28 iyul 2017-ci il tarixində “Standard ənd Purz” (Standard and Poor’s) reytinq agentliyi Azərbaycan Respublikasının suveren kredit reytinqinin ənənəvi qiymətləndirməsini aparmış və müvafiq hesabatını açıqlamışdır.

Maliyyə Nazirliyinin mətbuat xidmətindən "Marja"ya daxil olmuş məlumata görə, agentlik Azərbaycan Respublikasının uzunmüddətli və qısamüddətli xarici və milli valyutada suveren kredit reytinini dəyişməyərək müvafiq olaraq 'BB+/B' səviyyəsində, "mənfi" proqnoz ilə saxlamışdır.

“Standard ənd Purz” reytinq agentliyinin yaydığı son hesabatda reytinqin dəyişməz olaraq saxlanılmasına əsas səbəb kimi ölkənin möhkəm fiskal mövqeyi, xüsusiylə Azərbaycan Respublikası Dövlət Neft Fondunun xarici valyutada ehtiyyatlarının mövcudluğu göstərilir.

Agentlik hesab edir ki, tədiyə balansına olan təzyiqlərin aradan qalxacağı, ölkənin iqtisadi inkişaf göstəricilərinin gözlənilən artımı və daxili bank sistemində sabitliyin möhkəmlənməsi nəticəsində reytinq üzrə proqnoz mənfidən müsbətə keçirilə bilər.

OVERVIEW

Azerbaijan's economy is slowly recovering from the 2014-2015 terms of 
trade shock.

The government's fiscal and foreign exchange buffers remain significant.

We are affirming our 'BB+/B' ratings on Azerbaijan.

The negative outlook reflects the risks of the country's external 
performance becoming weaker than in our baseline forecast over the next 
six to 12 months.

RATING ACTION

On July 28, 2017, S&P Global Ratings affirmed its long- and short-term foreign
and local currency sovereign credit ratings on the Republic of Azerbaijan at 
'BB+/B'. The outlook for the long-term ratings remains negative.

OUTLOOK

The negative outlook primarily reflects the risks of Azerbaijan's external 
performance being weaker than in our baseline forecast over the next six to 12
months.

 We could lower the ratings if:

Balance of payments pressures do not recede, leading, for example, to a 
further decline in central bank reserves or accumulated savings in 
Azerbaijan's Oil Fund (SOFAZ); or

The government's fiscal flexibility is reduced, for instance because 
containing spending becomes challenging for political reasons.

We could revise the outlook to stable if balance of payments pressures abated 
while the country's growth prospects and domestic banking system stability 
improved.

RATIONALE

Our ratings on Azerbaijan are primarily supported by the sovereign's strong 
fiscal position, underpinned by the large stock of foreign assets accumulated 
in the sovereign wealth fund, SOFAZ. The ratings are constrained by weak 
institutional effectiveness, the narrow and concentrated economic base, and 
limited monetary policy flexibility.

Institutional and Economic Profile:Adjustment to lower commodity prices 
continues but growth is set to gradually strengthen

We expect Azerbaijan to experience a second year of recession with output 
contracting by 1% in 2017.

Economic performance should gradually strengthen thereafter but still 
remain below that of other countries at a similar level of economic 
development.

Azerbaijan's institutional arrangements remain weak and we expect limited 
progress on the structural reform front over the next few years.

This year, Azerbaijan's economy has continued to adjust to lower commodity 
prices. More than a year after the devaluation of the manat, the repercussions
are still being felt, not least in Azerbaijan's weakened financial sector.

We forecast the Azerbaijani economy will remain in recession in 2017 with 
output projected to contract by 1% in real terms, after contracting by just 
over 3% in 2016, as the devaluation of the manat and public spending cuts 
constrained demand and confidence.

We project investment will begin to recover this year owing to the ongoing 
work on the Southern Gas Corridor project, which is intended to bring Azeri 
gas from the offshore Shah Deniz Stage II gas field (SDII) in the Caspian 
first to Turkey at the end of 2018 and eventually to Europe by 2020. At the 
same time, we anticipate that consumption growth will be lacklustre reflecting
elevated inflation, and the rise in precautionary savings. We also expect 
exports to contract this year in real terms owing to both Azerbaijan's 
participation in OPEC output cuts and the natural aging of the country's 
oilfields. We understand that, absent sustained investment, oil production 
will likely decline gradually over our four-year forecast horizon.

We expect the economy will turn the corner in 2018 with growth strengthening 
further and reaching 3.5% in 2019. The launch of new gas exports from SDII is 
the key factor underpinning this forecast. Additionally, we consider that 
consumption and non-hydrocarbon-related investments should post a stronger 
performance as confidence improves and inflation subsides.

Still, even with the launch of the large SDII field, we expect Azerbaijan's 
growth to lag that of countries at a similar level of economic development 
over the next few years. At present, gas exports account only for an estimated
2% of total exports. Even as production is expanded threefold, this is 
unlikely to bring back the pre-2008 growth rates that emerged on the back of 
rapid expansion of oil output at the time.

More generally, we believe that at a time of lower and more volatile oil 
prices, the economic outlook for heavily commodity-reliant Azerbaijan will 
depend on the authorities' reform agenda, including efforts to improve the 
business environment and ultimately diversify the economy away from 
commodities. At present, we do not expect significant progress on the 
structural reform front.

