Home Ratings and Research Currently valid ERA affirms BB+ rating to Azerbaijan, outlook Stable
ERA affirms BB+ rating to Azerbaijan, outlook Stable
Friday, 12 April 2019

Affirmation of the unsolicited credit rating BB+ assigned to Azerbaijan stems from the ongoing process of economic stabilization based on reduced inflation, improvements in real growth, and relatively stable oil prices. The assessment is also supported by the presence of a sovereign fund with assets worth more than 80% of GDP. The assessment is constrained by the economy's high dependency on the oil sector, vulnerabilities in the banking system, and weak governance factors.

Rating components

Macroeconomic factors

Economic factors


Debt and current account sustainability factors


Public finance factors


Private finance factors


Foreign exchange stability factors


Liquidity factors


Final assessment


Forward-looking factors

Political and economic stability


Efficiency and reforms potential


Final assessment


Overall score


Final rating


Macroeconomic factors of rating assessment

Azerbaijan's economy has shown signals of stabilization after a period of drastic shock due to a plunge in oil prices and problems in the domestic banking sector. The negative oil shock has rapidly increased the government debt-to-GDP ratio, however the presence of a sovereign fund provides some cushion to tackle potential future economic shocks. Nevertheless, the economy's high dependency on the oil sector makes it susceptible to negative development in the oil markets.

Economic recovery from negative oil price shock:

The economy of Azerbaijan is currently recovering from a negative external shock which was represented by the fall of oil prices from 2014 to 2015. This shock affected the economy via two channels: the devaluation of currency and a drop in budget oil revenues.

The devaluation occurred when the inflows of oil revenues fell (between 2014 and 2015, crude petroleum export sales fell by more than 50%). The central bank was unable to maintain its dollar peg and had to devalue the currency against the dollar twice - 54% overall.

The devaluation of the currency sent the inflation up to double-digit levels. The central bank had to counter this development with a sharp increase in interest rates from 3% to 15%. The monetary shock was exacerbated by banks' weakened balance sheets that were hit by the devaluation, which had a negative impact on lending; this decreased by more than 45% between 2015 and 2017. According to the WEF survey for 2017-2018, access to credit was the most problematic factor for doing business (as claimed by almost 17% of respondents).

The second channel materialized as a decline in budget oil revenues; budget revenue contracted by more than 15% between 2013 and 2017 in local currency terms. This subsequently resulted in lower public investments. Capital investment fell by almost 17% between 2013 and 2016. Considering that public investment is a major source for the non-oil economy's growth, this has also seen a strong contraction.

In 2016, the economy contracted by 3.1% in real terms. Subsequent stabilization and rising oil prices, combined with increased competitiveness following the devaluation of the manat, helped the economy recover. In 2018, economic growth accelerated from 0.1% to 1.4%, driven mainly by the non-oil sector, which grew by 1.9%. The recovery should continue, with both the government and the IMF expecting the economic growth to accelerate to around 3.5% in 2019. Inflation has also been stabilized, dropping down from 12.8% in 2017 to below 3% in 2018, allowing the central bank to ease its policy. Its refinancing rate declined to 9%.

GDP growth (%) in Azerbaijan compared to its peers


Source: IMF

However, the outlook remains uncertain given the economy's high dependence on oil and the volatility present in the oil market, which is maintained considerably by the growth of shale oil extraction in the US. The oil industry accounts for more than 40% of GDP (net taxes on products and imports), with exports of hydrocarbons and hydrocarbon-based products accounting for around 90% of exports in 2017. In the case of repeated significant falls in oil prices, we could see a situation similar to the one in 2015-2016. On the other hand, any significant increase in oil prices would bring a positive shock for the economy.

Devaluations have increased the public debt:

The negative oil shock also significantly affected the country's public finances. As most of the public debt was denominated in foreign currencies, the public debt to GDP ratio jumped from 8.5% in 2014 to 22.6% in 2017 due to the devaluation, according to the IMF. To a lesser extent, this was also caused by the deficit budgets from 2015 to 2017. The stabilization of the economy also brought about the stabilization of public finances. The budget returned to a surplus in 2018 and the debt-to-GDP ratio has begun to decline; estimates predict that it should fall below 20% in 2018. Despite a more than twofold increase, the direct debt-to-GDP is still very low by global standards and much lower than that of its regional peers. On the other hand, in addition to the direct debt, the government also guarantees loans worth around 30% of GDP, which constrains the assessment of the fiscal position.

If the price of oil remains at current levels, the debt-to-GDP ratio is likely to continue to decrease. However, if the manat falls again under strong pressure in the event of falling oil prices, further devaluation and debt-to-GDP growth cannot be ruled out. This is true despite the new fiscal rules adopted in 2018 with the objective of limiting the public debt in relation to GDP. Moreover, lower prices would reduce government revenue, which would cause the debt to government revenues ratio to increase.

