Azernews.Az

BAKU – Standard & Poor's ratings agency said Tuesday that it affirmed its 'BB+/B' long- and short-term sovereign credit ratings on Azerbaijan, with outlook remaining positive. The transfer and convertibility assessment remains at 'BBB-'.

"The affirmation reflects our expectation that Azerbaijan's public sector net asset and international investment position will strengthen, and that general government debt will remain moderate on the back of expected budget surpluses," said Standard & Poor's credit analyst Luc Marchand.

The agency said the ratings on Azerbaijan remain constrained by the sovereign's regional geopolitical risks; its alleged challenges surrounding political, legal, and economic governance and lack of transparency; and a relatively weak monetary and banking system. The ratings are supported by the presence of a substantial resources endowment, fiscal and external buffers, and strong economic growth prospects.

Standard & Poor's said good prospects for oil production and exports are likely to maintain surpluses in the current account and consolidated budget position over the next few years. Given an expected quasi-flat oil production in 2011 and small increase in 2012, and the expected increase in oil prices to about $86 per barrel in 2011, the current account surplus should remain high at an average of more than 20% of GDP in 2011-2012.

"We believe stronger FDI flows in the sector should keep production increasing beyond 2012-2013. Despite the global slowdown, we estimate that output growth will remain close to 4.0% in 2010 and 2011, and expect it to accelerate gradually to 5.0% in 2012-2013 on the back of higher non-oil sector growth as the economy remains buoyed by hydrocarbons revenues."

Standard & Poor's said the positive outlook reflects its expectation of a further strengthening of Azerbaijan's external and fiscal balance sheets through twin surpluses on the budget and current accounts. Such a development could support a rating upgrade to investment grade during 2011. A significant improvement in the business environment, an acceleration of structural reform and economic diversification efforts, and a strengthening of monetary policy and the banking system could also lead to an upgrade, although the agency believes that this scenario is unlikely over the outlook horizon.

Standard & Poor's said a significant shortfall relative to its expectations about the development of external and fiscal buffers would prevent an upgrade of the ratings. So too would further weakening of economic and political governance structures, which in turn could hamper rational and efficient economic policy formulation and implementation. An unexpected escalation of geopolitical tensions or disruption of domestic political stability would also prevent an upgrade and, depending on the severity, could lead to downward ratings pressure, the analysts concluded.