S&P Global Ratings has revised its outlook on Azerbaijan from negative to stable, forecasting future economic growth, after years of economic contraction and turmoil since oil prices fell in 2014. The credit rating agency affirmed Azerbaijan’s long-term foreign and local currency sovereign credit at BB+/B, and forecasts that average annual GDP growth of 3.3% over the next four years. Even so, S&P cautions that the Azerbaijani economy is overly reliant on oil and gas for export, and says that institutional weakness in Azerbaijan prevents credit ratings from being assessed at a higher level.
S&P states Azerbaijan has likely weathered the worst of the post-2014 plunge in oil prices and will enjoy moderate economic growth. Oil makes up 90% of Azerbaijani exports, and the Azerbaijani economy contracted because of the fall in oil prices. Presently, however, S&P expects positive increases in consumption and business confidence, increased public spending on account of the October 2018 presidential election, and the upcoming completion of the Shah Deniz II (SDII) gas field, which will allow Azerbaijan to export natural gas to Turkey and Europe. For these reasons, GDP growth is estimated to average at 3.3% per year through the end of 2021.
Even so, the Azerbaijani economy is not expected to grow as rapidly as it did before the 2014 fall in oil prices. Oil production in Azerbaijan has declined since 2011, and while S&P has upwardly revised its forecast of the price of a barrel of oil to $60 in 2018 and $55 in 2019, oil prices will still likely not reach the $100 range they were in from 2011 to 2014. S&P warns that Azerbaijan has not diversified its economy and forecasts that such diversification will not be achieved in the medium term.
S&P also cautions that Azerbaijan’s institutional culture is weak, and this weakness has limited Azerbaijan’s credit rating. S&P holds that Azerbaijan’s political culture is highly centralized and lacks transparency. While Azerbaijan will like to enjoy an improving balance of payments and less government debt in the coming years, the Central Bank of Azerbaijan (CBA) also suffers from institutional weakness and a lack of independence in policy decision making.