S&P outlook for Azerbaijan revised to Negative
Friday, 30 January 2015
Standard & Poor’s Ratings Services revised its outlook on the Republic
of Azerbaijan to negative from stable. At the same time, we affirmed
the ‘BBB-/A-3′ long- and short-term sovereign credit ratings on
Azerbaijan. The change is based on the view that the country’s fiscal
and external balances will be hurt by the substantial drop in oil
prices, though government debt levels remain very low.
The outlook revision reflects S&P’s view that Azerbaijan’s government
might draw down its currently substantial fiscal buffers or accumulate
general government debt more rapidly than what we had previously
expected in order to compensate for significantly lower oil prices.
`We affirmed the ratings because Azerbaijan’s strong external and
government balance sheets continue to support the ratings,’ says S&P.
The ratings are constrained by Azerbaijan’s modest economic wealth
levels, generally weak institutional and governance effectiveness, and
limited monetary flexibility. Azerbaijan’s economy and general
government revenues depend on the hydrocarbons sector, which we
estimate contributed about 44% of GDP and 95% of merchandise exports
in 2013-2014. Since our last review, we have significantly lowered our
expectations on oil prices for 2015-2018. `We now forecast that the
oil price will decrease to $55/barrel in 2015 and will modestly
recover to an average $75/barrel in 2016-2018. Deteriorating terms of
trade will depress Azerbaijan’s economic growth and hurt its external
and fiscal balances,’ says S&P.
S&P notes that: `Azerbaijan’s wealth levels are in the midrange for
rated sovereigns, with estimated GDP per capita of about $7,800 in
2014. In 2014, Azerbaijan’s real GDP growth slowed to 2.8%, from 5.8%
in 2013. This was due to decreasing oil production, which was affected
by maintenance works at the key Azeri-Chirag-Guneshli oil field, and
because of decelerating growth in the non-oil sector’.
The ratings agency thinks that this year the economy will grow by only
1.9%, because oil production and exports will continue to shrink, and
the non-oil sector, especially construction, will be affected by lower
public-sector capital investment. We expect nominal GDP, on the other
hand, to contract by over 10% this year due to the sharply lower oil
prices.
Over the long term, economic growth will be supported by gas
production at new gas fields, which should compensate for stagnating
oil production, suggests S&P. `In 2018, the major Shah Deniz II field,
which will bring gas from Azerbaijan to Europe, is expected to come on
stream. Gas will be transported via the Trans-Anatolian (TANAP) and
Trans-Adriatic (TAP) pipelines. A consortium of the State Oil Company
of Azerbaijan Republic (SOCAR), international oil and gas
corporations, and the newly created Southern Gas Corridor CJSC are
planning to construct the pipelines over the coming years. In late
2013, the final route of both pipelines was determined, and
construction is set to begin in 2015′.
Essentially, any risks stemming from high economic concentration are
mitigated by the government’s large liquid fiscal assets. `We estimate
that, in 2015, Azerbaijan will be in a net asset position equivalent
to about 51% of GDP. However, beyond 2015, this ratio might decline,
following a deterioration in the country’s government finances’.
The government’s liquid assets are mainly accumulated in the State Oil
Fund of the Republic of Azerbaijan (SOFAZ), a fiscal reserve fund
which is invested externally and are estimated to be worth some 50%
of GDP.
However, S& P thinks that over the next two years, `SOFAZ’s liquid
financial assets will likely gradually decline both in nominal terms
and as a proportion of GDP. The fund will no longer accumulate surplus
oil-related revenues, and will spend a portion of funds to finance the
general government deficit. It will also likely continue to invest in
the construction of gas pipelines.