations showed signs of in late 2017, promising further improvement in 2018-2019.Loan volumes in the economy are still depressed and activity in the banking sector is stagnant.

ERA sees the potential for improvement in the banking sector associated with the IBA’s (International Bank of Azerbaijan) restructuring and a lagged rebound on the aggregate demand side. Thereby, low investment activity in the economy (-2.6% in 2017 in capital investments) is most likely to get closer to moderately positive figures. This tendency is also supported by a reduction in consumer inflation to the current 2-3% yearly. Even its reach of the 6-8% target corridor of the Central Bank of Azerbaijan in 2018-2019 is not a risk for it.


Dynamics of real loans directed to main sectors of Azerbaijan’s real economy, % year-on-year

Img_2

Source: National authorities

Forward-looking factors of rating assessment

Azerbaijan demonstrates average scores on all forward-looking indicators. However in recent years, the country has demonstrated improvements in all indices except Social Cohesion and Regulatory Quality.

Efficiency and reforms capacity:

Azerbaijan’s Reforms Capacity qualitative factors are estimated to be rather moderate with a better outcome pertaining to the Regulatory Quality sub-category and a slightly weaker estimation of the Government Efficiency sub-category. Within the South-Caucasus region Azerbaijan’s figures demonstrate the weakest conditions for efficiency enhancement and reforms capacities.

Political and economic stability:

Azerbaijan has slightly improved its figures of Political and Economic Stability qualitative factors since 2015, regaining in both the Rule of Law and the Control of Corruption categories, but demonstrating a slight lag in the Social Cohesion category. In the South-Caucasus, Azerbaijan’s forward-looking indicators are the weakest, and the gap is partially associated with differences in political system and institutional quality in the country as compared to that of neighboring Armenia and Georgia.

As the status of the Karabakh conflict remains unchanged, the risk of re-escalation is currently low and not in the forecastable agenda. However, if the risk materializes, it will trigger significant changes in domestic policy and indebtedness repercussions thereupon. Nonetheless, given the current conditions, it is considered as a negligible risk item.


Forward-Looking Indicators assessments of Azerbaijan in 2014-2017 (lower is better)

Img_3

Source: World Bank, ERA estimates

Outlook: Stable

The forecast has been assigned based on expectations of the Brent Crude Oil Price being within the range of $60-70 per barrel in 2018-2020, a stable political system, low risks of the Karabakh conflict re-escalating, with consumer inflation in Azerbaijan to be within the target-corridor of 6-8% in 2018-2019. Thus, the financial system as well as Azerbaijan’s governmental bodies will encounter much less intense inflationary and currency-reassessment pressure.

Key assumptions

The Stable outlook assumes that the rating will most likely stay unchanged within the 12-month horizon.

  • Relatively stable international market conjuncture on main Azerbaijan export commodities in 2018-2019
  • No re-escalation in the Karabakh conflict
  • Revival of domestic loans in 2018-2019 due to improved banking sector indicators and increased demand
  • Oil extraction in the volume of 39.8-40 millions tons of crude oil a year in 2018-2019

Potential outlook and/or rating change factors

A negative rating action may be prompted by:

  • Substantial deterioration of economic growth to the point of negative yearly dynamics, thus causing the deterioration of tax base and higher national reserves’ depletion
  • Escalation of the Karabakh conflict that may trigger budgetary imbalances and investment shrinkage
  • Drastic decline in oil-exports due to either volume decrease or price shocks consistently below $60/brl.

