Singapore, April 06, 2021 -- Moody's Investors Service ("Moody's") has today
changed the outlook on Azerbaijan's rating to positive from stable
and affirmed the long-term issuer and senior unsecured debt ratings
at Ba2.
The positive outlook reflects Moody's assessment that governance
and in particular policy effectiveness is improving, albeit from
a low base, which may raise the resilience of the government's
credit profile. In particular, enhancements to the monetary
and macro policy framework may promote stability in the external and banking
sectors in the face of shocks, while continued effective use of
sizeable fiscal buffers would allow counter cyclical spending and limits
the deterioration in the government's fiscal and debt metrics.
The rating affirmation balances credit strengths from the country's
sizeable net creditor position that underpins fiscal strength and lowers
government liquidity and external vulnerability risks, as well as
relative domestic political stability that supports the implementation
of oil and gas projects, against credit challenges including still
limited prospects for economic diversification, longstanding institutional
and governance weaknesses, and geopolitical tensions with neighbouring
Armenia.
Concurrently, Moody's has changed the outlook on the backed
foreign currency senior unsecured rating of Southern Gas Corridor CJSC
(SGC) to positive from stable, and affirmed the Ba2 rating.
SGC has received explicitly guarantees on all of its foreign currency
debt.
Azerbaijan's local and foreign currency ceilings remain at Baa3
and Ba2, respectively. The narrower-than-average
two-notch gap between the local currency ceiling and the sovereign
rating reflects the large footprint of the government on the economy and
still weak institutions and governance, notwithstanding ample sovereign
wealth assets that support the country's external and macroeconomic
stability. The two-notch gap between the foreign currency
ceiling and the local currency ceiling takes into consideration still
limited confidence in the local currency and the lack of currency flexibility
against the dollar, which raise the risk of transfer and convertibility
restrictions. These ceilings typically act as a cap on the ratings
that can be assigned to the obligations of other entities domiciled in
the country.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL443692
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
RATIONALE FOR THE POSITIVE OUTLOOK
An improving macroeconomic and fiscal policy framework -- albeit
from relatively weak levels -- points to greater resilience of the
government's credit profile. Policy adjustments since the
2014-17 shock have the potential to shore up stability of Azerbaijan's
macroeconomic environment, banking sector, and fiscal and
debt metrics through shocks, as seen during the coronavirus pandemic.
Enhancements to exchange rate management and the communication of monetary
policy by the Central Bank of Azerbaijan (CBAR) are likely to foster stability
in Azerbaijan's external and foreign exchange market dynamics.
Besides the predictable supply of US dollars through regular auctions
of transfers by the State Oil Fund of Azerbaijan (SOFAZ) into the government's
budget, CBAR has the ability to step up the frequency of the auctions
to meet temporary increases in the demand for dollars. In monetary
policy communication, regular publication of and increased transparency
in monetary policy priorities, decisions and meetings also help
manage inflation and risk sentiment. In 2020, these combined
to keep the manat stable against the dollar, despite the significant
shock of the coronavirus pandemic and its impact on oil prices.
Foreign exchange reserve levels rose slightly over the course of 2020,
signalling limited external pressures, in turn allowing CBAR to
cut policy rates by 125 basis points to provide monetary accommodation.
Going forward, consistent reliance on predictable and transparent
monetary and exchange rate policy would boost macroeconomic stability
and the resilience to shocks.
Similarly, continued application of reforms enacted ahead of the
coronavirus shock and proactive regulatory forbearance during the pandemic
would improve bank regulation and oversight further, supporting
stability of the sector and containing any potential second round effects
of a shock through impairments to credit supply and contingent liability
risks to the sovereign. Already, measures implemented in
the wake of the large 2014-17 oil price shock, such as restrictions
on foreign currency exposure, the resolution of legacy problem loans,
and recapitalisation requirements, have raised the resilience of
banks' balance sheets. Moody's expects the resumption
of banking sector reforms this year, including the rollout of Basel
3 requirements relating to liquidity and risk management to further promote
stability in the banking system.
Furthermore, effective use of fiscal buffers within the framework
of Azerbaijan's fiscal rules has the potential to reduce macroeconomic
risks while limiting the deterioration in fiscal and debt metrics in comparison
with peers. This was also illustrated during the pandemic.
