On February 25, Fitch Ratings reported that political and geopolitical developments, which heighten external vulnerabilities and policy weaknesses in the South Caucasus, have significantly impacted the sovereign credit profiles of Georgia (BB/Negative) and Armenia (BB-/Stable).

Of the three countries in the region, only Azerbaijan holds an investment-grade rating (BBB-/Stable), with its sustainable external economic position supporting its credit status. Fitch expects Azerbaijan’s fiscal policy to focus on maintaining sovereign external assets, preventing macroeconomic imbalances, and ensuring adequate financial buffers against oil price volatility. However, Azerbaijan’s monetary policy remains relatively weak compared to its peers, with key constraints including an underdeveloped capital market, excess liquidity, low financial intermediation, and high financial dollarization.

In Georgia, rising political risks and declining international reserves led Fitch to revise its outlook to Negative from Stable in December 2024. The recovery of reserves will depend on current account inflows, particularly foreign direct investment, alongside economic policy measures.

Armenia faces challenges in integrating approximately 65,000 people who fled from Karabakh, as well as managing increased military spending, which could lead to fiscal expansion and a higher public debt burden. The weakening of the Armenian dram poses additional risks to debt sustainability due to the high share of foreign currency liabilities.

Despite these challenges, the banking sectors in all three countries remain resilient and profitable. Azerbaijan’s banks have demonstrated improved financial performance since 2019, driven by reduced dollarization and better asset quality. In Georgia, political tensions have not significantly affected consumer confidence or bank profitability, with the sector benefiting from strong economic activity, high interest rates, and improving asset quality. In Armenia, Fitch expects the banking sector to maintain its strong growth trajectory, continuing the record growth observed over the past three years.