Moody's also downgraded to Ba2 from Ba1 the senior unsecured debt rating of Southern Gas Corridor CJSC (SGC), whose bonds are backed by the government's guarantee, and changed the rating outlook to stable.
The rating downgrade reflects the significant and long-lasting weakening of Azerbaijan's fiscal and economic strength, which is driven by the ongoing impact of lower oil prices, the country's declining oil production potential and its very weak banking system. Together these factors will continue to constrain growth and pose material contingent
liability risks to the sovereign.
The stable outlook reflects Moody's expectation that the growth of additional direct debt and contingent obligations, including government guarantees stemming from financial support to Azerbaijan's banking sector restructuring and its large hydrocarbon sector projects, will level off by 2020. The stable outlook also assumes that, over time, the government will manage fiscal policy and its own balance sheet and the assets of its sovereign wealth fund in a way that will improve flexibility and capacity to effectively buffer the impact of lower-for-longer oil prices and ongoing declines in oil production.
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