On September 15, Fitch Ratings affirmed Azerbaijan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB+' with a Positive Outlook.

About rating fundamentals, the report said, "The rating is supported by a very strong external balance sheet, the lowest public debt in the peer group, and financing flexibility from large sovereign wealth fund assets. Set against these factors are weak governance indicators, lack economic policy-making predictability, high financial dollarisation, heavy dependence on hydrocarbons, and geopolitical risks. The Positive Outlook reflects continued strengthening of external and fiscal buffers due to higher-than-budgeted energy prices and greater expenditure restraint than in previous energy sector windfalls."

Regarding external position, Fitch noted: "The current account surplus will decline to 19% of GDP in 2023 but remains the highest in the 'BB' category. We expect surpluses in double digits in 2024-2025 despite lower oil prices (oil and gas revenues equal 90% of total exports). We, therefore, forecast sovereign foreign-currency assets will increase to USD 68 billion in 2023, 82% held by SOFAZ, reflecting still-high energy revenues and investment portfolio recovery. We project Azerbaijan's net sovereign asset position to increase by 14pp to 63% of GDP in 2023 and 72% by 2025, the highest in the peer group."

On fiscal surpluses, the organization added: "Fitch expects higher-than-budgeted oil prices and non-oil revenue growth to underpin continued surpluses despite increased reconstruction spending. We forecast the consolidated budget surplus at 5.6% of GDP in 2023 before declining to 1.4% in 2025. Azerbaijan's 2022 fiscal rule seeks to reduce the non-energy primary deficit to 17.5% of non-oil GDP in 2026 (22.7% in 2022) and set a public debt ceiling of 30% (previously 20%) of GDP."

About debt increase, Fitch emphasized: "The debt ceiling increase, from 20% to 30% of GDP, was to include AZM 9.5 billion (7.5% of GDP) guaranteed debt from Agrarkredit in government debt. Fitch, therefore, forecasts debt to increase to 21.4% of GDP in 2023, the lowest in the 'BB' category. Outstanding external government guarantees and on-lending declined from USD6.4 billion at end-2022 to USD6.2 billion (8.3% of GDP) in 1H23."

"Geopolitical risks from the Karabakh conflict remain high, with sporadic fighting since the 2020 war. The US and EU have supported negotiations, but no political settlement has been reached. The closure of the Lachin corridor to Armenia has exacerbated friction. Recently, Azerbaijan and Armenia have both reported troop build-up at their borders. Fitch believes that in the event of a military conflict with Armenia, fighting would largely be limited to the disputed region, and broader macroeconomic implications for Azerbaijan limited," the report added.