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Rating Action:

Moody's Assigns Baa3 Rating to the Republic of Azerbaijan's $1.25 billion 4.75 per cent Notes due in 2024

Global Credit Research - 28 Mar 2014

Frankfurt am Main, March 28, 2014 -- Moody's Investors Service has assigned a Baa3 rating to the $1.25 billion 4.75 per cent Notes by the Republic of Azerbaijan. The Notes were issued at a price of 98.051 per cent of the principal amount of the Notes and will mature on 18th of March 2024. The bond rating matches the sovereign bond rating by the Republic of Azerbaijan, which was upgraded to Baa3 from Ba1 in April 2012. The outlook on the issuer rating is stable.

RATINGS RATIONALE

Azerbaijan's Baa3 foreign and local-currency government bond ratings are supported by low government debt and a strong net creditor position. These credit positive elements are due to the sizable foreign assets that Azerbaijan has accumulated with the sovereign wealth fund, State Oil Fund of the Republic of Azerbaijan (SOFAZ) and the Central Bank of Azerbaijan (CBA), the central bank. We believe that Azerbaijan's high level of foreign assets worth around $51 billion (or close to 69% of GDP) as of end-2013 will help to shield the economy from internal and/or external shocks. Meanwhile, real GDP growth has accelerated to 5.8% in 2013 on the back of a sustained brisk expansion in non-oil GDP sectors as well as recovering oil GDP.

However, the ratings also capture Azerbaijan's over-reliance on the hydrocarbon (i.e. oil and gas) sector, very low institutional strength, and the low credibility and effectiveness of policies. Azerbaijan's high reliance on oil revenue remains a key credit weakness because it exposes the economy to a plunge in global oil prices and/or to disruptions in domestic oil production. In this context, fiscal metrics have become increasingly vulnerable to a plunge in oil production and prices. This is because of (1) large and widening non-oil primary deficits over the past few years (to around 45% of non-oil GDP in 2012 and 2013, according to IMF estimates); (2) record high SOFAZ transfers to the state budget in the amount of around manats 11,350 million (accounting for close to 20% of GDP in 2013); and (3) rising break-even oil prices (to around 90 $/bbl in 2013 from below 20 in 2007, according to IMF estimates). However, sizable assets with SOFAZ, mainly held at short maturities are a key risk mitigating factor as they could serve as a financial cushion during periods of financial and economic stress.

Going forward, the government's capital investment program could facilitate the emergence of revenue generating non-oil sectors. However, Azerbaijan will most likely continue to rely heavily on hydrocarbon revenue to have the financial means to further develop its non-oil sectors. Moreover, the ratings capture Azerbaijan's sustained geopolitical tensions with neighbouring Armenia over the disputed territory of Nagorno-Karabakh, and rising risks from strong credit growth in the context of a generally weak banking system.

The stable outlook on Azerbaijan's Baa3 sovereign bond ratings is supported by the government's strong financial position, including large pool of foreign assets, which will mitigate the macroeconomic impact of volatility in oil prices and production, and is expected to help shielding the economy from internal and external shocks.

Upward pressure could be exerted on Azerbaijan's sovereign bond ratings following significant improvements in the country's institutional strength, sustained economic diversification as well as a decrease in geopolitical risks.

Downward pressure on Azerbaijan's sovereign bond ratings could develop in the event of significant deterioration in the domestic or regional political environment that could result in severe disruptions to oil production and/or foreign investments in the economy. A prolonged period of fiscal deterioration resulting into a pronounced rise in public indebtedness and/or depletion of foreign assets, could also result in downward pressure on the ratings.

This rating action concerns a new rating solicited by the issuer for a note that was not in the market at the time that the sovereign release calendar was published in December 2013, and is therefore being released on a date not listed in that publication.

GDP per capita (PPP basis, US$): 10,365 (2012 Actual) (also known as Per Capita Income)&Real GDP growth (% change): 5.8% (2013 Actual) (also known as GDP Growth)&Inflation Rate (CPI, % change Dec/Dec): 3.6% (2013 Actual) &Gen. Gov. Financial Balance/GDP: 1% (2013 Actual) (also known as Fiscal Balance)&Current Account Balance/GDP: 19.7% (2013 Actual) (also known as External Balance)&External debt/GDP: 17% (2012 Actual) &Level of economic development: Low level of economic resilience &Default history: No default events (on bonds or loans) have been recorded since 1983.

On 20 March 2014, a rating committee was called to assign a rating to a specific bond issuance in line with the government bond rating.

This rating action concerns a new rating solicited by the issuer for a note that was not in the market at the time that the sovereign release calendar was published in December 2013, and is therefore being released on a date not listed in that publication.

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sebastian Becker
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Bart Jan Sebastian Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Assigns Baa3 Rating to the Republic of Azerbaijan's $1.25 billion 4.75 per cent Notes due in 2024
No Related Data.

 

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