S&P affirmed its credit ratings on Azerbaijan

On Jan. 21, 2022, S&P Global Ratings affirmed its long- and short-term foreign and local currency sovereign credit ratings on Azerbaijan at ‘BB+/B’

On Jan. 21, 2022, S&P Global Ratings affirmed its long- and short-term foreign and local currency sovereign credit ratings on Azerbaijan at 'BB+/B', Qazet.az reports.

The outlook is stable.

The stable outlook indicates that we expect the ceasefire agreement between Azerbaijan, Armenia, and Russia will continue to broadly hold, while favorable hydrocarbon prices and rising gas exports will support Azerbaijan's fiscal and balance of payments positions over the next 12 months.

Of the sovereigns we rate in the 'BB' category, we consider Azerbaijan's fiscal and external stock positions to be among the strongest. The government has accumulated substantial liquid assets, mainly within the sovereign wealth fund SOFAZ. We forecast that the government will have access to liquid assets of close to 70% of GDP through 2025, and that general government debt will remain below 30% of GDP. Currently favorable oil prices also support Azerbaijan's fiscal and balance of payments profiles.

Our ratings on Azerbaijan remain constrained by weak institutional effectiveness, the country's narrow and concentrated economic base, and limited monetary policy flexibility.

Institutional and economic profile: Stronger short-term growth performance but the economy is facing a long-term structural decline in oil production.

We forecast Azerbaijan's economy to grow by 2.7% in 2022 following a strong 5.6% recovery in 2021.

However, medium-term growth prospects are weaker as oil production is declining due to ageing oil fields, while rising gas exports will likely only partially offset this trend. We forecast average annual growth at a modest 1.3% over 2023-2025.

Azerbaijan's institutional environment remains relatively weak and political power is centralized around the presidential administration.

Azerbaijan's economy depends significantly on the hydrocarbon sector, which is currently benefiting from favorable global oil prices. Oil and gas constitute almost 90% of exports and amount to 50% of Azerbaijan's GDP. The Brent oil price averaged $71 per barrel (/bbl) in 2021 (up from $43/bbl in 2020) and we project that it will average $75/bbl in 2022 (see "S&P Global Ratings Revises Oil And Natural Gas Price Assumptions For 2022-2024," published Jan. 20, 2022), $65 in 2023, and $55 in 2024-2025. In parallel, the OPEC+ group of countries (of which Azerbaijan is a member) agreed in July 2021 to add 400,000 barrels per day (bpd) of additional oil production to the market every month, of which Azerbaijan can produce around 7,000 bpd.

In our view, the present environment will benefit Azerbaijan's economic, fiscal, and balance-of-payments performance. The longer-term outlook, however, appears less favorable. Azerbaijan is one of the oldest oil producers in the world, and where industrial oil production started in the 19th century. Existing oilfields are ageing and exhibit a continued decline in production. Between 2010 and 2021, for instance, oil production dropped by close to 30% from over 1 million bpd (mbpd) to an estimated 0.74 mbpd.