General government debt (% GDP) and USDAZN exchange rate


Source: IMF, Central Bank of the Republic of Azerbaijan

Banking sector remains vulnerable:

Currency devaluation had a negative impact on banks' balance sheets. The increase of debt servicing costs, especially in foreign currencies, along with the recession, brought the share of overdue loans up sharply (from 5.3% in 2014 to 13.8% in 2017). The state authorities had to step in and save the situation by rescuing the largest bank in the country – the International Bank of Azerbaijan – which defaulted in 2016, and by closing down several smaller banks.

Currently, the situation is slowly stabilizing thanks to the state's interventions. The share of overdue loans decreased slightly to 12.2% in 2018. However, fundamental risks remain significant. Despite some improvement in the banking system, it remains highly dollarized, with the share of foreign currency deposits in commercial banks reaching almost 60% in 2018 and the share of foreign currency loans in the same year being around one third. That kind of balance sheet structure makes the banks vulnerable to liquidity, solvency, and currency shocks.

Overdue loans in Azerbaijan compared to its peers


Source: Central Bank of the Republic of Azerbaijan, World Bank, ERA

Reserves are low compared to the past, but the sovereign fund provides sufficient cover:

The rise in oil prices has brought the current account balance back to positive numbers (12.6%), strengthening the reserve coverage ratio. Since 2016, the official foreign reserves have increased by more than 40% to USD 5.8 bln and now cover almost 4 months of imports and almost 40% of external debt. Compared to the situation before the fall in oil prices, buffers are still significantly lower, along with the country's ability to face selling pressure on domestic currency.

Official foreign reserves (mil. USD) and oil prices


On the other hand, the country has the SOFAZ sovereign wealth fund at its disposal with USD 38.5 bln in assets (more than 80% of GDP). These funds can be used to finance external debt or support the currency in the event of an emergency, which is a positive factor for the country's creditworthiness assessment.

Forward-looking factors of rating assessment

Azerbaijan demonstrates below average scores in rule of law and control of corruption. Though in recent years, the country has demonstrated improvements in all indices but social cohesion. Azerbaijan's forward-looking indicators are weakest in the South-Caucasus region.

Weakest governance in the region despite recent improvement:

Azerbaijan's reform capacity has improved moderately in recent years. Nevertheless, Azerbaijan's figures demonstrate the weakest conditions for efficiency enhancement and reforms capacities within the South-Caucasus region. There are, however, some signs of improvement, which might not be captured in these data. According to the last Doing Business report, Azerbaijan's ranking improved significantly from 57th to 25th as a result of several measures to ease the administrative burden for business.

The political and economic stability assessment remains stagnant. Improvements in the rule of law and control of corruption have been wiped out in recent years by the decrease in political stability and absence of terrorism indicators. In the South-Caucasus region, Azerbaijan's forward-looking indicators are weakest.

Selected World governance indicators for Azerbaijan and its peers (ERA score 1-10):


Source: World Bank, ERA

Outlook: Stable

The outlook has been assigned based on expectations that the Brent Crude Oil Price will be within the $50-80/brl range in the medium-term, the political system will be stable, risks of the Karabakh conflict re-escalating remain low, and consumer inflation remaining at moderate levels. Thus, the financial system as well as Azerbaijan's governmental bodies will encounter significantly less intense inflationary and currency-reassessment pressure.

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

Key assumptions

• Relatively stable international market conjuncture on Azerbaijan's main export commodities in the medium-term;

• No re-escalation in the Karabakh conflict;

• Revival of domestic loans in the medium-term due to improved banking sector indicators and increased demand.

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 the tax base and higher national reserve 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 $50/brl.

A positive rating action may be prompted by:

• Government adherence to the economic policy of industrial and export diversification;

• Stable, positive real GDP growth throughout 2019-2022;

• Substantial improvement in governance factors.

Appendix 1. Peer-analysis materials. Stance among the peer-group sovereigns

Current account balance (% GDP)


Source: IMF

General government balance (% GDP)


Source: IMF

Appendix 2. Major sovereign indicators








GDP, bln USD







GDP growth rate, %







GDP per capita, ‘000 USD







Population, mln







Unemployment, %







Consumer inflation, year-average, %







External debt to GDP, year-end %







Public debt to GDP, %







Gross Domestic Investment to GDP, %







International reserves, bln USD







Trade balance, bln USD







Exports, bln USD







Imports, bln USD







Current account to GDP, %







Appendix 3. List of material data sources

International Monetary Fund

World Bank


The Bank for International Settlements

Central Bank of the Republic of Azerbaijan

The State Statistical Committee of the Republic of Azerbaijan

Regulatory disclosure

The unsolicited 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 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 an unsolicited rating, i.e. was not initiated by the rated entity or a related third party. The rated entity did not participate in the rating process and the information and documentation for its development was obtained from publicly available sources in accordance with ERA methodology. ERA did not have 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 unsolicited 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 Regulation (EC) No 1060/2009 of the European Parliament and of the Council of September 16, 2009, on credit rating agencies. The rated entity was notified on April 10, 2019, and after the notification there were no changes or amendments in the rating. The rating was first released for distribution on October 19, 2018.

Download pdf:

Azerbaijan affirmation_12.04.2019.pdf

Approved by the Rating Committee:

Zuzana Hrebičková, Acting

Head of credit rating analysts

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