Credit Risk Assessment in Azerbaijan Highlights Political and Economic Uncertainties
In its latest report, Coface has given Azerbaijan a B rating for country risk, citing political and economic uncertainties that can affect corporate payment behavior. The corporate default probability is considered appreciable.
Challenging Business Environment
The business climate in Azerbaijan is challenging, with the country’s business environment rated as “C” by Coface. Corporate financial information is often unavailable or unreliable, making debt collection unpredictable. Additionally, the institutional framework has several weaknesses that make intercompany transactions risky.
Strengths Supporting the Economy
Despite these challenges, Azerbaijan has some strengths that support its economy:
- A well-endowed sovereign wealth fund thanks to hydrocarbon production and being a net external creditor
- Significant gas potential in the Caspian Sea and natural gas exports to Italy, Greece, Bulgaria, and Turkey
Weaknesses Facing the Country
However, Azerbaijan faces several weaknesses:
- Landlocked and dependent on Turkey and Russia, increasing its economic risk
- Highly reliant on hydrocarbons (50% of GDP, 90% of exports, and approximately 66% of tax revenues)
- Fragile, opaque, and dollarized banking system
- Underdeveloped private sector credit
Governance Concerns
Azerbaijan’s governance is also a concern:
- Corruption
- Low competition
- Repression
- Politicization of the judiciary
- Weak links with international institutions
Conflict and Demographic Issues
The country has an armed conflict with Armenia over Nagorno-Karabakh and faces a low population growth rate and aging population.
Economic Outlook for 2023
Coface expects Azerbaijan’s energy sector to continue growing in 2023, driven by high oil and gas prices and increased pipeline exports to the EU. However, this growth is not expected to trickle down to the broader economy, due to the country’s dependence on hydrocarbons.
Government Efforts to Diversify Economy
The Azerbaijani government has been working to diversify its economy:
- Investing in infrastructure and industry
- Seeking to increase its presence in international markets through membership in the International Monetary Fund (IMF) and the World Bank
Conclusion
Despite these efforts, Azerbaijan’s credit risk assessment remains high due to its challenging business environment, lack of economic diversification, and governance issues.