We view Azerbaijan's institutional arrangements as weak, characterized by 
highly centralized decision-making, which lacks transparency and makes future 
policy responses difficult to predict. Political power remains concentrated 
around the President and his administration, with limited checks and balances 
in place. The referendum in September 2016, followed by amendments to 
Azerbaijan's constitution, has further centralized the president's power, in 
our view.

Flexibility and Performance Profile: The balance sheet is strong but balance 
of payments vulnerabilities persist

A strong fiscal position is the main factor supporting the ratings.

Nevertheless, net debt has risen rapidly reflecting the materialization of
contingent liabilities at International Bank of Azerbaijan (IBA).

External position remains strong on a stock basis but downside risks 
persist.

Monetary policy effectiveness is limited.

Azerbaijan's strong fiscal position remains the main factor supporting the 
sovereign ratings. It is underpinned by the large foreign assets accumulated 
in the sovereign wealth fund SOFAZ. We forecast these will amount to about 80%
of GDP at year-end 2017, and the sovereign will remain in a net asset position
averaging 40% of GDP over the four-year forecast horizon.

Even though the sovereign balance sheet is still strong, fiscal pressures 
remain elevated. We forecast that the consolidated budget will post a deficit 
of 3.2% of GDP in 2017, following deficits averaging 3% in 2015-2016. This 
compares to a decade of average fiscal surpluses of almost 7% of GDP. The 
projected deterioration of fiscal performance this year primarily reflects the
one-off transfer from the country's sovereign wealth fund SOFAZ to the Central
Bank of Azerbaijan (CBA), which has previously spent most of its reserves 
defending the peg that was later abandoned. We understand that this transfer 
is needed to underpin confidence and arrest the balance of payments crisis of 
2015-2016.

Net of the transfer to CBA, we estimate the consolidated budget at close to 
balance. We note the high fiscal flexibility on the expenditure side 
reflecting both the high level of capital spending and the government's 
willingness to quickly adjust spending when required. This has prevented the 
fiscal flow performance from weakening further over the last two years. 
Looking ahead, budgetary outcomes will also be supported by the weaker 
exchange rate, launch of gas exports from SDII, and some recovery in oil 
prices. The latter should be particularly important as Azerbaijan's government
revenues remain substantially dependent on the hydrocarbon sector. Still, we 
continue to see downside risks to fiscal performance and flexibility, 
particularly if keeping expenditures under control becomes difficult for 
social or political reasons given the already sharp adjustment in living 
standards.

Importantly, however, general government debt has expanded at a considerably 
faster pace than the headline deficits imply over the last two years. This is 
primarily due to the materialization of contingent liabilities in the banking 
system: the government has contributed substantial resources to the majority 
state-owned International Bank of Azerbaijan in 2016. In May 2017, the bank 
announced its intention to undertake a debt restructuring to address its weak 
financial position (see "Azerbaijan 'BB+/B' Ratings Affirmed Following 
Announced IBA Debt Exchange; Outlook Remains Negative," published May 26, 
2017).

On July 18, the proposed exchange was approved by the creditors. In line with 
our previous expectations, the government will therefore assume additional net
debt of roughly 9% of GDP in relation to IBA--6% due to the direct assumption 
of IBA's foreign liabilities, and another 3% from SOFAZ's deposit at IBA, 
which we now exclude from our calculation of government liquid assets.

We do not expect IBA's debt exchange to lead to broader repercussions for 
other banks. Still, we believe that the domestic banking system remains weak 
and vulnerable to difficult economic conditions. The CBA reports nonperforming
loan levels of close to 12% as of May 2017 but we consider this to be an 
underestimate, with the actual amount of toxic assets being higher.

Mirroring the developments on the fiscal side, Azerbaijan's external position 
remains strong on a stock basis, and we expect the country's liquid external 
assets to exceed external debt for the foreseeable future. Nevertheless, 
Azerbaijan's net external asset position (external assets net of external 
liabilities) is weakening and could decline to a level insufficient to fully 
mitigate the risks from its volatile export revenue base, constraining the 
government's ability to respond to potential adverse shocks in the future.

We currently project a gradual improvement in external flows, which should 
help arrest the decline in accumulated buffers. However, if that does not 
happen, ratings pressure could emerge. This could result from a combination of
weaker-than-projected oil prices and delays in the SDII gas project launch, 
among other factors. We also note the only limited available data for 
Azerbaijan's balance of payments and international investment position, which 
possibly leads to an underestimation of external risks.

Our ratings on Azerbaijan remain constrained by the limited effectiveness of 
its monetary policy. We believe that the increased flexibility of the manat 
exchange rate has helped lessen external pressures and husband foreign 
exchange reserves.

At the same time, apart from setting the country's foreign exchange regime and
undertaking interventions, the CBA's ability to influence economic 
developments remains considerably constrained. We estimate that the resident 
deposit dollarization remains at over 60%, which in our view severely limits 
the CBA's attemp to influence domestic monetary conditions. In addition, 
Azerbaijan's local currency debt capital market remains small and 
underdeveloped, while CBA's operational independence remains limited.

KEY STATISTICS

Table 1

 RATINGS SCORE SNAPSHOT