Fitch upgrades AzerbaijanÂ
Interfax
22.11.2004
London. (Interfax) – Fitch Ratings, the international rating agency,
upgraded Azerbaijan’s Long-term foreign currency and local currency
ratings to ‘BB’ from ‘BB-‘ (BB minus), the agency said in a press
release.
The Short-term foreign currency rating is affirmed at ‘B’. Following
the upgrade, the Outlook for the Long-term ratings is now Stable.
The upgrade reflects a combination of macroeconomic stability and
low general government debt, together with the ongoing development
of the important oil and gas sector.
The high oil prices of the past two years have been relatively well
managed by the authorities, resulting in consolidated budget surpluses
and an accumulation of foreign reserves and assets in the State Oil
Fund of Azerbaijan (SOFAZ).
Notwithstanding pressures to raise social expenditure, government
debt is forecast to remain equivalent to around 20% GDP for the next
two to three years. The majority of government debt is external,
and carries relatively low rates of interest and long maturities.
If official foreign exchange reserves and the external assets of
SOFAZ are taken into account, the general government is a net external
creditor to the tune of around 4% of GDP at end-2004.
Key oil and gas projects are proceeding as expected, pointing to
a sharp increase in output and export capacity as well as budget
revenues starting in 2006. This development is likely to increase
Azerbaijan’s dependence on the hydrocarbon sector, although rising
output will offer some insulation from price shocks.
While a large proportion of oil revenues have been placed with SOFAZ,
Fitch will continue to monitor oil wealth management closely. As oil
output rises, it will be increasingly important for the government
to adopt a long-term oil revenue management strategy to deal with
the windfalls that fall outside the State Fund.
This is of particular importance given the country’s limited economic
diversity and finite reserves of oil and gas, which could become
exhausted within 20 years.
Against a firm macroeconomic backdrop, structural reform has
effectively stalled. The privatization program remains subject to
delay and resistance, and the next stage of energy reform has been
slow in coming.
Meanwhile, efforts to diversify the economy have been weak. Although
the October presidential elections passed smoothly, Fitch believes
that the new regime will be subject to greater political risk than
the previous administration. While this is unlikely to lead to major
unrest, power vacuums or an escalation of tensions with Armenia, it
does suggest that the structural reform process will be more difficult.
As the country’s external balance sheet improves further and public
finances strengthen on the back of rising oil revenues, there could
be upward pressure on the rating, but the economy will, nonetheless,
remain highly exposed to sharp oil price fluctuations.
Continued prudent management of oil revenues through the State Oil
Fund is critical, as is the eventual adoption of a broader, more
comprehensive oil revenue management strategy. Structural reforms,
especially in the energy and financial sector will be lesser, albeit
important, considerations.
–Boundary_(ID_iFJD8tVB/kqfJJWPMttC0g)–