Moody's completes scheduled review of Azerbaijan's ratings

International credit rating agency Moody's Ratings has completed its latest scheduled review of Azerbaijan's sovereign ratings, Report informs.

According to Moody's, the review was conducted during a rating committee meeting, where the agency reassessed the rationale behind Azerbaijan's ratings based on its core methodology and recent developments.

Moody's said the review does not constitute a rating action and does not indicate that any rating decision is expected in the near term.

The agency noted that Azerbaijan's ratings, including its long-term issuer rating of Baa3, are supported by the country's strong net creditor position, underpinned by substantial financial assets managed by the State Oil Fund of Azerbaijan (SOFAZ). These assets provide a significant fiscal buffer, helping reduce liquidity risks and external vulnerabilities.

Moody's also highlighted improvements in monetary and macroeconomic policymaking, which have strengthened external stability and enhanced the resilience of the financial sector. The agency said prudent use of fiscal buffers has enabled countercyclical spending while helping preserve budgetary and debt sustainability.

At the same time, Moody's pointed out that Azerbaijan's economy remains highly dependent on the hydrocarbon sector, limiting its resilience to external shocks, although economic diversification has accelerated in recent years.

The agency noted that economic growth remained moderate this year. Real GDP contracted by 0.3% year-on-year in the first quarter, while output during the first five months of the year was broadly unchanged from the same period last year, as continued declines in oil production due to maturing fields were only partially offset by growth in non-oil sectors.

Moody's said the gradual reduction in reconstruction activity has weakened the construction sector, while information and communication technologies, tourism, and manufacturing continue to support economic growth.

The agency expects Azerbaijan's economy to expand by around 1.5% this year, with medium-term growth averaging between 2% and 2.5%, supported by diversification efforts, investment in digital infrastructure, and regional connectivity projects.

According to Moody's, institutional development continues to improve through stronger public financial management, the introduction of digital technologies in public administration, and enhancements in banking supervision and budget oversight.

The agency also noted that Azerbaijan's fiscal sustainability is supported by its commitment to medium-term non-oil fiscal consolidation. Higher non-oil revenues and a gradual decline in reconstruction spending have contributed to a reduction in the non-oil primary budget deficit, while SOFAZ's assets are expected to continue growing and could reach 97% of GDP in 2025, remaining among the largest sovereign wealth fund reserves relative to economic output for countries with similar credit ratings.

Moody's forecasts that higher oil prices in 2026 will boost hydrocarbon revenues and further increase SOFAZ's assets, strengthening the government's ability to withstand external shocks and maintaining fiscal flexibility.

The agency also assessed the geopolitical environment as becoming more favorable. It said expanding economic cooperation between Azerbaijan and Armenia, progress on regional transport corridors, and continued international support for a peaceful settlement are gradually improving regional connectivity and reducing geopolitical risks despite the absence of a formally ratified peace agreement.

Moody's said Azerbaijan's ba1 economic resilience score reflects a balance between improving medium-term growth prospects and the country's still-significant, though declining, dependence on the oil and gas sector. It added that Azerbaijan's aaa fiscal strength is supported by its strong net creditor position, as sovereign wealth fund assets fully cover the government's direct debt and guarantees despite the relatively high share of foreign-currency-denominated debt.