Fitch's positive outlook: Azerbaijan's path to improved credit rating

Fitch Ratings, the renowned international credit rating agency, has recently highlighted the potential for an increase in Azerbaijan's credit rating. This forecast is based on several key factors that reflect the country's economic strengths and its efforts to address existing vulnerabilities.

One of Azerbaijan's notable strengths is its robust external balance sheet, coupled with low debt levels, standing at 21.8% by the end of 2023. This healthy financial position has been further bolstered by the government's commitment to adopt a more prudent fiscal stance, particularly in managing windfall revenues generated from high oil prices. Such proactive measures have garnered a Positive Outlook from Fitch Ratings in 2022.

Despite these positive indicators, Fitch recognizes persistent vulnerabilities within Azerbaijan's economic landscape. These include weak monetary policy, heavy reliance on hydrocarbons, and low potential growth. Monetary policy constraints stem from factors such as excess liquidity, an underdeveloped local market, and high financial dollarization.

However, Fitch acknowledges the progress made in addressing these vulnerabilities. The introduction of new central bank instruments aimed at improving policy rate transmission and efforts to reduce financial dollarization are steps in the right direction. Nonetheless, Fitch underscores that fiscal policy remains the primary lever to manage risks associated with oil revenue volatility.

Fitch emphasizes that greater confidence in preserving Azerbaijan's strong public balance sheet and enhancing the effectiveness of its policy framework to manage external shocks could prompt a positive rating action. This underscores the importance of continued efforts towards fiscal prudence and economic diversification.

It's important to note that Fitch Ratings recently confirmed Azerbaijan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB+' with a Positive Outlook on February 17 of the current year. This affirmation reflects a stable credit profile with the potential for further improvement, contingent upon the country's ongoing commitment to economic reforms and prudent fiscal management.

In conclusion, Fitch's positive outlook underscores Azerbaijan's progress in strengthening its economic fundamentals. However, sustained efforts are needed to address lingering vulnerabilities and ensure long-term financial stability and growth.