Moody’s: Azerbaijan enjoys vibrant economy, challenges lie ahead

In its new credit analysis on the Republic of Azerbaijan, Moody's Investors Service said that the government's Ba1 long-term ratings for bonds and notes, with a stable outlook, reflect the country's vibrant oil-driven growth, the hefty surpluses in both its budget and current account, and its slight public-sector debt. Real economic growth has been above 24% per annum over the last several years; the consolidated budget surplus is forecast to be 11.5% in 2010; and public sector debt — mostly long-term — is now less than 8% of GDP, and declining.
However, Moody's said that the ratings also incorporate serious challenges, such as high inflation, a relatively undiversified economy, a rudimentary banking system, untested socio-economic institutions, and few managerial cadres.
"Given the windfall nature of Azerbaijan's oil and gas-related revenues, the government faces the difficulties of sheltering the economy from its current overexposure to potential external shocks, whether they come in the form of lower oil/gas prices –although this seems less likely at present — or currency fluctuations or, even, geopolitical problems," Moody's said.
As is the case with most oil-driven economies, Azerbaijan will eventually have to cope with "Dutch disease" phenomena that may undercut investments in its non-energy sectors. Such a result would reinforce the country's external vulnerabilities.
According to the report, one of the clear ways to improve the situation during the medium-term credit rating horizon of the next three to five years is to improve the nation's business environment to stimulate the non-energy sectors of the economy.
"Moreover," Moody's said, "further reform of the financial sector would be extremely useful, so that it can perform the normal role of financial intermediation necessary to diversify the economy, assist in restructuring and upgrading provision of public infrastructure (transport, communications, electricity, water, gas, sewage, etc.), and play a more efficient role in management of large oil-related capital inflows."