Fitch Ratings upgrades Azerbaijan's rating from BB+ to BBB-, maintaining stable outlook

(MENAFN) Fitch Ratings announced on Friday that it has upgraded Azerbaijan's long-term foreign currency issuer default rating from BB+ to BBB- with a stable outlook. This upgrade reflects Azerbaijan's strong external balance sheet, ongoing current account and fiscal surpluses, reduced foreign-currency vulnerabilities, low government debt, and evolving monetary policy. The rating agency noted that annual inflation in Azerbaijan remained below the central bank's target band of 4 percent in the first half of 2024 and is expected to average 3.5 percent for the year, with a projected increase to 4.7 percent by 2026.

Despite the central bank pausing its monetary easing cycle since May, Fitch does not anticipate further rate cuts. This expectation is due to an anticipated rise in inflation from increased regulated prices and higher government spending from the amended 2024 budget. Azerbaijan's economy is forecast to grow by 3.2 percent this year but is expected to slow to 2.7 percent in 2025 and 2.3 percent in 2026, although public investment will continue to provide support. The oil sector's drag on the economy will lessen compared to previous years, thanks to new oil production that could slow the pace of decline and higher natural gas production.

Fitch cautioned that Azerbaijan's rating could be negatively impacted if there is a deterioration in the economic policy mix that leads to macroeconomic and financial stability risks, or if Azerbaijan becomes more vulnerable to external shocks, including oil price volatility. Other potential negative factors include significant erosion of its balance sheet due to persistently low commodity prices, a rapid decline in hydrocarbon outputs, or substantial fiscal loosening.

On a positive note, Azerbaijan's rating could be further improved if the country continues to strengthen its economic policy framework and institutional capacity, enhancing its ability to absorb shocks. Successful implementation of structural reforms that support better governance and higher growth could also result in a positive rating action. Fitch emphasized that these improvements would enhance Azerbaijan's resilience and long-term economic prospects.

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