Moody's forecasts Azerbaijani government's debt burden to be below 30% of GDP

The relatively narrow state deficit will keep the Azerbaijani Government's debt burden well contained below 30% of GDP, according to Moody's, Report informs.

"The relatively narrow state deficit will keep the government's debt burden well contained below 30% of GDP as targeted by the latest medium-term fiscal framework, remaining significantly lower than the median for similarly rated peers," Moody's said in an announcement of periodic review on Azerbaijan.

"Azerbaijan's ratings, including its Baa3 long-term issuer ratings, are supported by the government's large net creditor position given sizeable financial assets held by the State Oil Fund of Azerbaijan (SOFAZ), the country's sovereign wealth fund, which provides a significant financial buffer and lowers government liquidity and external vulnerability risks. Its policy effectiveness is also improving, although from a low base. In particular, improvements in the monetary and macroeconomic policy framework promote stability in the external position and financial system soundness in the face of shocks, while effective deployment of fiscal buffers allows for countercyclical spending and limits the potential deterioration in the government's fiscal and debt metrics," said Moody's.

The rating agency believes "still-high economic concentration in the hydrocarbon sector constrains the economy's shock-absorption capacity, though diversification prospects are improving."

Real GDP of the country grew by 1.6% year-on-year over the first eleven months and Moody's expects full year growth to be around 1.5%.

Meanwhile, the rating agency expects softer oil prices and increased expenditure to result in a narrowing of the consolidated fiscal surplus - which includes the revenues and expenditures of the Nakhchivan region, various social-related funds, and the State Oil Fund of Azerbaijan (SOFAZ) - to about 2.4% of GDP in 2025 from 4% in 2024. "The state budget is likely to record a mild deficit, driven by accelerated spending on infrastructure, reconstruction, and social programmes."

Meanwhile, Azerbaijan and Armenia agreed to a peace framework in August 2025 that has increased diplomatic engagement and lifted border restrictions, suggesting a potential easing of geopolitical risks relative to past decades of sporadic military conflict between the two countries, Moody's emphasized.

"The positive outlook reflects our view that ongoing reforms could further reduce economic and fiscal dependence on the hydrocarbon sector beyond our expectations. Moreover, there are prospects for further enhancements in institutional strength and governance amid ongoing reforms to enhance monetary policy transmission, financial sector regulations, public finance management and transparency in public administrative processes," Moody's said, adding: "Material improvements in economic and diplomatic ties with Armenia that reduces risk of a reescalation in geopolitical tensions will also be credit positive."

The positive outlook signals that a rating downgrade is unlikely over the near term, according to the rating agency. "The outlook would likely be changed to stable if there were signs of erosion in the credibility and effectiveness of the enhanced macroeconomic and fiscal policy framework that undermines the ability of institutions to respond to long-term challenges."

The Southern Gas Corridor's (SGC) Baa3 rating and positive outlook also remain unchanged.

"We rate SGC at the same level as the Government of Azerbaijan as it has received explicit guarantees on all of its foreign currency debt from the government," Moody's said.