Concurrently, Moody’s affirmed the foreign currency-backed senior unsecured rating of Southern Gas Corridor CJSC (SGC) at Ba1 and changed the outlook to positive from stable.
The positive outlook reflects improving economic diversification prospects and macroeconomic policy effectiveness that may further strengthen Azerbaijan’s credit profile, potentially leading to a higher rating. The rising prominence of the Middle Corridor as a key transport route between Europe and Asia, along with increased investment across the country, is driving economic prospects, although the impact on economic strength will only become tangible over time. Additionally, greater European demand for Azeri gas and a growing pipeline of renewable projects will help mitigate the impact of depleting oil resources on the country’s external accounts.
Azerbaijan’s ability to maintain macroeconomic stability through recent shocks, including oil price fluctuations and fiscal discipline, points to increased policy effectiveness. Continued efforts to enhance governance, if successful, will further strengthen institutional effectiveness and policy credibility over time.
The rating affirmation reflects the country’s strong government balance sheet with a low debt burden, very high debt affordability, and sizeable fiscal reserves held in foreign assets, which reduce government liquidity and external vulnerability risks. These strengths are balanced against longstanding challenges related to governance and geopolitical tensions with Armenia.
Azerbaijan’s local and foreign currency ceilings remain unchanged at Baa2 and Ba1, respectively. The gap between the local currency ceiling and the sovereign rating balances the significant role of the government in the economy and still weak institutional governance against ample sovereign wealth assets that support the country’s external and macroeconomic stability. The gap between the foreign currency ceiling and the local currency ceiling considers the improving but still significant level of dollarization in the economy and the perceived de facto currency peg against the dollar, which raise the risk of transfer and convertibility restrictions.
