Fitch evaluates impact of geopolitical events on South Caucasus sovereign credit profiles

Political and geopolitical developments that exacerbate external vulnerabilities and policy weaknesses in the South Caucasus region have a significant impact on the sovereign credit profiles of countries, in particular Georgia (BB/Negative) and Armenia (BB-/Stable), Report informs referring to the international rating agency Fitch Ratings.

Of the three countries in the region, only Azerbaijan has an investment rating (BBB-/Stable). Fitch notes that Azerbaijan's sustainable external economic position continues to support its credit rating. The agency expects the country's fiscal policy to be aimed at preserving sovereign external assets, which will avoid macroeconomic imbalances and provide sufficient financial buffers to manage oil price volatility. However, Azerbaijan's monetary policy remains relatively weak compared to peers.

Among the key constraints, Fitch highlights an underdeveloped capital market, excess liquidity, low levels of financial intermediation, and still high dollarization of the financial system.

The rating agency believes that the sharp increase in political risks in Georgia, accompanied by a decline in international reserves, was one of the reasons for the agency’s December 2024 revision of its outlook to Negative from Stable. The recovery of reserves will depend on current account inflows, especially foreign direct investment, as well as economic policy measures.

In Armenia, the integration of about 65,000 people who left Karabakh voluntarily and rising military spending will lead to an expansion of fiscal policy and an increase in public debt.

The weakening of the national currency creates additional risks to the debt burden, given the large share of liabilities in foreign currency. Despite these factors, the banking sectors in all three countries remain resilient and profitable.

In Azerbaijan, banks' financial performance has benefited from declining dollarization and improving asset quality since 2019. In Georgia, political tensions have not had a significant impact on consumer confidence or bank profitability. The sector is benefiting from resilient economic activity, relatively high interest rates, and improving asset quality. In Armenia, Fitch expects the banking sector to maintain the record growth rates seen over the past three years, according to Fitch.