By activating the escape clause to its fiscal rule for 2020-21
and increasing the level of SOFAZ transfers slightly compared to 2019
-- instead of reducing the transfers with the decline in oil revenue
-- the government was able to support the economy through cash handouts
to low income families, unemployment benefits, the temporary
creation of public jobs, wage and tuition subsidies, and discounts
on utility bills in 2020, as well as higher infrastructure spending
this year. While fiscal buffers have increased at a slower pace,
the increase in the government's debt burden has been relatively
modest, reaching 23% of GDP at the end of 2020 from slightly
above 20% a year prior. This compares to the median increase
of over 10 percentage points of GDP across Ba-rated peers.
Moody's assumptions for Azerbaijan's government debt include
all of its direct debt and the guaranteed debt of Azerbaijan Railways,
which is undergoing restructuring and receives ongoing financial support
from the government. At the same time, Moody's no longer
includes the guaranteed debt of Aqrarkredit -- which amounted to
around 13% of GDP at the end of 2020 -- in government debt;
the rating agency expects Aqrarkredit will continue to service its obligations
without government financial support.
Overall, the enhancements to Azerbaijan's policy framework,
if sustained, would lower government liquidity risk, contain
external vulnerability, and provide policy flexibility, especially
aided by Azerbaijan's large net creditor status and sizeable sovereign
wealth assets.
RATIONALE FOR THE RATING AFFIRMATION
The affirmation of Azerbaijan's Ba2 rating is underpinned by the
government's large net asset position -- which in addition
to providing fiscal flexibility also contains government liquidity and
external vulnerability risk as discussed above -- and the relative
stability in domestic politics that will continue to facilitate the implementation
of oil and gas projects and provide policy continuity. Balanced
against these credit strengths are the country's still significant
reliance on oil and gas to drive longer-term economic growth and
support government finances, still limited prospects for economic
diversification beyond this sector, as well as longstanding institutional
and governance challenges and geopolitical tensions with Armenia that
weigh on economic competitiveness.
Assets held by SOFAZ, which are foreign currency denominated and
invested in liquid markets, continued growing in 2020 despite the
pandemic, and are large enough to cover nearly 480% of the
government's direct debt. Based on Moody's oil price
assumptions of $45-65 per barrel over the medium term,
the size of SOFAZ assets is likely to keep growing over the next few years,
absent a sharp increase in transfers to the government.
Meanwhile, Moody's expects Azerbaijan's economy to continue
to be driven by developments in its oil and gas sector for the foreseeable
future. The oil and gas sector accounts for around 45% of
GDP directly, 90% of total goods exports, 70%
of industrial production and 60-70% of consolidated government
revenue. In 2021, besides base effects stemming from the
relaxation of coronavirus-related restrictions on activity and
movement, increased oil production under the agreement with the
Organization of Petroleum Exporting Countries and higher gas production
as exports to Europe ramp up with the completion of the Trans-Adriatic
Pipeline at the end of last year underpin Moody's real GDP growth
forecast of around 3.5%. Over the next 2-3
years, Moody's estimates growth to average around 3%,
supported by ongoing reinvestment in the existing oil and gas fields --
such as a new platform in the largest Azeri-Chirag-Guneshli
field that will help sustain production at current levels for some time
-- and increased oil and gas production from the completion of ongoing
projects at the Karabakh and Absheron fields.
Diversification prospects remain limited. Although Azerbaijan's
transport and logistics sector benefits from the higher quality of physical
infrastructure compared to regional peers in the South Caucasus,
as well as potential for oil and gas transit revenue from other producers
in the region, the size of the sector remains too small to have
a significant impact on economic growth. Similarly, the agriculture
sector is also dwarfed by the oil and gas sector, despite steady
demand for Azerbaijan's food produce from large markets including
Russia. The tourism sector, which had shown some potential
before the coronavirus shock, may take time to recover even as borders
gradually reopen.
