Moody’s ups outlook on Azerbaijan’s rating on higher oil revenues

Moody's Investors Service has changed its outlook to ‘positive’ from ‘stable’ on Azerbaijan's Ba1 issuer ratings for foreign- and local-currency government debt, taking into account the low government debt and the country's excellent medium- to long-term fiscal and external prospects.
Large projected surpluses on the consolidated budget position and the balance of payments will reflect windfall profits from the rapid expansion of oil and gas production and exports in the context of high prices, the rating agency said.
Moody's has also changed to ‘positive’ from ‘stable’ the outlook on Azerbaijan's Ba2 country ceiling for foreign currency bank deposits and the Baa2 country ceiling for foreign currency bonds.
"Because of the rapid rise in oil and gas prices, the internal mechanics governing the distribution of profits from Azerbaijan's oil and gas exploration and exploitation contract with British Petroleum have shifted dramatically in Azerbaijan's favor," said Moody's Vice President Jonathan Schiffer. "The result is that the vast majority of revenues generated by the increased volumes of oil and gas extracted over the medium-to-long term will now flow to Azerbaijan rather than BP."
He said the large revenues are expected to swell government coffers, expand official and 'Oil Fund' foreign currency reserves significantly, and shrink already-low debt ratios.
"The key challenges for economic policy-makers will center on their ability to manage these windfall gains prudently and to encourage diversification in the non-oil sectors of the economy," said Schiffer.
"Over time, government expenditure restraint, in conjunction with the development of local capital markets, would help the economy to deal with massive capital inflows and help reduce macroeconomic distortions, such as are now visible in the high inflation rate and the local real estate market."
The analyst explained that policy cooperation and coordination between the government and central bank would help to avert potentially steep currency appreciation as a result of the external surpluses. He said an overvalued exchange rate would undermine the economic diversification effort, discourage competition in the banking system and likely lead to excessive credit growth.
Given the generous scale of financial resources that will become available, Moody's believes that the government will likely consider making a greater investment in human resources to bolster its relatively weak institutions. This could include educational initiatives to increase the number of high-quality economic and managerial decision-makers, thereby improving administrative efficiency and accountability. Should such an effort materialize, it would supplement the significant program of physical infrastructure expansion already underway.