A positive rating action may be prompted by:

  • Government’s adherence to economic policy of industrial and exports diversification
  • Political stability, implying both regional and Azerbaijan’s domestic politics
  • Stable, positive real GDP growth throughout 2018-2022

Appendix 1. Peer-analysis materials

Accumulated indicators of peer-sovereigns in 2017

Kazakhstan

Azerbaijan

Russia

Georgia

Macroeconomic Indicators

Real GDP growth, %

4

0.1

1.5

5.0

Fixed capital investments,
% of GDP

17

22.2

17.3

13.8

External debt, % of GDP

103.4

22.81

32.8

109.1

Public debt, % of GDP

26

54.72

12.2

44,9

Unemployment rate, %

4.9

4.9

5.2

13.9

Population, million

18.3

9.6

146.8

3.73

Source: National authorities

Appendix 2. Major sovereign indicators

Indicators

2014

2015

2016

2017

2018_F

2019_F

GDP, bln USD

75235

52997

37863

40748

44100

47441

GDP growth rate, %

2.8

1.1

-3.1

0.1

1.5

2.1

GDP per capita, ‘000 USD

7.94

5.52

3.90

4.15

4.6

4.8

Population, mln

9477.1

9593

9705.6

9810

9898

9950

Unemployment, %

4.9

5.0

5.0

5.0

4.9

4.9

Labor force, mln

6.3

6.3

6.4

6.4

6.4

6.4

Personal income, ‘000 USD

5.3

4.2

2.9

2.9

3.2

3.42

Consumer inflation, Dec/Dec. %

1.4

4

12.4

12.9

5.9

5.7

Consumer inflation, year-average. %

1.4

4

12.4

12.9

6.0

5.9

Public debt to GDP, %

14.4

35

50.7

54.7

54.9

56.4

External debt to GDP, %

8.6

12.4

20

22.8

23

23.3

M2/International Reserves (%, end-year)

1.11

1.2

1.5

3.6

2.6

2.4

Gross Domestic Investment to GDP, %

23.64

21.18

10.3

6.8

6.83

6.8

Loans to economy, bln USD

23.5

21.8

16.4

11.8

11.7

12.6

National Fund, bln USD

13758.3

5016.7

3974.4

5334.6

6200

6200

International reserves, bln USD

18.93

5.81

4.21

6.11

6.7

6.9

Trade balance, bln USD

18.9

5.8

4.2

6.12

6.7

6.7

Exports, bln USD

27.3

15.0

12.5

14.1

15.3

16

Imports, bln USD

9.3

9.8

9.0

9.0

8.6

9.3

Current account to GDP, %

1.4

-0.1

-0.4

3.53

5.7

5.4

1As of 01.01.2018
2 IMF staff estimates
3 IMF staff estimates

Appendix 3. List of material data sources

International Monetary Fund

World Bank

Bank for International Settlements

The Central Bank of the Republic of Azerbaijan

The State Statistical Committee of the Republic of Azerbaijan

The Ministry of Finance of the Republic of Azerbaijan

Regulatory disclosure

The credit rating and outlook were issued in accordance with ERA methodology for sovereign entities in the version from July 4, 2018 (available at www.euroratings.co.uk. section Methodology). In the same section there is a rating scale including an explanation of the importance of each rating category and a default definition. Information on the rate of historical failure is available at www.cerep.esma.europa.eu and the explanatory statement of the meaning of those default rates is available at www.euroratings.co.uk (Regulatory Framework/Disclosure). This rating is issued as a solicited rating. The rated entity participated in the rating process by providing information and documentation. Other information was obtained from publicly available sources in accordance with ERA methodology. ERA had access to the rated entity’s internal documents. ERA, in the context of routine care, verified all sources entering the rating process. ERA considers the scope and quality of the information entering the analytical process to be sufficient to assign a credit rating. The disclosure of the rating and outlook was preceded by the approval of the Rating Committee. No actual or potential conflicts of interest have arisen. Since July 30, 2012, ERA has been a registered credit rating agency according to the of Regulation (EC) No 1060/2009 of the European Parliament and of the Council of September 16, 2009, on credit rating agencies.

Download pdf
Azerbaijan_Sovereign_Rating_Report.pdf

Approved by the Rating Committee:

Natalia Porokhova, Head of credit rating analysts

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