The diversification prospects are in part limited by institutional and
governance constraints, including weaknesses in rule of law and
control of corruption as reflected in Azerbaijan's Worldwide Governance
Indicator rankings, skills shortage, the dominance of large
domestic holding companies that hinder entrepreneurship, and unresolved
geopolitical tensions with Armenia over Nagorno-Karabakh --
despite last year's peace agreement -- that have the potential
to weigh on foreign investor sentiment outside of the oil and gas sector.
The government aims to address some of these constraints, including
through governance-related reforms with the help of development
partners. Notably, the government has set up a holding company
-- Azerbaijan Investment Holding (AIH) -- to better manage the
SOEs, introduce stricter corporate governance, financial disclosure
and audit rules, and enhance oversight through a supervisory board.
The SOE reforms are being undertaken with support from international financial
institutions such as the Asian Development Bank and the World Bank,
and have the potential to raise the level of governance, transparency
and financial health of SOEs, in turn reducing the contingent liability
of the sector to the government. However, Moody's expects
tangible effects to take time to materialise.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Azerbaijan's ESG Credit Impact Score is highly negative (CIS-4),
primarily reflecting its high exposure to environmental risk and weak
governance profile, while the exposure to social risk is moderate.
Relatively weak institutions constrain the government's capacity
to address ESG risks.
The exposure to environment risk is highly negative (E-4 issuer
profile score), as the economy and government finances are highly
susceptible to a global transition away from hydrocarbon fuels over the
longer term. The hydrocarbon sector, which is currently dominated
by oil production, accounts for around 90% of total goods
exports and contributes to 60-70% of consolidated government
revenue. While the government is emphasising economic diversification
through its strategic road maps, tangible benefits will take time
to materialise and are limited by human capital and institutional constraints.
The exposure to social risk is moderately negative (S-3 issuer
profile score) as still low education and skills attainment constrain
the development of the labour market, while rising inequality and
restrictions on voice and accountability tend to be political flashpoints
domestically. That said, the deployment of hydrocarbon revenue
on public services including in healthcare, education and social
infrastructure helps address social concerns.
The influence of governance is highly negative (G-4 issuer profile
score), reflecting the lack of judicial independence and challenges
in the rule of law, control of corruption, governance and
transparency. These limit the effectiveness of institutions,
prospects for economic diversification, and the resilience of the
country to environment and social risks.
GDP per capita (PPP basis, US$): 15,076 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.5% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.4%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: 9.1%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 9.1% (2019 Actual) (also
known as External Balance)
External debt/GDP: 32.9% (2019 Actual)
Economic resiliency: ba3
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 1 April 2021, a rating committee was called to discuss the rating
of the Azerbaijan, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutions and governance strength, have materially
increased. The issuer's fiscal or financial strength, including
its debt profile, has materially increased. The issuer's
susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on the rating could develop if ongoing and further reforms
were to increase the level of governance, transparency, and
policy predictability, and in turn the quality of institutions beyond
Moody's current expectations. Increased prospects for a more
rapid decline in the government's debt burden and reduction in contingent
liabilities over the medium term, for example through effective
implementation of the fiscal rule and SOE reforms, would also be
credit positive. Over time, marked progress in economic diversification
that reduces the economy's high dependence on hydrocarbons would
additionally put upward pressure on the rating.
The positive outlook signals that a rating downgrade is unlikely over
the near term. The outlook would likely be changed to stable if
there were signs of erosion in the credibility and effectiveness of the
enhanced macroeconomic and fiscal policy framework that in turn raised
the likelihood of external instability and/or a sustained increase in
the government's debt burden. Banking sector weaknesses resurfacing
and significantly raising contingent liability risks could also put downward
pressure on the rating. A renewed escalation of the conflict over
Nagorno-Karabakh with a protracted negative impact on economic
activity and government finances would in addition be credit negative.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies 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 credit rating action, if applicable.
REGULATORY DISCLOSURES
The List of Affected Credit Ratings announced here are a mix of solicited
and unsolicited credit ratings. Additionally, the List of
Affected Credit Ratings includes additional disclosures that vary with
regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL443692
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
• Rating Solicitation
• Issuer Participation
• Participation: Access to Management
• Participation: Access to Internal Documents
• Disclosure to Rated Entity
• Endorsement
• Lead Analyst
• Releasing Office
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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.
Christian Fang
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
