S&P: Azerbaijan’s current account will reach significant surplus

Standard & Poor's expects Azerbaijan's net general government asset position to account for 59 percent of GDP in 2012, and 62 percent of GDP in 2013.

"We believe this compares favorably with all peers as well as the 'BBB' median (Kazakhstan, Russia, Morocco, Panama, Peru and Columbia), which is expected to have a net debt position equivalent to 35% of GDP in 2011," the agency told Trend.

Azerbaijan's net general government asset position is estimated to have reached 53% of GDP in 2011 (up from 6% in 2007).

For the purposes of the report Azerbaijan's peer group includes the oil-rich CIS countries in the 'BBB' rating category, such as Kazakhstan (foreign currency BBB+/Stable/A-2;) and the Russian Federation (Russia; BBB/Stable/A-3). In addition, the Kingdom of Morocco (BBB-/Stable/A-3), the Republic of Panama (BBB-/Positive/A-3), the Republic of Peru (BBB/Stable/A-3) and the Republic of Colombia (BBB-/Stable/A-3) are comparable peers. In December 2011 Azerbaijan was assigned investment rating BBB-/Stable/A-3.

According to the agency, the ratings on Azerbaijan are mainly supported by its comparatively strong current account surpluses and increasing general government assets. The Azeri government's borrowing requirements have been lower than the peer group average, due to stronger macroeconomic and fiscal performances than many other 'BBB' rated sovereigns.

Azerbaijan's consolidated general government is expect to post a budget surplus of 14% of GDP in 2011 and 10% in 2012, before transfers to SOFAZ, which compares very favorably with all peers. This is far better than any peer (2.6% for the 'BBB' median), including oil-producer Kazakhstan whose fiscal surplus in 2011 was an estimated 4% of GDP.

"We expect the current account to have reached a significant surplus of 22% of GDP in 2011. With the continued elevation of oil prices above or close to $100/barrel, this surplus should remain high (in 2012 - 18.8 percent, 2013 - 19.7 percent and in 2014 - 18.5 percent),
which would further bolster Azerbaijan's external position relative to peers.

Similarly, given that SOFAZ acts as the country's sovereign wealth fund and invests all of its assets abroad, Azerbaijan is in an exceptionally strong external asset position. With narrow net external assets equal to 107% of CARs, Azerbaijan's external liquidity is significantly
stronger than any of its peers, including other oil producers Russia (26.9%) or Kazakhstan (27.0%).

"Trend GDP growth has moderated, but will remain in line with peers. We estimate that GDP growth virtually came to a standstill in 2011 at 0.1% and will rebound to 3.0% in 2012, as maintenance work on the main oil field is completed and production increases again. Nevertheless, Azerbaijan's era of extremely rapid economic growth is not expected to return," the agency's analysts believe.

High real growth rates were also mirrored by high per capita growth rates. From 2005-2010, per capita growth averaged 17.0%, compared to 2.7% for the 'BBB' median and 6.3% for Panama, the best performing peer.

"Looking ahead, we forecast per capita growth to average 3.2% in 2012-2014, in line with the 'BBB' median of 3.0% but behind most of its peers, particularly commodity-based Kazakhstan and Russia, which have much lower population growth," the agency noted.

Future growth should, in S&P view, remain underpinned by FDI in the oil sector, rising hydrocarbons production and exports, as well as strong government spending which in turn will support expected strong non-oil growth prospects.

"We expect GDP per capita to increase to $7,063 in 2012, significantly lower than in Kazakhstan and Russia, as well as the 'BBB' median ($11,697), but comparing well with Morocco, Colombia, and Peru," the agency's experts believe.

S&P believes diversification is crucial to making the Azeri economy more resilient against external shocks. "Compared with its regional and nonregional peers, Azerbaijan's economy is less diversified, with the hydrocarbon sector (including gas) accounting for around 92% (in 2011) of total exports and about 40% of GDP (not counting ancillary industries). These concentrations are higher than those estimated for Russia (about 64% of total good exports in 2011) and Kazakhstan (about 60% of good exports and 25% of GDP in 2011). All other peers are significantly more diversified," S&P notes.

The government has invested heavily in infrastructure to spur the non-oil economy and reduce regional income disparities.

"Nevertheless, the Azeri economy remains narrowly based and dependent on commodities, which leaves it vulnerable to external shocks. This is similar to Kazakhstan and Russia, which also export significant volumes of commodities that are sensitive to international price fluctuations. Continuing FDI inflows will be crucial to developments in GDP and per capita growth, and, in this respect, Azerbaijan's prospects are stronger than those of many of its peers," S&P says.


/Trend/