The Azerbaijani government is revising the 2015 budget based on a lower oil price assumption, Fitch Ratings said.
“The budget approved by the country’s parliament in November 2014 targeted a state budget deficit of 2.8% of GDP, at an average oil price of USD90/b,” the report said. “A weaker exchange rate will cushion the blow to oil revenues in manat, while the government will reduce infrastructure expenditure from very high levels by delaying non-essential upcoming projects.
This combination should prevent the general government from going into a sizeable deficit. The general government ran a surplus of 2.9% of GDP in 2014.”
As a result, the government is likely to avoid a large net draw-down of the state oil fund, SOFAZ. The fund’s assets totaled USD37.1bn or 49% of GDP at end-2014, Fitch said.
The banking sector remains a relative weakness, and manat depreciation has been a considerable shock. Banks had a short on-balance sheet FX position of USD1.7bn, or 43% of system equity, at end-2014, only partly hedged. Foreign-currency loans comprised 27% of total lending at end-2014.
“We estimate that depreciation will have caused a reduction of just under 2ppt in the sector’s total regulatory capital ratio, which was high at 19% at end-2014,” the report said.
“We estimate that the current account surplus fell to 13.7% of GDP in 2014, from 16.6% of GDP in 2013, and forecast that it will decline further, to around 6% of GDP in 2015, before recovering to around 8% of GDP in 2016 as the oil price rises,” the report said.
Lower oil prices have delivered a negative shock to Azerbaijan’s oil-dependent economy; hydro carbon exports account for over 90% of total merchandise exports.
“We forecast that growth will fall to 1.5% in 2015. A stabilization in oil output and the pass-through from a rise in oil prices will support an acceleration to growth of 3.5% in 2016,” the report said.
The following risk factor, individually or collectively, could trigger positive rating action:
– Sustainable economic diversification, supported by reforms to improve governance and transparency. Fitch Ratings has affirmed Azerbaijan’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BBB-‘. The Outlooks are Stable.
The issue ratings on Azerbaijan’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BBB-‘.
However, Fitch expects the policy response to mitigate pressure on public and external finances, and limit damage to the sovereign’s strong net creditor position, which underpins the rating.
“Depreciation is broadly neutral for the sovereign profile,” the report said. “It will assist fiscal and external adjustment to the lower oil price, but will also push inflation up to around 10%, negatively impact private consumption and may lead to pressure on bank asset quality, requiring some sovereign support for the banking sector.”
The manat rate versus the US dollar has reduced to 1.05 manat per dollar (compared to 0.7844 manat earlier) in accordance with the decision of the Central Bank of Azerbaijan (CBA) since February 21. The rate decreased by 33.9 percent.
