Azernews.Az

International rating agency Moody`s has stressed the existence of strong potential for Azerbaijan`s medium-term economic growth.

``Given the country`s large oil and gas reserves, Azerbaijan`s medium-term economic growth potential is strong although a lack of economic diversification could hinder growth in the long term if not addressed,`` the agency said.

Financial robustness is ranked high, with government debt ratios expected to remain low in the medium term.

``Azerbaijan runs a large current account surplus, which is estimated at 27.2 percent in 2011, slightly below its 2010 level of 29 percent as a result of a temporary disruption in oil production,`` the report said. ``The government`s State Budget usually targets a modest deficit in the government`s financial balance (1.5 percent of GDP in the 2012 State Budget) as part of an active policy to develop the country`s domestic capital market.``

The consolidated budget however, (which includes the State Oil Fund`s - SOFAR`s - revenues) usually registers sizeable surpluses which for 2011 is estimated at 9.8 percent.

``Azerbaijan`s susceptibility to event risk is considered to be moderate, largely due to political risks reflecting geopolitical tensions with the autonomous region of Nagorno-Karabakh [an Azerbaijani region where ethnic Armenians are running a self-proclaimed republic] and its supporter, Armenia,`` the report said. ``Economic and financial event risks, on the other hand, are both ranked very low. The outlook on the government`s bond ratings is positive which reflects our expectations of further improvements in Azerbaijan`s already strong government finances as well as the country`s institutional capacity supporting the prudent management of its oil windfall.``

Banking system stabilized
Fitch Ratings says in a newly-published report that the credit metrics of Azerbaijan`s banks have stabilized since the height of the global financial crisis, and currently high oil prices are supporting asset quality and liquidity in the sector, Fitch Ratings Deputy Director for Financial Institutions in the CIS, Dmitry Abramov, said at the presentation ``Azerbaijan`s banking system: recovery after crisis`` last week.

However, credit impairment remains significant following rapid pre-crisis growth, and loan recoveries are hampered by weak governance and transparency in the corporate sector and a still depressed real estate market, Abramov said.

Limited profitability and often moderate capital cushions restrict banks` ability to absorb losses, and the system, like the broader economy, remains highly exposed to any significant negative oil price shock, he added.

Fitch expects loan growth in 2012 to remain broadly in line with the 21 percent expansion reported for 2011. New credit is being extended primarily to the retail and SME segments, an expansion supported by the currently moderate leverage in the economy: loans/GDP stood at 20 percent at end-2011, with loans/non-oil GDP at 45 percent. However, weaknesses in the corporate sector, a deceleration of real GDP growth rates and the tighter monetary stance of the authorities are constraining credit expansion, Abramov stressed.

Sector development is also undermined by the capital deficit of the International Bank of Azerbaijan (IBA), the country`s largest bank accounting for nearly 35 percent of system assets. In February 2012, after a protracted period of capital ratio breaches by IBA, the authorities announced a recapitalization plan for the bank involving contributions of both subordinated debt and equity. Although these measures will help to bring IBA`s capital ratios into compliance with statutory requirements, Fitch believes they are likely to be still insufficient relative to the bank`s asset quality problems, he said.