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S&P outlook for Azerbaijan revised to Negative

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  • S&P outlook for Azerbaijan revised to Negative

    S&P outlook for Azerbaijan revised to Negative
    Friday, 30 January 2015


    Standard & Poor's Ratings Services revised its outlook on the Republic
    of Azerbaijan to negative from stable. At the same time, we affirmed
    the 'BBB-/A-3' long- and short-term sovereign credit ratings on
    Azerbaijan. The change is based on the view that the country's fiscal
    and external balances will be hurt by the substantial drop in oil
    prices, though government debt levels remain very low.

    The outlook revision reflects S&P's view that Azerbaijan's government
    might draw down its currently substantial fiscal buffers or accumulate
    general government debt more rapidly than what we had previously
    expected in order to compensate for significantly lower oil prices.
    `We affirmed the ratings because Azerbaijan's strong external and
    government balance sheets continue to support the ratings,' says S&P.

    The ratings are constrained by Azerbaijan's modest economic wealth
    levels, generally weak institutional and governance effectiveness, and
    limited monetary flexibility. Azerbaijan's economy and general
    government revenues depend on the hydrocarbons sector, which we
    estimate contributed about 44% of GDP and 95% of merchandise exports
    in 2013-2014. Since our last review, we have significantly lowered our
    expectations on oil prices for 2015-2018. `We now forecast that the
    oil price will decrease to $55/barrel in 2015 and will modestly
    recover to an average $75/barrel in 2016-2018. Deteriorating terms of
    trade will depress Azerbaijan's economic growth and hurt its external
    and fiscal balances,' says S&P.

    S&P notes that: `Azerbaijan's wealth levels are in the midrange for
    rated sovereigns, with estimated GDP per capita of about $7,800 in
    2014. In 2014, Azerbaijan's real GDP growth slowed to 2.8%, from 5.8%
    in 2013. This was due to decreasing oil production, which was affected
    by maintenance works at the key Azeri-Chirag-Guneshli oil field, and
    because of decelerating growth in the non-oil sector'.

    The ratings agency thinks that this year the economy will grow by only
    1.9%, because oil production and exports will continue to shrink, and
    the non-oil sector, especially construction, will be affected by lower
    public-sector capital investment. We expect nominal GDP, on the other
    hand, to contract by over 10% this year due to the sharply lower oil
    prices.

    Over the long term, economic growth will be supported by gas
    production at new gas fields, which should compensate for stagnating
    oil production, suggests S&P. `In 2018, the major Shah Deniz II field,
    which will bring gas from Azerbaijan to Europe, is expected to come on
    stream. Gas will be transported via the Trans-Anatolian (TANAP) and
    Trans-Adriatic (TAP) pipelines. A consortium of the State Oil Company
    of Azerbaijan Republic (SOCAR), international oil and gas
    corporations, and the newly created Southern Gas Corridor CJSC are
    planning to construct the pipelines over the coming years. In late
    2013, the final route of both pipelines was determined, and
    construction is set to begin in 2015'.

    Essentially, any risks stemming from high economic concentration are
    mitigated by the government's large liquid fiscal assets. `We estimate
    that, in 2015, Azerbaijan will be in a net asset position equivalent
    to about 51% of GDP. However, beyond 2015, this ratio might decline,
    following a deterioration in the country's government finances'.

    The government's liquid assets are mainly accumulated in the State Oil
    Fund of the Republic of Azerbaijan (SOFAZ), a fiscal reserve fund
    which is invested externally and are estimated to be worth some 50%
    of GDP.

    However, S& P thinks that over the next two years, `SOFAZ's liquid
    financial assets will likely gradually decline both in nominal terms
    and as a proportion of GDP. The fund will no longer accumulate surplus
    oil-related revenues, and will spend a portion of funds to finance the
    general government deficit. It will also likely continue to invest in
    the construction of gas pipelines.


    http://www.ftseglobalmarkets.com/news/sp-outlook-for-azerbaijan-revised-to-negative.html

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