Allianz Trade upgrades Azerbaijan rating amid Middle East conflict

The international insurance and risk management company Allianz Trade, against the backdrop of the escalating conflict in the Middle East and disruptions to shipping in the Strait of Hormuz, has revised Azerbaijan's country rating upward - from C1 to B1, Report informs.

Allianz specialists emphasize that the current situation overall has provoked a large-scale reassessment of non-payment risks, with the number of sovereign rating downgrades exceeding the number of upgrades.

"We downgraded the non-payment risk backdrop for five economies (Kuwait, Qatar, Serbia, the UK and the UAE) and upgraded only three (Azerbaijan, Costa Rica and Kazakhstan)," the company's statement reads.

In most rating scales, letter designations are arranged in descending order of reliability: A - highest reliability, B - medium level, C - elevated risk, D - default or pre-default status. The rating downgrades are driven either by first-order effects (rising commodity prices and supply disruptions threatening profitability) or by internal vulnerability factors, particularly the fiscal situation in the United Kingdom. Second-round effects are likely to materialize most severely in economies facing a triple vulnerability: high dependence on hydrocarbon imports – particularly those sourced from or transiting through the Gulf – compounded by a current account deficit and a large fiscal deficit. A first tier of most-exposed economies includes Ukraine, Jordan, Pakistan, Kenya and Ethiopia, where weakened external positions leave limited buffer to absorb both the energy price pass-through and the tightening of global financial conditions simultaneously. A second tier – Ghana, Egypt, Sri Lanka and Türkiye – faces a different but equally acute stress profile.

"In Asia, we are closely monitoring Indonesia, Thailand, Philippines and Taiwan. Third-round effects are also becoming more visible as FX reserve accumulation has decreased and tighter external financing conditions begin to feed into higher sovereign risk premia and rising debt-service costs, particularly in countries geographically close to the conflict and those where weaker external buffers and policy constraints amplify vulnerability ," the statement indicates.

Analysts note that at the country level, rating downgrades are concentrated among economies directly affected by the Strait of Hormuz shock or experiencing a combination of internal problems.

"Kazakhstan and Azerbaijan benefit from stronger hydrocarbon demand, improved geopolitical positioning and, in Azerbaijan"s case, reduced political risk following regional normalization," the experts emphasize.