Published: May 3, 2012
Moody's changes Azerbaijan's sovereign debt to Baa3 stable.
Azerbaijan’s time has come. In April the former Soviet state’s sovereign debt was upgraded to investment status by rating agency Moody’s Investors Services.
The country’s foreign and local currency government issuer ratings were increased to Baa3 with a stable outlook from Ba1. All three of the world’s largest major rating agencies have now given the country investment grade status following the BBB- ratings confirmed last year by Standard & Poor’s and Fitch.
Even before this latest announcement there was excitement at the opportunities the oil-rich state has to offer. Farid Akhundov, executive chairman of Azerbaijan Pasha Bank, says the country is proving more attractive to foreign investors.
“In the past five years our currency has appreciated every year making it a good investment,” he said. “More and more interest will be attracted to the possibilities of income generation in Azerbaijan. We are in the right place at the right time.”
Behind the scenes
Factors driving Moody’s upgrade include strong government finances – high oil prices have helped the state to accumulate considerable foreign revenues through the State Oil Fund of Azerbaijan (SOFAZ), a sovereign wealth fund, and the reserves of the central bank. These amounted to some US$40bn in 2011, 75% of GDP.
Moody’s believes the wealth generated by SOFAZ and the central bank are sufficient to protect the country from internal and external financial shocks. Indeed, the agency highlights that the price of oil would have to fall to US$56 a barrel from its current price of US$105.60 before the government would struggle to balance its budget.
There is another factor behind Moody’s rating upgrade – namely, the performance of Azerbaijan’s non-oil sector. Here the government has played a key role in diversifying the economy away from oil by upgrading the country’s infrastructure and working to providing private companies with growth funding.
The success of that strategy was demonstrated last year when non-oil sector output expanded by 9.4%, up from 7.9% in 2010. This performance ensured that the economy remained resilient despite a fall in oil output due to maintenance work in the country’s main Azeri-Chirag-Guneshli oilfields.
One initiative adopted by the government to build a strong private sector is to provide an alternative to traditional short-term bank funding, which can be expensive. In March last year Azerbaijan’s capital market regulator, the State Committee for Securities (SCS), unveiled a five-year plan to develop the country’s capital markets infrastructure and regulatory framework.
In September the SCS started work on the plan after securing the US$15.8mn it needed for the project, which included a US$12mn loan from the International Bank for Reconstruction and Development.
Capital growth
Strong capital markets could attract more investors to the country but it appears there is still work to do – only a handful of domestic companies have raised funds on local markets in recent years. “Generally speaking the market is largely underdeveloped,” Pasha’s Akhundov says.
Pasha Bank has played a lead role as a market marker in some of these debt issuances in the past few years, which included raising AZN40mn (US$50.9mn) for mobile telecommunications company Bakcell, ANZ5mn for leasing company UniLeasing and ANZ20mn for private bank UniBank’s issuance.
“At the start of an interesting breakthrough in the development of the capital markets, we can see interest from banks and investment funds in Azerbaijan for local issuers,” Akhundov says.
“There is a lot of positive momentum now,” he adds. “That is good for the market, good for the economy and good for our clients.”