Azerbaijan’s risks are spiralling


Jeremy Weltman
Published on:

Confidence in the oil producer is wavering as a bank crisis unfolds.


Healing qualities: Azerbaijan’s economy is slowly finding its feet, in response
to higher oil prices since 2016

Risk experts are still downgrading Azerbaijan in response to disappointing economic indicators, highlighting the effects of depressed oil prices and a lack of clarity from the government concerning its policymaking.

As of mid-May, Azerbaijan’s risk score has fallen to 39.4 out of a possible 100 points in Euromoney’s country risk survey – a long-term slide that has seen the country lose almost nine points since 2010.

This has pushed Azerbaijan below Gabon and Guatemala to 87th in the global rankings of 186 countries, deeper into the fourth of five tiered groups synonymous with a B- to BB+ credit rating, and forcing open a bigger gap in risk-terms to Russia (ranking 70th) and Kazakhstan (72nd).

Azerbaijan is rated an equivalent Ba1/BB+ credit by Fitch, Moody’s and Standard & Poor’s, but all three agencies put their ratings on a negative watch last year.

Surely now is the time to act.


Difficult times

The crisis at the International Bank of Azerbaijan (IBA), the nation’s largest lender, underlines the cracks caused by the oil price decline.

The bank has halted foreign debt payments, effectively defaulting on a $100 million payment to Rubrika Finance and is in dire need of a $3.3 billion rescue.

The bank stability score has fallen sharply on a year-on-year basis, and is the lowest of all Azerbaijan’s economic indicators, although all five have plummeted and all score less than half the points available.

The risk of government non-payment/non-repatriation had been rising in the survey more than any other political factor, but scores are also very low for factors such as transparency and the regulatory and policymaking environment, adding to the heightened risk profile.


Lilit Gevorgyan,
IHS Markit

“IBA was sending positive messages of stabilization of its balance sheets in the first quarter of 2017, which makes it even harder for investors to interpret the bank’s decision to halt its debt service obligations,” says Lilit Gevorgyan, senior economist and country risk analyst at IHS Markit.

She believes that even if the IBA restructuring deal is favourable for investors, the manner of its unfolding will have alarmed many investors, and investor confidence will sink if it is perceived to be unfair.

Indeed, the financial situation might make haircuts in principal unavoidable, others suspect.

Gevorgyan adds: “The IBA story has exposed significant risks in Azerbaijan that perhaps were overlooked when the oil price was high, but have become more pronounced now.”

Last year the economy tanked, with GDP contracting in real terms by 3.8%, making it the worst-performing economy in the region.

Sky-high inflation is now being tamed and the economy is slowly finding its feet, in response to higher oil prices since 2016, but GDP will still contract by 1% this year, says the IMF.

Interconnected risks

The IBA failure also highlights the interconnected risks, as it is predominantly state-owned and closely linked to Socar, the state oil company, which is an important source of government revenue. The biggest share of its loan book involves corporate-sector liabilities.

The bank had been a prospect for privatization this year and its failure will seriously undermine confidence in the delayed programme, not least because of huge concerns about corruption, still rated as a prime risk by Euromoney survey experts.

Jahangir Hajiyev quit the IBA as chairman in 2015, citing health reasons and was convicted last year for fraud.

The financial sector problems overall are considerably larger with a non-performing loan ratio now believed to exceed 20%, and with 12 of the 32 smaller banks still operating assumed to be in financial difficulty for failing to meet a deadline for submitting financial reports to the regulator.

“The transfer of some of the central bank’s functions to the Financial Market Supervisory Body, set up in 2016, has achieved some banking sector consolidation, but policymaking has become even more obscure,” says Gevorgyan.

It is just one example. Others include the delayed response when devaluing the currency and even discussing financial support with multilateral lenders despite the $33 billion-worth of sovereign wealth fund assets, which further raises questions as to why the authorities would even let IBA default.

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