Announcement: Moody's: Azerbaijan's credit profile affected by legacy effects of oil shock and limited diversification, despite rebound in oil prices

Moody's Investors Service says that Azerbaijan's (Ba2 stable) GDP growth and fiscal revenue will benefit from higher oil prices, but the legacy effects of the 2014-16 oil shock that significantly and durably hit the government's fiscal strength will continue to weigh on both factors.

In particular, the sharp depreciation in the country's currency and high inflation, as well as tight fiscal and monetary policies, continue to pressure the economy and the government's finances.

Moreover, the banking sector remains fragile and credit continues to contract, which also weighs on growth.

Overall, Moody's forecasts that Azerbaijan's GDP growth will register 1.5% in 2018, after averaging 0.2% during 2014-17. Moody's also expects the fiscal balance to turn into a small surplus of 1.0% of GDP in 2018 after three consecutive years of deficits.

Moody's analysis is contained in its recently-released report titled "Government of Azerbaijan: FAQ on impact of oil prices on growth and public finances, and prospects for economic diversification."

Moody's expects government debt, including guarantees, to remain around 53% of GDP in 2018 — more than triple the levels seen in 2014.

Fiscal revenue remains weak, preventing a marked improvement in fiscal metrics in the near term, although still-sizeable assets in the sovereign wealth fund provide substantial support to fiscal strength.

Limited prospects for diversification leave the sovereign vulnerable to shifts in supply and demand for oil over the medium term.

Moody's says that a set of "strategic road maps" approved in December 2016 identified a number of key focus areas for diversification away from hydrocarbons.

Moody's points out that progress has been more evident in tourism and transport and logistics, but Azerbaijan's weak skill levels and pervasive corruption will constrain the effectiveness of the government's push for diversification. And, some of the diversification projects' reliance on government incentives indicates that the gains for fiscal revenue could also prove limited.