On 26 August, the global credit rating agency Fitch revised Azerbaijan’s 2020 budget highlights due to the expected hit on the country’s public finances from lower oil prices and the pandemic. 

According to the Fitch report, the planned budget deficit was raised to 12.4% of GDP from 2.3% in the original budget. An increase in the planned transfer from the sovereign wealth fund (SOFAZ) to the budget, should support the 1.7 AZN/USD exchange rate, which has faced less pressure in recent months.

The key change was in the revised consolidated budget, approved by the Azerbaijani  President Ilham Aliyev in mid-August, which foresees a lower oil price assumption within the state budget. Fiscal projections are now based on an average of USD35/b), compared with USD55/b in the original 2020 budget. Spending has been revised up by 1.2pp of GDP. This incorporates a rise of 0.4pp of GDP in health expenditure compared with the original budget, additional capital investments to stimulate the economy amounting to 0.3pp of GDP, and 0.5pp of GDP in additional unspecified measures.

The report further outlined that despite the severe adverse impact on the fiscal deficit, large savings provide Azerbaijan with a significant degree of financing flexibility. The consolidated budget deficit will be primarily financed by a drawdown of SOFAZ assets and the large cash deposits in the government's single treasury account.

SOFAZ assets were broadly flat over the first six months of 2020, with the end of June at USD43.2 billion and changes in the value of its portfolio offsetting lower oil revenues and transfers to the budget. With nominal GDP falling in US dollar terms and its portfolio primarily in foreign currency-denominated assets, SOFAZ assets will remain in excess of 85% of GDP. Consequently, while most sovereigns are projected to post large rises in debt/GDP in 2020, Fitch forecasted that Azerbaijan's general government debt to increase by just 4.0pp to 23.0% of GDP, with much of that resulting from a sharp fall in the denominator.

The 2020 economic growth assumption in the revised budget has been cut to -5.0% from 2.4% (close to Fitch's forecast of -4.2%) reflecting coronavirus containment measures and Azerbaijan's participation in OPEC+ oil supply cuts. A renewed lockdown in July highlights the lingering risk of coronavirus in Azerbaijan and downside risks from further waves of infections and renewed lockdown measures, which could further pressure real GDP growth.

In April 2020, Fitch Ratings affirmed Azerbaijan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB+' with a Negative Outlook. It was highlighted that Azerbaijan's 'BB+' IDRs balance very strong sovereign and external balance sheets and fiscal financing flexibility due to large sovereign wealth fund (SOFAZ) assets, against the economy's high dependence on oil, weak governance indicators and lack of predictability and transparency of policy-making, especially in relation to the exchange rate regime. The agency forecasted Azerbaijan’s government debt to rise to 23% of GDP at end-2020 but return to 19% of GDP by 2022.