Moody's Sees Azerbaijani Banks As Least Exposed To Regional Geopolitical Risks

Azerbaijan's banking sector has the lowest exposure to geopolitical risks among banks in Central Asia and the South Caucasus, according to a recent report by Moody's.

The rating agency attributes the sector's resilience to Azerbaijan's limited economic and financial ties with Russia, the support provided by hydrocarbon revenues amid higher oil prices, and the stability offered by the manat's effective peg to the US dollar.

More broadly, Moody's said economies across Central Asia and the South Caucasus remain vulnerable to the indirect effects of geopolitical developments, particularly through inflation. Higher prices for energy, food and other commodities could delay monetary policy easing, keeping interest rates and borrowing costs elevated.

“Banks with a significant share of lending to individuals and small and medium-sized enterprises are particularly vulnerable to inflationary pressure,” the report states.

Kazakhstan's banking sector would be particularly sensitive to a further increase in inflation, Moody's said, as higher prices would put additional pressure on household purchasing power.

“Persistent price pressures and high interest rates on loans are hindering improvements in the operating environment for banks by limiting credit demand and borrowers' debt-repayment capacity. A prolonged period of high interest rates could also exert pressure on banks in Kyrgyzstan, where large and rapidly growing retail loan portfolios increase sensitivity to changes in household financial conditions,” Moody's analysts said.

The agency also warned that a rise in regional geopolitical risks or a significant global economic slowdown could trigger capital outflows from Central Asian and Caucasian economies, putting pressure on national currencies. Moody's does not currently anticipate such a scenario.

“This would fuel inflation and increase the debt burden of banks in Central Asia and the Caucasus that hold significant currency risk exposures. Banks in Azerbaijan are the least exposed to this risk, as the manat is effectively pegged to the US dollar, which helps shield the economy and the banking system from exchange rate volatility,” the report states.

According to Moody's, exporters across the region, particularly oil and gas producers, are generally better positioned to withstand currency depreciation because foreign-currency revenues provide a natural hedge against expenses denominated in local currencies.

Kazakh companies are also considered relatively resilient. Following several currency shocks, non-export-oriented firms have reduced the risk of mismatches between revenues and debt obligations by shifting toward local-currency financing.

Uzbek companies, by contrast, remain more exposed to currency risks because they continue to hold significant amounts of foreign-currency debt, Moody's said.

Higher oil prices strengthen Azerbaijan's fiscal position

Moody's said operating conditions for banks and companies across Central Asia and the South Caucasus remain broadly favorable, with the region benefiting from economic opportunities created by the changing geopolitical landscape.

“The shift of economic activity away from Russia toward other destinations, government initiatives to diversify economies, and gradually improving access to international capital markets continue to have a positive impact on both sectors. Furthermore, higher oil prices are fostering increased trade flows and strengthening the fiscal positions of oil-exporting nations such as Kazakhstan (Baa1, stable outlook) and Azerbaijan (Baa3, positive outlook). We also expect that strengthened regulation will support banking sector performance,” the report states.

At the same time, Moody's cautioned that geopolitical uncertainty continues to present risks that may have a relatively low probability but potentially significant consequences.

“Despite successfully weathering the volatility, the ongoing war between Russia and Ukraine continues to pose risks for banks and companies due to existing structural ties with Russia in the areas of energy infrastructure, trade, and remittances. A decline in economic activity in Russia could lead to increased risks regarding bank assets and funding. The potential imposition of secondary sanctions on entities with ties to Russia negatively affects foreign partner confidence and access to counterparties,” Moody's analysts said.

The rating agency said the conflict in the Middle East has no direct negative impact on banks and companies in Central Asia and the South Caucasus. However, it noted that indirect risks are more pronounced, although they remain manageable.

“A long-standing conflict that periodically intensifies could fuel inflation by driving up global prices for energy, food, and other resources. This, in turn, could delay or limit interest rate cuts and hinder companies' access to long-term financing. A slowdown in economic growth among key partner countries could lead to a decline in exports, transit volumes, and foreign direct investment,” the report states.

Despite these risks, Moody's said banks and companies in the region retain sufficient financial capacity to absorb external shocks.

“Capital and liquidity buffers within the banking systems of countries in the region have strengthened over the past four years, supported by favorable operating conditions. Furthermore, the majority of the companies we assessed do not carry a heavy debt burden and possess adequate liquidity reserves. Ongoing market reforms, strengthened regulation, and continued state support for strategic development programs further reinforce the resilience of both sectors,” the report states.

MENAFN11092026000195011045ID1111651375